April 7th, 2019
10 Social Security Terms You Need to Understand
Just 10? Nah, there’s lots more but let’s start with these.
If you’ve been paying FICA taxes ( see #3 below ), and have done so for at least 40 quarters, then you can expect to qualify for retirement benefits at some point. None of these 10 tell you when to claim benefits, or what those benefits might be, or whether they will still be there for you if you live long enough, or what happens if you die and leave a spouse. But this is a good start.
And if you haven’t already, get yourself to SSA.GOV and create an account. If for no other reason than to confirm the numbers they have for you are what you think they should be.
In a few years, it’s predicted that people age 65 years or older will outnumber those 18 and younger. Virtually every one of those millions of people will be eligible for Social Security benefits. Today, it serves as a key source of income for countless retirees and disabled individuals.
After years of helping people come to terms with those questions I suggested above, it’s an extremely complex program loaded with rules and terminology. I’ve had conversations with people working for the local office who have no clue what I’m talking about. Maybe they were just new employees. But that’s a sample of what might happen to you if you don’t make an effort to understand it all before you reach at 62.
OASDI stands for old age, survivors, and disability insurance, and in the context of your paycheck, it’s the tax used to fund the Social Security program. The current OASDI tax rate is 12.4%. If you are self employed, that full amount is charged against your income. If you work for someone else, your employer will pay 6.2% and you’ll pay the rest.
SSI stands for supplemental security income, and it’s different from OASDI. It’s a program funded by general tax revenues, not Social Security taxes. SSI is designed to help those who are over 65, blind, or disabled with limited financial resources keep up with their basic needs.
3. FICA Tax
FICA stands for the Federal Insurance Contributions Act. It’s the tax that’s withheld from your salary or self-employment income that funds both Social Security and Medicare. For the current year, 2019, FICA tax equals 15.3% of earned income up to $132,900. (12.4% for Social Security and 2.9% for Medicare), but those making above $132,900 will continue to pay 2.9% FICA tax on income exceeding that threshold. You can expect it to increase in 2020.
4. Social Security credits
In order to collect Social Security benefits, you must earn enough credits during your working years. In 2019, you’ll receive one credit for every $1,360 in earnings, up to a maximum of four credits per year. For 2018, the value of a single credit was $1,320 of earnings. Those born in 1929 or later need 40 credits to qualify for benefits in retirement.
AIME stands for average indexed monthly earnings, and it’s used to calculate your personal Social Security benefit. The amount you receive from Social Security is based on your highest 35 years of earnings. To arrive at your AIME, your past earnings are adjusted for inflation so that they don’t lose value. If you have some zeros in that 35 year history, it will discourage you from taking early benefits. You might want current earnings to replace some of those zero years.
6. Full retirement age
Your full retirement age, or FRA, is the age at which you’re eligible to collect your Social Security benefits in full. FRA is based on your year of birth, and for today’s older workers, it’s 66, 67, or 66 and a number of months. Though you’re allowed to claim benefits prior to reaching FRA (the earliest age is 62), doing so will cause you to collect a reduced benefit amount — permanently.
7. Delayed retirement credits
Though waiting until full retirement age will ensure that you collect your benefits in full, if you hold off on filing for Social Security past FRA, you’ll rack up delayed retirement credits that will boost your benefits. Specifically, for each year you wait, you’ll get an 8% increase in your payments. Delayed retirement credits stop accruing at age 70, so that’s typically considered the latest age to file for Social Security (even though you can technically wait even longer than that).
8. Trust Fund
The Social Security Trust Fund was established in the early 1980s to cover any future shortfalls the program might face. If Social Security has a year in which it collects more taxes than it needs to use, that money is placed in the Trust Fund and invested in special Treasury bonds. Once Social Security’s incoming tax revenue fails to cover its scheduled benefits, the Trust Fund will be tapped to make up the difference. Come 2034, however, the Trust Fund is expected to run out of money, at which time future recipients might face a reduction in benefits.
In the context of Social Security, it stands for cost-of-living adjustment, and it’s designed to help beneficiaries retain their purchasing power in the face of inflation. In the early days, those who collected Social Security received the same benefit amount year after year. Beginning in 1975, beneficiaries have been eligible for automatic COLAs based on fluctuations in the Consumer Price Index. While guaranteed, if consumer prices don’t climb in a given year, benefits can remain stagnant. The CPI used is actually the CPI-W, which is the CPI for Urban Wage Earners and Clerical Workers. It’s argued this is not realistic since younger, working age people spend their money very differently from older retired people whose health care expenses are statistically much higher.
10. Survivors benefits
Survivors benefits are designed to provide income for your beneficiaries once you pass. Those benefits are based on your earnings records and the age at which you first file for Social Security. Surviving spouses, children, and even parents of deceased workers are eligible for survivors benefits.
Clearly, there’s a lot to learn about Social Security, but familiarizing yourself with these key terms will help you better understand how the program works. It also pays to read up on ways to maximize your benefits so that you end up getting the best possible payout you’re entitled to.
Tony Kendzior, CLU, ChFC
Got a question for Tony? Go to the "Retirement Talk with Tony" thread in our forums.