Will It Affect The Amount Of Your Benefits
Social Security benefits are probably going to be one of your key sources of retirement income, so it can be helpful to understand a little bit about how your benefit amount is determined, and to know the amount of money you’re likely going to get from the Social Security Administration when you retire.
If you’re trying to figure that out, one of the key things to know is how the calculation used to determine your benefits changes from year to year. In particular, here’s what’s going to happen to it in 2021.
Image source: Getty Images.
Fact #: Social Security Is More Than Just A Retirement Program It Also Provides Important Life Insurance And Disability Insurance Protection
Over 65 million people, or more than 1 in every 6 U.S. residents, collected Social Security benefits in January 2022. While older adults make up about 4 in 5 beneficiaries, another one-fifth of beneficiaries received Social Security Disability Insurance or were young survivors of deceased workers.
In addition to Social Securitys retirement benefits, workers earn life insurance and SSDI protection by making Social Security payroll tax contributions:
- About 96 percent of people aged 20-49 who worked in jobs covered by Social Security in 2020 have earned life insurance protection through Social Security.
- For a young worker with average earnings, a spouse, and two children, thats equivalent to a life insurance policy with a face value of nearly $800,000 in 2020, according to Social Securitys actuaries.
- About 89 percent of people aged 21-64 who worked in covered employment in 2020 are insured through Social Security in case of severe disability.
The risk of disability or premature death is greater than many people realize. Some 7 percent of recent entrants to the labor force will die before reaching the full retirement age, and many more will become disabled.
New Benefit Awards 2020
Benefits were awarded to about 5.8 million persons of those, 58% were retired workers and 11% were disabled workers. The remaining 31% were survivors or the spouses and children of retired or disabled workers. These awards represent not only new entrants to the benefit rolls but also persons already on the rolls who become entitled to a different benefit, particularly conversions of disabled-worker benefits to retired-worker benefits at FRA.
| Beneficiary |
|---|
Read Also: Commonwealth Senior Living Employee Benefits
Expand Benefits Across The Board
Despite the success of Social Security, it is clear that too many seniors and other beneficiaries are still struggling to get by. DeFazio believes that we must expand Social Security so that everyone in America can retire with the respect that they have earned and deserve after a lifetime of hard work. Thats why in addition to reforming the COLA formula, DeFazios plan would expand Social Security Benefits across-the-board. As a result, Social Security retirement benefits for low-income workers would go up by about $1,300 a year.
DeFazios plan would also help low-income workers stay out of poverty by updating the outdated Special Minimum Benefit formula so that more individuals can qualify. In addition, DeFazios plan would restore student benefits up to age 22 for children of disabled or deceased workers. Restoring this program, which was eliminated in 1983, would help educate children of deceased or disabled parents who are full-time students in a college or vocational school.
Doing A Breakeven Analysis And Other Ways To Decide How Soon To Start
InvestopediaForbes AdvisorThe Motley Fool, CredibleInsider
If youre about to retire, you may be wondering whether you should start claiming your hard-earned Social Security benefits now. Here are a few key factors to consider in making that decision.
Also Check: How Do I Calculate My Retirement Benefits
How About Prescription Drug Costs Under Medicare They Eat Into Social Security Benefits
Most seniors prescription drugs are covered through Medicare Part D, and that program has not had a cap on the amounts that beneficiaries must pay out of pocket after deductibles are met. That can be a hardship for older people with very high drug costs. In 2020, 1.4 million Part D enrollees spent $2,000 or more out of pocket on drugs, according to the Kaiser Family Foundation.
The climate and health care bill that President Biden signed into law in August aims to start curbing those costs with a series of changes that will start phasing in next year.
In 2023, the Inflation Reduction Act curbs the soaring cost of insulin with a $35 monthly cap for Medicare enrollees. Also starting next year, drug makers will pay penalties for any price increase on a drug that exceeds the rate of general inflation.
The legislation takes a two-stage approach to capping total out-of-pocket costs. In 2024, Medicares requirement that enrollees pay 5 percent coinsurance above the Part D catastrophic threshold will be eliminated. That will provide important relief to retirees who now pay 5 percent of the cost of very expensive drugs for conditions such as cancer, diabetes, rheumatoid arthritis and atrial fibrillation. And starting in 2025, a $2,000 total out-of-pocket cap takes effect.
The large COLA will push some retirees over income thresholds that require them to pay income taxes on part of their Social Security benefit.
Now You Know How The Social Security Benefit Formula Works
Now you know exactly how the Social Security benefit formula works. To sum it all up:
So, while the Social Security benefits formula may seem simple since you’re just adding up different percentages of your average earnings over 35 years depending how much you earn, there’s obviously a lot more to applying the formula than first meets the eye.
You May Like: Benefits Of Filing Tax Extension
The Impact Of Medicare Changes
Medicare costs are decreasing, which is good news for seniors. Medicare announced in September that it would be reducing premiums by about 3% for most people with a Medicare Part B plan. The typical plan will drop by $5.20 per month, lowering the standard payment most pay to $164.90 per month. Health care costs are a big portion of many seniors monthly budgets, and any reduction here is a good thing.
One key concern, though, comes from some higher earners who may get bumped up to the next tax bracket with the COLA increase. Specifically, those who earned over $97,000 as an individual or $194,000 as a couple in 2021 will pay more than the standard Part B premium as well as pay more for Part D drug plans. For some, that could be a concern going forward.
Costs Of The Solution
Two issues that are likely to arise in any discussion of fixing this problem are its cost to the Social Security trust fund and its cost to the federal budget. With regard to the cost to the Social Security trust fund, there are three ways to look at the issue.
One way is to view the cost relative to costs in a world in which no pandemic had occurred. For example, the cost could be measured using the economic assumptions in the most recent Social Security trustees report , which were formulated before the pandemic began. From this perspective, the cost would be zero because the legislative change would restore the world of Social Security benefits to what it would have looked like had there been no pandemic.
A second way of looking at the issue is to view the cost of the change relative to costs in a world that reflected economic assumptions indicative of the economic recession caused by the pandemic. From this viewpoint, there would be a cost associated with fixing the problem. For example, the chief actuary of the SSA estimates that if the AWI in 2020 were to fall 5.9 percent below its 2019 level, the AWI adjustments proposed by Chairman Larson would cost $90 billion in present-value dollars for the 75-year period from 2020 through 2094about 0.02 percent of taxable payroll over that period. . The cost over the 10-year period from 2020 to 2029 would be about $21 billion in nominal dollars.
You May Like: Northrop Grumman Employee Benefits Login
Reducing Cost Of Living Adjustment
At present, a retiree’s benefit is annually adjusted for inflation to reflect changes in the consumer price index. Some economists argue that the consumer price index overestimates price increases in the economy and therefore is not a suitable metric for adjusting benefits, while others argue that the CPI underestimates the effect of inflation on what retired people actually need to buy to live.
In 2003 economics researchers Hobijn and Lagakos estimated that the social security trust fund would run out of money in 40 years using CPI-W and in 35 years using CPI-E.
An Example Of Taxed Benefits
Lets say you receive the maximum Social Security benefit for a worker retiring at FRA in 2021: $3,148 per month. Your spouse receives half as much, or $1,574 a month. Together, you receive $4,722 a month, or $56,664 per year. Half of that, or $28,332, counts toward your combined income for determining whether you have to pay tax on part of your Social Security benefits. Lets further assume that you dont have any nontaxable interest, wages, or other income except for your traditional individual retirement accounts required minimum distribution of $10,000 for the year.
Your combined income would be $38,332half of your Social Security income, plus your IRA distributionwhich would make up to 50% of your Social Security benefits taxable because youve exceeded the $32,000 threshold. Now, you may be thinking, 50% of $56,664 is $28,332, and Im in the 12% tax bracket, so the tax on my Social Security benefits will be $3,399.84.
Fortunately, the calculation takes other factors into account, and your tax would be a mere $225. You can read all about the taxation of Social Security benefits in Internal Revenue Service Publication 915.
Also Check: Social Security Survivor Benefits Income Limit
Total Benefits Paid By Year
| Year |
|---|
Workers in Social Security covered employment pay FICA or SECA taxes and earn quarters of coverage if earnings are above minimum amounts specified in the law. Workers with 40 quarters of coverage are “fully insured” and eligible for retirement benefits. Retirement benefit amounts depend upon the average of the person’s highest 35 years of “adjusted” or “indexed” earnings. A person’s payroll-taxable earnings from earlier years are adjusted for economy-wide wage growth, using the national average wage index , and then averaged. If the worker has fewer than 35 years of covered earnings these non-contributory years are assigned zero earnings. The sum of the highest 35 years of adjusted or indexed earnings divided by 420 produces a person’s Average Indexed Monthly Earnings or AIME.
The AIME is then used to calculate the Primary Insurance Amount or PIA. For workers who turn 62 in 2021, the PIA computation formula is:
90 percent of the first $996 of average indexed monthly earnings, plus
32 percent of average indexed monthly earnings between $996 and $6,002, plus
15 percent of average indexed monthly earnings over $6,002
Monthly benefit amounts are based on the PIA. Once the PIA is computed, it is indexed for price inflation over time. Thus, Social Security monthly benefit amounts retain their purchasing power throughout a person’s retirement years.
How Does The 2023 Increase Compare To Prior Years
The 2023 COLA is markedly higher than most other years. For 2022, the Administration raised the COLA by 5.9%. The increase was just 1.3% for 2021 and 1.6% for 2020.
The last big increase was in 1981 when the Administration set the COLA at 11.2%. In 1980, it was adjusted by 14.3%, the highest since 1975.
Also Check: Retired At& t Employee Benefits
Child Beneficiaries December 2020
About 2.9 million children under age 18 and students aged 1819 received OASDI benefits. Children of deceased workers had the highest average payments, in part because they are eligible to receive monthly benefits based on 75% of the worker’s PIA, compared with 50% for children of retired or disabled workers. Overall, the average monthly benefit amount for children was $653.
What Is The Social Security Benefits Formula For 2019
The Social Security benefits formula that applies to determine your primary insurance amount is the formula in effect when you turn 62. The percentage of AIME you receive never changes, but the bend points do. In 2019, the bend points are $926 and $5,583. So, if you turn 62 in 2019, the Social Security benefits formula that would apply to determine your benefits is:
- 90% of the first $926 in AIME
- 32% of the amount of AIME between $926 and $5,583
- 15% of the amount equal to or greater than $5,583 in AIME
You May Like: What Zip Codes Get Extra Social Security Benefits
Claim That Politicians Exempted Themselves From The Tax
Critics of Social Security have said that the politicians who created Social Security exempted themselves from having to pay the Social Security tax. When the federal government created Social Security, all federal employees, including the president and members of Congress, were exempt from having to pay the Social Security tax, and they received no Social Security benefits. This law was changed by the Social Security Amendments of 1983, which brought within the Social Security system all members of Congress, the president and the vice president, federal judges, and certain executive-level political appointees, as well as all federal employees hired in any capacity on or after January 1, 1984. Many state and local government workers, however, are exempt from Social Security taxes because they contribute instead to alternative retirement systems set up by their employers.
Timing And Your Health Coverage
Your health insurance coverage can also play a role in deciding when to claim Social Security benefits. Do you have a health savings account to which you would like to keep contributing? If so, note that if youre age 65 or older, then receiving Social Security benefits requires you to sign up for Medicare Part A, and once you sign up for Medicare Part A, youll no longer be allowed to add funds to your HSA.
The SSA also cautions that even if you delay receiving Social Security benefits until after age 65, you might still need to apply for Medicare benefits within three months of turning 65 to avoid paying higher premiums for life for Medicare Part B and Part D.
In 2022, the average monthly premium for Part D will be $33 per month versus $31.47 in 2021. If you enroll in a Medicare Advantage plan, the average monthly premium will be $19 per month in 2022 versus $21.22 in 2021. However, if you are still receiving health insurance from your or your spouses employer, you might not yet have to enroll in Medicare.
As of Dec. 26, 2021, Social Security offices are only open by appointment, and to get an appointment you need to be in a limited, critical situation. Most people will have to transact their business online, by phone, or through the mail.
Don’t Miss: Suffolk County Employee Retirement Benefits
How To Calculate Social Security Benefits
This article was written by Jennifer Mueller, JD. Jennifer Mueller is an in-house legal expert at wikiHow. Jennifer reviews, fact-checks, and evaluates wikiHow’s legal content to ensure thoroughness and accuracy. She received her JD from Indiana University Maurer School of Law in 2006.There are 10 references cited in this article, which can be found at the bottom of the page. This article has been viewed 68,132 times.
Understanding how much you’ll receive each month in Social Security benefits is a big part of retirement planning. The average is around $16,000 a year, but the actual amount you’ll receive depends on how much money you’ve put into the system. The Social Security Administration and other groups have online calculators that can help you estimate your benefits, but to calculate them more exactly you’ll have to calculate your average indexed monthly earnings to find your primary insurance amount. This amount must then be adjusted up or down to account for the age you decide to retire.XResearch source
Fact #: Social Security Is Especially Beneficial For Women
Social Security is especially important for women, because they tend to earn less than men, take more time out of the paid workforce, live longer, accumulate less savings, and receive smaller pensions. Women represent more than half of Social Security beneficiaries in their 60s and 7 in 10 beneficiaries in their 90s. In addition, women make up 96 percent of Social Security survivor beneficiaries.
You May Like: Certified Employee Benefits Specialist Cebs
When Can I Start Collecting Social Security
The minimum age to claim benefits is 62. If you are turning 62 and need the income from Social Security to support yourself, then you can start claiming your benefits now. However, if you have enough other income to keep you going until you are older, you may want to delay increasing the size of your monthly benefit.
Will Your Expenses Decrease After You Retire
Retirement could be more expensive than you expect.
If you’re planning an active retirement or carry a mortgage or other debt, retirement may be more expensive than you expect. Some regular expenses like your out-of-pocket health care costs will likely increase as you get older. You can protect your retirement lifestyle by reducing your largest expenses. You can also increase your regular income by claiming at your full Social Security benefit age or later. If you claim earlier, your monthly benefit could be reduced by as much as 30 percent.Create a retirement budget.
Retirement could be more expensive than you expect.
If you’re planning an active retirement or carry a mortgage or other debt, retirement may be more expensive than you expect. Some regular expenses like your out-of-pocket health care costs will likely increase as you get older. You can protect your retirement lifestyle by reducing your largest expenses. You can also increase your regular income by claiming at your full Social Security benefit age or later. If you claim earlier, your monthly benefit could be reduced by as much as 30 percent.Create a retirement budget.
Maintain your lifestyle by planning ahead.
Maintain your lifestyle by planning ahead.
Many people find retirement is more expensive than expected.
Many people find retirement is more expensive than expected.
Recommended Reading: Roth Ira And Tax Benefits