Top 10 Terms in Social Security
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Social Security may seem like a big and bewildering topic. But it doesn’t have to be. Here’s a list of terms to give you a better understanding of the benefits you receive and how Social Security affects your life.
COLA is the cost-of-living adjustment for benefits, based on rising prices and granted almost every year. The lower the rate of inflation, the smaller the adjustment. But over time, the COLA plays a big role in helping people keep up with the cost of living, particularly as their other financial resources may dwindle in old age. The 2015 increase was 1.7 percent.
This is the payroll tax for Social Security and Medicare, which is deducted from your wages and also paid by your employer under the Federal Insurance Contributions Act. The Social Security tax rate for employees (and employers) is 6.2 percent on earnings up to an annual cap, and the Medicare rate is 1.45 percent on all earnings. Self-employed individuals pay both the employee and employer share under SECA, the Self-Employment Contribution Act.
Each year, Social Security sets a cap on the amount of wages subject to the payroll tax ($118,500 in 2015). Taxes are deducted on your earnings up to that amount. If you earn above the cap, those higher earnings aren’t taxed for Social Security. This ceiling has various names, including the taxable maximum, the taxable earnings base, the wage base, and the contribution and benefit base.
Raising or eliminating the taxable maximum is often mentioned as a way to significantly improve Social Security’s long-term finances. But critics say such a move could hurt the economy by discouraging work and saving.
Full retirement age
This is the age at which you qualify for a full retirement benefit. If you collect Social Security benefits earlier, your benefit is reduced. The full retirement age is 66 for people born between 1943 and 1954. For those born between 1955 and 1959, it phases upward from 66 toward 67. And for people born in 1960 or later, the full retirement age is 67.
It’s important to know, however, that you can get a bigger benefit by waiting past the full retirement age to claim benefits. Your monthly payment is higher — 8 percent per year for people born in 1943 or later — for each year you wait to claim until reaching 70. At that point, you should start collecting, as there’s no advantage to waiting any longer.
Early retirement age
Although the full retirement age is headed to 67, the early retirement age remains at 62. That’s the birthday when you can begin collecting Social Security retirement benefits. But early benefits come with a cost. If your full retirement age is 66, you take a 25 percent hit by claiming at 62. If you claim at 63, your benefit is cut about 20 percent. These reductions are permanent and can add up to tens of thousands of dollars over time.
That’s why it often makes sense to hold off on claiming your benefits. Of course, some people can’t afford to wait, or may not expect to live long enough to come out ahead if they wait for a higher payment in the future. Whatever your situation, it’s important to consider the pros and cons of claiming benefits early.
Retirement earnings test
If you claim benefits before reaching your full retirement age, your payment may be reduced if you earn more than a certain amount of money: $15,720 in 2015. The retirement earnings test works like this: Social Security withholds $1 for every $2 you earn above the limit, which is reset each year. For the year in which you reach full retirement age, Social Security uses a different test. It withholds $1 for every $3 earned above a set amount ($41,880 in 2015).
When you reach your full retirement age, income from work has no impact on your Social Security benefits. Also, at that point, Social Security increases your benefit to offset the mount that was withheld because you earned above the limit while claiming benefits.
This is the Social Security Administration’s official record of how much you earned and paid in Social Security taxes, and it provides critical data used in determining your benefits (which are based on your 35 years of highest earnings). So you need to make sure it’s accurate.
There are a few ways you can review your earnings history. One is to open a personal account with the Social Security Administration. Another is to review the written personal statement that Social Security sends out at five-year intervals starting at age 25 (and annually at age 60) to those who don’t have personal accounts. The other option is to visit a Social Security field office, although you may face a $32 charge. If you believe Social Security has incorrect information about your earnings, it’s important to notify the agency as soon as possible.
Most of us think about retirement benefits when we hear the term “Social Security.” But Social Security includes other protections, as well, such as survivor benefits that may go to dependent family members when a worker dies.
In general, children under 18 (or older under certain circumstances) qualify for survivor benefits. Working-age surviving spouses qualify if they have the worker’s child in their care. Surviving spouses age 60 and older may qualify (age 50 and over if disabled) or at younger ages if raising the worker’s child. Even the worker’s parents can qualify (if they depended on the worker for at least half of their financial support). The rules can get technical, but survivor benefits may potentially be paid to divorced spouses, stepchildren, and step-grandchildren.
If you’re married to a covered worker, you may qualify for a Social Security spousal benefit if the worker has claimed retirement benefits. Spouses may become eligible at age 62 — or younger, if caring for the worker’s child who is under 16, or if the worker’s child is collecting Social Security disability benefits. The spousal benefit pays up to 50 percent of the worker’s retirement benefit, if the spouse claims it at full retirement age. Otherwise, it’s reduced.
If you’re a spouse who has earned benefits based on your own work history, Social Security will pay you your spousal benefit or your retirement benefit — whichever is higher — but not both. (Members of same-sex unions may qualify for the spousal benefit if they meet certain requirements. During their application process, they must live in a state that recognizes their same-sex marriage, and their union must have been deemed valid in the state where it took place. Given the complexity, interested people should check with the Social Security Administration for details.)
This is the Social Security Administration’s official website, and it provides a great deal of information. You can create a personal Social Security account, apply for retirement and other benefits, find a field office, use benefit-estimating tools, download forms, and get answers to frequently asked questions. You can also find information about benefits for survivors, spouses, and disabled individuals; Medicare; international Social Security issues; and more.
Some of the information may be more general than you seek. But the website may be a useful starting point for your search. If you need to know more, call Social Security’s toll-free number: 1-800-772-1213 (TTY 1-800-325-0778). Representatives are on duty weekdays, 7 a.m. to 7 p.m., all time zones.