Most Americans understand the basics of Social Security -- you work and pay taxes into the system, then when you retire, you claim a benefit. But there's more to the program than that. Social Security is a federal program that provides retirement, disability, and survivor benefit to eligible individuals. It was established in 1935 as a safety net for American workers, and today, it provides benefit to over 64 million people.
Eligibility for Social Security benefit is based on your contributions to the program through payroll taxes. To qualify for retirement benefit, you must have earned a certain number of "credits" based on your age and earnings. Currently, you earn one credit for every $1,470 in earnings, up to a maximum of four credits per year. You need a minimum of 40 credits to qualify for retirement benefit.
The amount of your Social Security benefit is based on your lifetime earnings. Social Security uses a formula to calculate your "primary insurance amount," or PIA, which is the amount you would receive if you claimed benefit at your full retirement age (which varies based on your year of birth). If you claim benefit before your full retirement age, your benefit will be reduced, and if you delay claiming benefit past your full retirement age, your benefit will increase.
Many people are concerned about the future of Social Security, as the program faces a long-term financial shortfall. Social Security is funded through payroll taxes, which are currently not enough to cover the program's expenses. The Social Security Board of Trustees projects that the program's trust funds will be depleted by 2035, at which point benefit will need to be reduced unless changes are made to the program.
One proposal to address Social Security's funding shortfall is to increase the payroll tax rate. Currently, employees and employers each contribute 6.2% of earnings up to a certain limit ($142,800 in 2021). Increasing the payroll tax rate would generate more revenue for the program, but it would also increase the tax burden on workers and employers.
Another proposal is to increase the retirement age. Currently, the full retirement age is gradually increasing from 66 to 67 for people born in 1960 or later. Some policymakers have proposed raising the full retirement age even further to reflect increases in life expectancy and changes in the workforce.
Today's Social Security column addresses questions about whether people living outside the US can still collect their Social Security benefit. The answer is yes, in most cases. If you're a US citizen or lawful permanent resident (green card holder) and you've earned enough credits to qualify for benefit, you can receive your benefit while living abroad. However, there are some countries where Social Security benefit cannot be paid, and there are some restrictions on how much you can receive if you're living outside the US.
If you're approaching retirement age, it's important to plan carefully for when you'll claim Social Security benefit. Make sure you don't regret claiming Social Security by asking yourself how your choice will affect your monthly income. Claiming benefit early can provide a steady stream of income, but it can also reduce your overall benefit amount. Delaying benefit can increase your overall benefit amount, but it may mean you need to rely on other sources of income until you start receiving Social Security.
The trustees who oversee the Social Security and Medicare trust funds have released new projections outlining the financial health of those programs. The projections show that the Social Security trust fund will be depleted by 2034, one year earlier than previously projected. The Medicare trust fund is also projected to run out of money by 2026, although the program will continue to pay benefit at a reduced level.
Policymakers will need to patch the Social Security program by 2033 to avoid draconian cuts in benefit, a year earlier than had been projected in the last report. This means that policymakers will need to act soon to address the program's long-term financial shortfall. Some proposals to shore up the program include increasing the payroll tax rate, raising the full retirement age, and means-testing benefit for higher-income retirees.
Readers sent some of their most urgent financial queries, asking about issues like Social Security and student loan debt. If you have questions about Social Security eligibility or benefit, it's important to consult with a financial advisor or Social Security representative. They can provide guidance on your specific situation and help you make informed decisions about your retirement planning.