About one in six people in the United States collect some form of Social Security benefits each month, a total of nearly 60 million recipients. We often think of Social Security as a well-known retirement benefit, but Social Security is an expansive program with many types of benefits for people of nearly all ages. Choosing the right type of benefit — if you’re eligible — can make a big difference in your monthly benefit from Social Security.
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What are Social Security Benefits?
The Social Security program that we know today originally began in 1935, when the Social Security act was signed into law by President Franklin D. Roosevelt as part of the Second New Deal. The primary goal of the Act was to provide financial aid for children, the unemployed, and the elderly. At the time the legislation was passed, the country was still only midway into the Great Depression, and the Social Security Act was accompanied by several other measures designed to jumpstart the economy and provide financial relief to those in need.
Social Security benefits include the following:
- Social Security Disability Income (SSDI) benefits
- Survivor benefits
- Social Security benefits for children
- Supplemental Security Income (SSI) benefits
- Social Security retirement benefits
What are Social Security Retirement Benefits?
Over 70% of the people receiving Social Security benefits are receiving retirement benefits. The retirement benefit is only available for those who are at least 62 years of age. Eligibility for retirement benefits requires that the recipient has earned at least 40 work credits, with four credits available for each year worked. In 2015, the method of calculating eligibility for work credits changed, assigning one work credit for every $1,220 in earnings as opposed to the amount of time worked.
Social Security retirement benefits can be affected by your age, when you begin to draw benefits, and the average of your 35 highest-earning working years. There’s also a cap on how much can be received as a retirement benefit. Partial benefits can be paid at age 62, with full benefits available at age 65 to 67, depending on your birth year. In most cases, retirees benefit most from waiting until they can receive a full benefit at age 70 because the amount of the benefit increases by up to 8% each year between age 62 and age 70. However, there can be exceptions to this rule and households with retirees who retire at different times should research their options carefully. The difference can mean tens or even hundreds of thousands of dollars in Social Security benefits that you may or may not receive as a household, depending on your choice.
Workers who become disabled later in life may also have the option of filing for disability benefits as opposed to retirement benefits.
How work credits impact your Social Security
Some of Social Security’s benefits are only available in select circumstances, such as the benefits available to a child whose parent is deceased, but there’s often confusion regarding disability benefits and retirement benefits, specifically which one to choose if you are at or near retirement age and become unable to work.
Both disability and retirement benefits are funded by contributions made by payroll deductions
Social Security disability and retirement benefits are funded by a FICA tax of 15.3% of the worker’s gross earnings, which includes contributions for both Social Security and Medicare. The Social Security withholding applies to earnings below $128,400 in 2018. Earnings above this amount are not subject to Social Security withholding but are still subject to Medicare withholding, approximately 3% of gross earnings. FICA taxes are split between the employee and employer. Self-employed individuals are responsible for the entire 15.3%, subject to their income.
Both Social Security disability and retirement benefits use work credits to determine eligibility
Both Social Security disability and retirement benefits use work credits to determine eligibility. In most cases, a total of 40 work credits are required for full benefits. For disability benefits, 20 of the 40 work credits must be earned in the 10 years preceding your disability. For younger workers, the work credits requirement may be lowered. Up to four work credits are available for each year in the workforce. Until 2015, the system worked off a simple calendar system. Beginning in 2015, work credits are earned based on earned wages, with a minimum amount of earnings required to earn a work credit.
Both disability and retirement benefits can provide income when 62 years of age or older and unable to work due to a disability
Assuming you have enough work credits earned based on your age, disability benefits are available long before retirement age. Disabled workers under age 24, for example, only need six work credits earned in the three years prior to their disability. Social Security disability benefits are available up until the full age of retirement.
Social Security retirement offers full benefits available at age 65 to 67 depending on the year in which you were born, and partial benefits available beginning at age 62. Retirees have the option of waiting until age 70 to draw Social Security, allowing their monthly benefit to grow by about 8% each year and providing a higher monthly income than if they took benefits when first eligible for full benefits.
A third option, Supplemental Security Income (SSI), is available to low-income individuals who have a disability and haven’t earned sufficient work credits to qualify for SSDI, including those who have never worked. Unlike Social Security disability and retirement benefits, SSI is not funded by payroll deductions. Instead, the SSI benefit is funded by general fund taxes.
Disability requires meeting strictly defined criteria, retirement benefits rely on work credits and age
Social Security disability benefits and retirement benefits rely on different guidelines for work credits to determine eligibility,
However, if the required amount of work credits has been met, eligibility for the two benefits begins to diverge. To qualify for disability benefits, applicants must pass a strict set of guidelines to demonstrate that they are unable to work in their chosen field and are also unable to work in other areas. Generally, the hurdles to qualify for Social Security disability benefits become smaller for older applicants. This creates some important considerations for workers over age 62 who become disabled. Technically, disabled workers over age 62 may be able to qualify for either Social Security disability or Social Security retirement benefits. It isn’t possible to collect both at the same time, but one may be advantageous over the other.
Benefit amounts can differ depending on age
For workers over age 62 and below the age of full retirement who become disabled, it’s usually advisable to apply for Social Security disability benefits. At age 62, Social Security retirement benefits only pay 75% of the full benefit. By comparison, Social Security disability benefits pay 100% of the full retirement benefit – even at age 62. Additionally, someone over age 62 receiving Social Security disability benefits can still defer their Social Security retirement benefits until they reach full retirement age, thereby ensuring that their Social Security retirement benefits will not be reduced because they began drawing disability benefits prior to full retirement age.
Social Security can provide benefits for people of nearly all ages, but often it’s when you’re at retirement age that your choices have the most financial impact on both current income and future income. Waiting an extra few years until you reach age 70 — and earning income along the way — can create a dramatic increase in your Social Security retirement benefit, an important consideration now that we’re living longer.
Another important consideration is when to take Social Security disability benefits if you’re over age 62 and can qualify for either Social Security disability benefits or retirement benefits. Many people who may qualify for disability benefits instead choose retirement benefits because they’ve heard that qualifying for disability benefits is difficult or because they feel a stigma may be attached to receiving disability benefits. Qualifying for disability benefits when you’re older is typically easier, and the difference and the monthly benefit can be as high as 25%, making it an option that’s worth exploring for disabled working-age seniors.