While everyone has heard that Social security benefits are subject to change in the coming years, it is important to know how the current plan works.
There are 4 components to social security benefits: retirement benefits for workers, retirement benefits for spouses, disability benefits, and survivor benefits. This post deals only with retirement benefits for workers.
Here are the basics of Social security retirement benefits under the current law:
- You must have worked a minimum of 10 years to earn any retirement benefits.
- The benefits are based on the average of the highest 35 years of your earnings, where the earnings in a year cannot exceed the "Social Security Wage Base" limit for each year ($97,500 for 2007).
- If you worked for less than 35 years, the earnings for each year that you did not work will be counted as zero when calculating the average. (Note: this will have a serious impact for "early" retirees.)
- To account for inflation, earnings of more than 2 years before the calculation year are indexed upward (using the national wage index) before using in the above calculation.
- Those born after 1960 will be eligible for full retirement benefits at 67. You are eligible for reduced benefits at 62, but if you opt for this, it will reduce the payment amount for the rest of your life.
- Payroll withholding for social Security is 6.20% of the gross wages, up to the Social Security Wage Base limit. The employer also contributes the same amount.
- It is important to note that social security is not an investment program. Rather, it is a pay-as-you-go system that covers payments to current retirees out of the contributions by current workers. There is currently a surplus in the social security trust fund, but this is projected to end in 2018 when baby boomers fully load the system with retireees.
- Social security is also not a "contractual right"; Congress may pass laws at any time that reduces benefits or suspends eligibility for anyone.