US Social Security Pensions Explained

U.S. legislation contains a deluge of pension laws that may or may not be simple to comprehend. Before diving into some of those laws, it’s worth noting that experts believe a pension fund for a comfortable retirement should equal to around 80% of an employee’s previous earnings. 

Unfortunately, the majority of middle-class citizens are hindered by tough economic conditions and the costs of living, finding it extremely difficult to live comfortably. This also means individuals and families are struggling to ensure financial stability in their later years. 

To secure a sufficient pension in the States, one has to investigate the various financial arrangements available. And the choice is plenty, encompassing many private plans and federal programs. According to the SSA (Social Security Administration), America’s Social Security program covers over 95% of American employees. To learn about the system and understand how it works, take a look at this U.S. Social Security pensions article. We’ll show you the necessary requirements, rules, and retirement benefits while tackling some essential questions. 

Social Security Essentials

Social Security Essentials

The government initiated the Social Security program. It provides income in retirement for eligible individuals as well as their legal dependents. Some of the requirements are based on the number of employment years, salary, and the Social Security number. 

Moreover, this federal program is actually named OASDI, aka Old-Age, Survivors, and Disability Insurance. Yet, Social Security is the colloquial and more memorable term for it. Moreover, the SSA federal agency is in charge of running this nationwide initiative. 

Essentially, it’s an insurance program through which employees earn credits. The program requires citizens to pay Social Security taxes. 

The tax contributions are then dispersed into separate funds. Firstly, one is for Social Security disability beneficiaries (DI). The other for retirees (OASI). What’s more, monthly benefits are then paid through those funds to those who meet the qualifications. 

Key Points

  • The minimum age for eligibility is 61 and eight months.
  • Workers must have paid into the program for a minimum of ten years. 
  • Those who begin receiving benefits at 70 years old will get higher amounts.
  • Depending on a recipient’s earnings record, their spouses and ex-spouses could also qualify for the benefits. 

Application

Application

Overall, an application for the retirement program can be submitted online on SSA’s website. It takes approximately 15 minutes to apply, and the same form can be used to apply for Medicaid, depending on your age. Moreover, one must possess a Social Security number before applying. 

In addition, future participants can complete their application locally in Social Security institutions. Those institutions will also allow you to schedule consultations with representatives for detailed inquiries. 

Lastly, it’s important to mention that this program is independent of the 401(k) plan. In fact, you may use them simultaneously. 

Retirement Plan Eligibility and Benefits

During employment, individuals can pay taxes and then obtain credits. The credits will count toward retirement benefits. 

How to Qualify

Persons born throughout and after 1929 will need to have completed ten years in employment to gain 40 credits. Those who were born earlier will get a smaller requirement. Forty is the necessary number of credits, and benefits cannot be paid without fulfilling the requirement. 

Plus, the maximum credit number one can gain each year is 4. One credit is awarded for $1,360 in earnings. This requirement changes on a yearly basis in order to compensate for the average earning statistics increase. 

Moreover, in the case of a career break and a lack of earnings, the credit number will be frozen. You will not lose them and will be able to gain more credits after returning to work or switching jobs. Career breaks could affect the benefit size, though. The credit balance is shown in a participant’s Social Security record. What’s more, if traveling or living abroad, participants can collect their monthly benefits as usual. However, there are a few foreign countries, such as North Korea or Cuba, in which you will not be allowed to collect the benefits. For Americans working outside the U.S., different rules will apply.

How Are Benefits Calculated?

The program calculates the benefits according to an employee’s AIME (average indexed monthly earnings). Moreover, the benefits are referred to as PIA, that is, the primary insurance amount. Overall, the AIME takes into account 35 years, during which the individual gained the highest earnings. It stops at age 60. From that, the individual will get an average monthly benefit. 

Specific rules exist regarding legal dependants such as spouses and children.

Pension Amounts

In 2019, a Social Security monthly payment is approximately $1,460 on average. Plus, the highest benefit payments will go to those who collect them later on. Some monthly sums could include approx. $3,700 (collecting at 70), $2,860 (at 66), or $2,200 (at 62). 

The program will also modify the full retirement age slightly based on a retiree’s birth year. However, this number will usually be 66 or 67. 

One thing to note here is that benefits can be reduced if one goes into retirement before reaching the full age. In fact, they could be lessened by around 27% if one collects them before the full age. 

Early or Delayed Retirement? 

If a 62 y/o individual retires in 2019, the benefit size will decrease. However, the benefits may also be reduced if one enters early retirement, does not work, and does not collect benefits. In case of health issues during this time, it may be smarter to opt for disability benefits. 

And in case of a late retirement (after the full retirement age), an extra earnings year will be added to each working year. In addition, if one does not retire before 70, the pension benefits can increase by a specific percentage. This percentage is decided according to the birth year. For instance, if it’s 1943 and later, 8% will be added to the Social Security account. 

Job-Specific Rules

It’s important to point out some job-specific rules. For instance, if self-employed, the requirements will be nearly identical. Moreover, those working in the military will gain credits in the same way but could be eligible to receive additional credits. Domestic and agricultural work, as well as church-related work, will contain special requirements. Some will be related to whether or not your profession requires you to pay employment taxes. 

Timing and Estimates

Ultimately, your timing could be crucial, and it’s important to estimate the best retirement year on an individual basis. For this, one can use various online calculators set up for free by the SSA. They can provide you with estimates on the retirement and disability benefit amounts according to your birth year, retirement year, etc. Moreover, Social Security representatives can also help you to reach an optimal decision for you and your family. 

Final Words

Unlike private and somewhat risky employer-sponsored plans which are quickly fading away, Social Security offers participants a pension secured by the government if all conditions are met. Unfortunately, the average benefits are only slightly higher than the poverty line. As you’ve seen in our article, it’s best to plan in advance in order to get an estimate of the most successful Social Security benefit plan. It’s critical to coordinate factors such as full retirement age and early/late retirement. One way to set up a balanced and sufficient pension may be to use a 401(k) plan in early retirement years and then opt to receive Social Security benefits later. Good luck with your golden years!