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Social Security: A Comprehensive Guide

Selena Maranjian, The Motley Fool

Social Security and the retirement benefits it offers are critical to the future financial well-being of most Americans -- including, probably, you. Thus, it's rather important that you understand what the program is, what it does and doesn't offer, and how to get the most out of it.

For starters, know that Social Security offers you much more than your retirement benefits. There are, for example, disability benefits, spousal benefits, survivor benefits, children's benefits, and supplemental benefits if you're 65 or older and blind or disabled. You may qualify for more than you expected. Read on to learn more about Social Security in this comprehensive guide.

Older woman looking satisfied, holding a bunch of hundred dollar bills

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What is Social Security?

In 1965, President Lyndon Johnson observed: "Thirty years ago, the American people made a basic decision that the later years of life should not be years of despondency and drift. The result was the enactment of our Social Security program." Social Security was signed into law by President Franklin Roosevelt on August 14, 1935. Since then, Social Security has become the biggest source of income for most older Americans. Most elderly beneficiaries get 50% or more of their income from Social Security, while 21% of married elderly beneficiaries and 44% of unmarried ones get fully 90% or more of their income from Social Security. It's been estimated that without Social Security income, the percentage of elderly Americans living in poverty would surge from 15% to more than 50%.

In 2018, some 63 million Americans received roughly $1 trillion in Social Security benefits -- a sum that makes up a hefty 5% of our country's entire gross domestic product (GDP), which was about $19 trillion in 2017. About 43 million recipients are retirees collecting retirement benefits, with the remainder including dependents of those retirees, disabled workers and their dependents, and survivors, including children.

Your Social Security number and card

Social Security numbers were created for the Social Security program, but they are now a critical part of our identity, used not only by financial companies but also in healthcare, employment, taxes, and more.

Each Social Security number has nine digits. As the Social Security Administration (SSA) explains, a Social Security number is composed of three parts:

  • The first set of three digits is called the Area Number
  • The second set of two digits is called the Group Number
  • The final set of four digits is the Serial Number

The Area Number is geographically based -- or at least it used to be. Before 1972, cards were issued through branch offices of the SSA, and the Area Number referred to the location where a card was issued (which didn't have to be where the card-holder lived). Since 1972, the number has related to the zip code of the applicant's mailing address. Numbers issued on the east coast tend to be low, while west-coast numbers will be higher. The Group number doesn't appear to mean much, and it has been assigned in a certain order "for administrative reasons." The last four digits are simply serial numbers, issued consecutively from 0001 to 9999 before starting over again. Since 2011, Social Security numbers have been randomized, in order to prevent anyone learning any information from them.

The easiest way to get a Social Security number is when you're born. When a child's birth certificate is being prepared, the parents can generally indicate that they'd like to apply for a number for the child. The Social Security numbers of both parents will typically be required. After that point, if a child -- or an adult -- needs to get a card and number, they or their parents can visit the Social Security website, where they may be able to apply online. Failing that, they can print and fill out the application form and mail it or take it to a local Social Security office.

a Social Security card nestled among dollar bills

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Social Security retirement benefits -- do you qualify?

One of the first things you need to know in regard to Social Security is whether you qualify for Social Security retirement benefits -- and if you don't, whether you can do anything in order to qualify.

Obviously, you need to be of a certain age to qualify to receive Social Security retirement ("Old Age and Survivors Insurance") benefits. You can start collecting the full benefits to which you're entitled at your "full" retirement age. That age used to be 65, but for most of us these days, it's 66, 67, or somewhere in between. The table below will help you discover your full retirement age:

Birth Year

Full Retirement Age

1937 or earlier

65

1938

65 and 2 months

1939

65 and 4 months

1940

65 and 6 months

1941

65 and 8 months

1942

65 and 10 months

1943-1954

66

1955

66 and 2 months

1956

66 and 4 months

1957

66 and 6 months

1958

66 and 8 months

1959

66 and 10 months

1960 and later

67

Data source: Social Security Administration. 

Your full retirement age is important to know because it's likely to be a key part of any Social Security strategizing you may do.

Here's a second qualification hurdle: In order to qualify for Social Security benefits based on your earnings, you need to collect 40 "quarter of coverage" credits, with a credit representing earnings of at least $1,360 (as of 2019). You can earn up to four credits per year. Thus, most of us can qualify simply by working for a decade and by earning at least $1,360 per quarter -- which amounts to just $5,440 per year. (The minimum sums increase in most years.)

Social Security retirement benefits -- what to expect

Before jumping into what kind of benefits you might expect from Social Security and how you might boost them, understand what they are. They're not, as some people think, a government handout. Recipients have actually been paying into the program throughout their working lives, via those "FICA" tax withholdings on paychecks. Most workers in America have 6.2% of their pay withheld for Social Security tax -- with employers chipping in another 6.2%, for a total of 14.4% of our pay going toward Social Security. That money from people who are currently working is used to provide benefits to those collecting retirement benefits at that time -- people who have paid into the system previously.

The average Social Security retirement benefit was recently $1,420 per month, or about $17,000 per year. You might well collect more, though, and there are ways to increase your Social Security benefits, too. (We'll get to that soon.) The maximum benefit for those retiring at their full retirement age in 2019 is $2,861 per month -- or about $34,000 for the whole year. For those who wait until age 70 to start collecting benefits, the maximum is $3,770, or about $45,000. These maximums go to those who earned a lot more than average in their working lives.

The numbers above are helpful for context, but they don't really tell you how much you can expect from Social Security, and you do need to have a pretty good idea of how much of your overall retirement income Social Security is likely to provide.

The best way to find out more precisely what you can expect to receive from Social Security is to set up a my Social Security account at the Social Security website. The SSA used to send out summaries of earnings records and expected benefits annually, but it has cut back on its paper mailings. By setting up an account, you'll be able to access that information any time. You can take care of other Social-Security-related tasks there, too, such as changing your address, checking the status of your application for benefits, or requesting a replacement Social Security card (if you meet certain criteria).

Don't plan to set up an account years down the road, when you think you might need it more. Many identity thieves these days are setting up accounts for those who haven't done so yet, aiming to collect benefits due them. It's best to at least set up your account soon, even if you don't use it much yet.

Two red dice near a piece of paper on which is printed, "Will Your Social Security Be Enough?"

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How to increase your Social Security retirement benefits

If you've looked up how much you can expect to receive in Social Security benefits, and you're not thrilled, take heart: There are some ways to increase your Social Security benefits.

The most obvious way to do so is just to delay starting to collect your benefits -- because the longer you put it off, the bigger your checks will grow. The earliest you can start collecting benefits is age 62, and the latest is age 70. For every year beyond your full retirement age that you delay starting to receive benefits, their value will rise by about 8%. If you would expect to receive $2,000 monthly by starting to collect at your full retirement age of 67, and you delay starting to collect until age 70, your checks can swell by about 24% -- to $2,480.

If you're thinking that the only sensible thing to do is delay as long as you can (until age 70), you're forgetting a key detail: Yes, if you start collecting checks early they will be smaller, but you'll get many more of them. Many, if not most, of us would do well to start collecting at age 62.

You can see the effect of collecting early, late, or on time, in the table below, which shows the approximate percentage of full Social Security benefits one would get by starting to collect at various ages. So, if your full retirement age is 67, and you start collecting at, say, age 63, you'll receive about 75% of the amount you'd have gotten if you started at 67.

Start Collecting at:

Full Retirement Age of 66 

Full Retirement Age of 67 

62

75%

70%

63

80%

75%

64

86.7%

80%

65

93.3%

86.7%

66

100%

93.3%

67

108%

100%

68

116%

108%

69

124%

116%

70

132%

124%

Data source: Social Security Administration. 

Here are some other strategies to employ in order to increase your benefits:

  • Look for and correct any errors in your earnings record. This is the easiest strategy to try. Through your my Social Security account, look up and examine the record of your income and taxes paid into the Social Security system. If any numbers are too small, you might end up receiving less in benefits than you've actually earned. Correct any errors and presto -- you could increase your benefits. 
  • Have at least 35 years of earnings. Your Social Security benefits are calculated based on your earnings in the 35 years in which you earned the most money (adjusted for inflation). If you only earned income in 28 years, the formula will be incorporating seven zeros, which leaves lots of potential benefit dollars on the table.
  • Try to add more high-earning years to your record. The formula uses your 35 highest-earning years. If you have worked at least 35 years and are now earning significantly more than you have in the past (on an inflation-adjusted basis), for every additional year you work, a low-earning year will be kicked out, increasing your benefits. 

Social Security strategies

Be sure to give some thought to what your best strategy might be and how you might maximize the money you get from Social Security. One key strategic move is deciding at what age you'll start collecting your benefits. It's often best to start collecting as soon as possible, despite the fact that delaying will leave you with bigger checks. That's because the system is designed so that if you live an average-length life, it will be a wash whether you start collecting early or late. If your family reunions feature lots relatives in their 90s, and you're in good health, expecting a very long life yourself, it's reasonable to aim to start collecting your benefits as late as you can. 

If you're married, you have more things to know and strategies to consider. For starters, if you never earned a lot and your expected benefits are meager, at least compared to those of your spouse, know that you may be able to collect "spousal benefits" based on your spouse's earnings history -- getting up to 50% of their benefits instead of collecting benefits based on your own work history. For the full 50%, you have to start collecting at or after your full retirement age.

If you and your spouse have very different earnings records, you might start to collect the benefits of the lower-earning spouse on time or early, while delaying starting to collect the benefits of the higher-earning spouse. That strategy delivers at least some income earlier in retirement, before the second income stream starts. That second income stream should be more substantial. But wait -- there's more! Should the higher-earning spouse die first, the spouse with the smaller earnings history can collect those bigger benefit checks. That's because when one spouse dies, the other is allowed to start receiving the late spouse's benefits instead of their own, if those benefits are greater. (There are benefit strategies available for divorcing or divorced people, too.) 

A dial labeled benefits, with pointer pointing to maximum

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How to apply for Social Security benefits

Here's what you need to know about applying for your benefits. For starters, there are three ways to do so:

  • Online: To apply online, visit the Social Security website.
  • Over the phone: To apply over the phone, call the SSA at 800-772-1213.
  • In person: To apply in person, visit your nearest Social Security office. (This tool can help you find the nearest office.) To minimize waits and hassles, call first and make an appointment.

When should you apply? A few months before you want your benefit checks to start arriving. An online application can be completed in less than an hour -- possibly even 15 minutes. You'll be asked to answer questions about yourself, your family, and your work, among other things. The system allows you to stop at various points, save what you've entered so far, and return to the application later. That can be especially helpful if you need to find some required information to enter. You can even go back and make changes or fix errors all the way until you save the application for the last time and click the "Submit" button.

The online application process will tell you what information it needs and what documents you will need to provide. You can mail those in, or if you prefer, you can take them to a Social Security office in person. You'll "sign" the application electronically, with the push of a button. Once you're done, you'll get a receipt with a confirmation number. That will allow you to check on the status of your application online later.

Be sure you're filling out the form on a secure network and not on, say, a coffee shop's free Wi-Fi network, to prevent any snooping or attempts at identity theft or fraud. You don't want to be entering Social Security numbers and other important personal information over an open network.

Social Security disability benefits

Now let's pivot to a totally different kind of Social Security benefit that not every worker will collect: the Social Security disability benefit. First, understand that there are two acronyms that are often confused: SSDI and SSI. They relate to two Social Security programs that offer benefits to the disabled: the Social Security Disability Insurance (SSDI) program and the Supplemental Security Income (SSI).

The Supplemental Security Income program is designed to offer benefits to elderly (aged 65 and up), blind, or disabled adults -- and to disabled or blind children, too -- who have sufficiently little in the way of income and assets. It can be received by folks who are also receiving Social Security retirement benefits or SSDI benefits. As of November 2018, it served about 8.1 million people. 

The Social Security Disability Insurance program, meanwhile, recently served about 10.2 million people. It provides benefits to disabled people who have worked enough to qualify as "insured." Most folks will need to have worked for 10 years, but there are lower thresholds for younger people, and a few other rules, too. For example, a 46-year-old person will typically need about six years of work. Some family members of qualifying disabled people may be able to receive benefits, as well.

The disabled person will also have to meet the Social Security Administration's definition of disabled for this program. For starters, they will need to have a medical condition that prevents them from working and that's longterm, expected to last at least a year or lead to death.

How much might you receive in benefits if you qualify? Well, it will depend on your earnings history, just like Social Security retirement benefits depend on them. The average monthly benefit was recently $1,200 (that's about $14,400 per year).

Here are some specific things the Social Security Administration considers as it reviews your application:

  • Whether you're currently working, and if you are, how much you're earning: The limits change every year or so. In 2019, for example, if you're disabled (but not blind) and earning more than $1,220 per month, on average, you won't qualify. The limit is $2,040 if you're blind.
  • The severity of your condition: The Social Security Administration's definition of disability requires you be significantly limited in terms of being able to do basic working activities (such as sitting, standing, walking, lifting, and remembering) for at least a year.
  • Whether your condition or impairment is on the list: The SSA will check to see if your condition is on their list of sufficiently severe conditions. (These include chronic liver disease, recurrent arrhythmia, a heart transplant, various cancers, multiple sclerosis, and many others.) If it's not, they'll take a closer look at it to determine whether it qualifies.
  • Whether you can do the work you used to do: The SSA will want to determine whether your disability prevents you from doing your previous job. If it doesn't, then you likely won't qualify.
  • Whether you can do any other work: The SSA will take into account your age, skills, education, work experience, disability, and so on in order to determine whether you may be able to do some other kind of work. If it decides that you can do other work, you will likely not be deemed to have a qualifying disability.

The requirements for qualification are clearly stringent, but if you think you or a loved one might qualify, it's well worth looking into it more, and perhaps applying.

Once you've received disability benefits for two years, you'll automatically get Medicare coverage.

You can apply for disability benefits online or in person at your local Social Security office. It's smart to make an appointment first, to save yourself a lot of waiting time. Once you apply, the Social Security Administration will review your application and see whether you meet the various criteria. A state agency will likely consult with your doctors and health service providers you've used about your condition and treatments you've received. You may be asked to undergo a medical exam, too, possibly performed by your own doctor and paid for by Social Security.

If you're approved, you'll receive a letter telling you so and letting you know how much money you can expect to receive. If you're denied, you'll also receive a letter, explaining why. You'll be able to appeal the decision, if you want.

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Social Security survivor benefits

Social Security also provides survivor benefits to qualifying spouses and children of workers who die.

Surviving spouses may be able to receive payments from Social Security if their late partner worked enough to qualify for Social Security retirement benefits. Some others may be eligible, too. Here's the list of possible recipients, according to the Social Security Administration:

  • The spouse of the deceased, aged 60 or older
  • The spouse of the deceased, aged 50 or older, if disabled
  • The spouse of the deceased at any age, if he or she is caring for the deceased's child who is younger than 16 or disabled
  • An unmarried child of the deceased who is younger than 18, or younger than 20 if still a full-time student in elementary or secondary school or 18 or older and with a disability that began before age 22
  • A stepchild, grandchild, stepgrandchild, or adopted child under certain circumstances
  • Parents aged 62 or older, who were dependent on the deceased for at least half of their support
  • A surviving divorced spouse, under certain circumstances

A widow or widower can start collecting retirement benefits as early as age 60, but they will be reduced. To collect the full benefits, he or she will have to wait and begin collecting at their full retirement age.

If two spouses are both collecting Social Security retirement benefits, with one benefit check bigger than the other (as is typically the case), if the partner with the bigger checks dies, the surviving spouse will start to receive those larger checks instead of their own smaller ones. Yes, the household will lose one of the benefits, but it will be the smaller one.

The first step to claiming Social Security survivor benefits is to inform Social Security of the death. This is often done by the funeral home taking care of the deceased, if the family provides the deceased's Social Security number. It's important to be sure that Social Security is notified soon after the death, so that, for example, any retirement benefits being paid to the deceased will be stopped. (If Social Security is notified after a post-death payment is made, it will have to be repaid.) Also, the sooner Social Security is notified, the sooner it will be able to make payments to whoever is entitled to them -- and some benefits are not retroactively paid.

If you're going to notify Social Security yourself, know that you can't do so online. You'll have to either visit your local Social Security office or speak with the agency on the phone (at 800-772-1213). Be prepared with your Social Security number and that of the deceased, as well as the date of death. Birth and death certificates will likely also come in handy.

Social Security benefits for children

Children can collect benefits from Social Security, too, if they qualify in any of a variety of ways. (This discussion of children generally includes adopted children, dependent stepchildren, and even, sometimes, grandchildren.) To qualify, a child must:

  • Have one or more parents who are retired and entitled to Social Security benefits
  • Have one or more parents who are disabled and entitled to Social Security benefits
  • Have one or more parents who have died, after having worked enough (paying Social Security taxes) to be entitled to Social Security benefits

The child must also be unmarried and meet one of the following conditions:

  • Be younger than age 18
  • Be 18 or 19 years old and a full-time student in elementary or secondary school
  • Be 18 or older and disabled, with the disability having commenced before age 22

Children who are disabled may qualify for benefits on their own, too.

Closeup of a dictionary page, defining the words "Social Security"

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The Social Security trust fund

Finally, it's good to have a handle on how Social Security is set up. Remember that the money you pay into the Social Security system is used to pay the benefits owed to current beneficiaries. For a long time now, there has been more money coming in than going out, so the process proceeded smoothly, with the surplus funds going into...the Social Security trust fund.

The "Social Security trust fund" term actually encompasses two funds: The Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. Managed by the Department of the Treasury, they allow our government to contain assets collected and to keep track of inflows and outflows. A board of trustees watches over the trust funds and reports to Congress annually on their condition. By law, funds are spent only on benefits and administration, and assets in the funds are invested only in securities guaranteed by the U.S. government. The Treasury makes "special issues" available solely for the trust funds. They differ from traditional marketable Treasury securities by being less vulnerable to changes in value due to overall market conditions. In other words, these investments are structured so as to never lose value. These securities then generate interest that can be used to pay benefits and can be redeemed or sold over time, too.

Many people misunderstand this process, and some (such as politicians or the media) occasionally mischaracterize it, suggesting that the government is borrowing from, or "raiding" the Social Security trust fund. To help you see why that's not a fair accusation, consider this: If you invest in U.S. bonds, you're giving the government money, and the government is promising to pay back your investment at a certain time (when the bond "matures"), and to pay you interest, too. You're lending money to the government, and the government is borrowing from you -- and rewarding you, too. It's not raiding your bank account or stuffing suspect IOUs into your pocket. The Social Security trust fund, like you, is simply investing money and is receiving interest along the way, too.

Here's another misconception about the Social Security trust fund: It's not going broke any time soon. It does face some serious challenges, though:

It used to be that there were many more Social-Security-tax-paying workers than beneficiaries, and that kept the system flush with funds. But as people have been having fewer children and living longer, the contributing-workers-to-beneficiaries ratio has been falling. Back in 1950, the ratio was 16.5, with about 48 million workers supporting close to three million beneficiaries. In 2018, it was just 2.8 -- and it's expected to hit 2.2 by 2035.

Thus, while the Social Security trust funds have been running a surplus in every year since 1984 -- meaning they took in more money than they paid out -- the surpluses are likely to stop around 2020. All is not lost at that point, though. At that point, the Social Security system can rely on incoming interest payments to make up the funding deficit -- for a while. According to several government estimates, Social Security funds are likely to see their reserves run dry between 2033 and 2037 if no changes are made. If that happens, payment checks won't disappear, but they'll likely shrink by about 25%. 

There are plenty of changes that might be made to the program -- to strengthen or even possibly weaken it. As an example, it's been estimated that fully 77% of the trust funds' shortfall could be eliminated by increasing the Social Security tax rate for employers and employees from its current 6.2% to 7.2% in 2022 and 8.2% in 2052. This wouldn't be a new strategy. The tax rate was increased in 1983, in order to bolster the program ahead of many Baby Boomer retirements.

Another possibility is taxing all of each worker's income, instead of just the first $132,900 of it. Many don't realize it, but there's a cap on how much of our earnings are taxed for Social Security -- for 2019, that cap is $132,900. Most of us are thus taxed on all our income, but those lucky enough to earn, say, $1,132,900 pay no Social Security tax on a million dollars of their income. Eliminating the earnings cap over a 10-year period has been estimated to be able to wipe out 71% of the trust fund shortfall.

Other possibilities include raising the full retirement age further, reducing benefits paid, and imposing a means test on recipients. If you have any strong feelings about Social Security and whether you want it strengthened, contact your representatives in Washington and let them know.

Social Security is likely to be around for a long time, in one form or another. To get the most out of it, it's smart to learn a lot about it and about effective Social Security strategies.

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