Social Security

Social Security Benefits After You Retire

By Beth Laurence, J.D., University of California, Hastings College of the Law

Social Security is a federal government program designed to provide financial support to workers when they retire and are unable to earn an income. Although benefits vary from person to person, they are often only enough to cover basic living expenses. Social Security is an important part of retirement planning for most people.

Funded With Your Taxes

Under the Social Security system, a tax is deducted from your paycheck by your employer, and your employer provides a matching contribution. The tax that is deducted from your paycheck (part of the FICA tax) amounts to 6.2% of your income. This tax is only taken out of individuals' first $127,200 in income.

To qualify for Social Security retirement benefits, you must work at least 10 years, but your benefits are calculated using your average annual income for your highest-earning 35 years. As of 2017, the average Social Security benefit was $1,360 per month, while the maximum benefit (at full retirement age) was $2,687. These amounts usually increase annually to offset inflation. You are entitled to receive benefits from the time you retire until the time you die.

Delaying Retirement Can Increase Benefits

As of 2017, age 62 is the minimum age to receive Social Security retirement benefits. This is considered early retirement, however, and you will not receive the full amount you are entitled to if you collect benefits before your full retirement age. Benefits are reduced 6-7% for year year you collect benefits before full retirement age. The longer you wait to retire, up until age 70, the higher your benefits will be. Benefits increase 8% each year you wait after full retirement age to collect benefits.

For workers who were born in 1943 to 1954, full retirement age is 66. However, full retirement age is set to gradually climb to age 67 for those born in 1960 or later.

Working and Collecting Early Retirement Benefits

If you continue working while you collect early retirement, or if you go back to work, your benefits will be reduced based on how much money you earn. Once you reach full retirement age, working will not affect your benefits. For more information, see our article on reduced early retirement benefits for workers.

Special Rules for the Self-Employed

If you are self-employed, you must pay self-employment tax equal to both employee and employer Social Security contributions. In 2017, this amounts to 12.4% of your first $127,200 in income. Social Security tax applies only to wages, not to dividends. Some folks try to lower their self-employment taxes by incorporating and taking some of their compensation in dividends rather than salary, but this alternative will reduce their retirement benefits. In addition, the IRS can impose tax penalties for those who pay themselves an unreasonably low salary to avoid self-employment taxes.

If you were self-employed before retirement, the Social Security Administration may make a special determination of your benefits if you choose to retire before full retirement age.

Future of Social Security

Due to accelerating retirement of the "baby boom" generation, as well as expected slower wage growth, the Social Security trust fund is expected to run short of money sometime in the future. Although the trust fund is still increasing (and it stands at $2.8 trillion as of 2016), by 2033, the trust fund is expected to run dry. At that point, if nothing is done to shore up the trust fund, Social Security will be able to pay only 77-80% of the benefits it currently pays to recipients. The federal government, however, is expected to make changes to prevent this from happening, such as increasing Social Security taxes and/or increasing minimum and full retirement ages.

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