Retirement Planning - Your Social Security Benefits

Social Security is the retirement-income security program run by the Social Security Administration (SSA), an agency of the federal government. An estimated 47 million Americans will receive basic Social Security benefits in 2004.

Social Security is considered a "safety net" program. As a result, Social Security pays a benefit that is often inadequate by itself to maintain a standard of living in retirement that matches what you enjoy in your working years.

Financial planners and advisers encourage you to save with tax-deferred accounts such as IRAs and 401(k) plans to supplement your retirement income. This educator has explained some of the features of these investment vehicles.

To earn Social Security benefits, you must have paid Social Security taxes during your working years. Social Security taxes are also called payroll taxes, since your employer withholds these taxes from your income and pays an equal share to the IRS. The combined rate for payroll taxes is 7.65%. Social Security taxes are also called FICA taxes.

Social Security taxes consist of two main components: taxes for the Old Age Survivors and Disability Insurance (OASDI) fund and Medicare taxes. For 2004, you pay 6.2% of the first $87,900 in income for OASDI. Your employer contributes the same percentage. If self-employed, you pay 12.4% of the first $87,900 in taxes.

You also pay 1.45% of your income in Medicare taxes. There is no limit on the amount of taxable income that is taxed for Medicare. Your employer contributes the same percentage. If self-employed, you pay 2.9% of your income in Medicare taxes.

To qualify for Social Security benefits, you must earn 40 credits during your working years. You can earn as many as four credits a year. To earn one credit in 2004, you need to earn $900. Social Security benefits are reported as taxable income at higher incomes.

For single filers, 50% of your benefits are taxable if your income is between $25,000 and $40,000. At higher incomes, 85% of your benefits are taxable. For married persons filing a joint return, 50% of your benefits are taxable if your combined income is between $32,000 and $50,000. At higher incomes, 85% of your benefits are taxable.

According to the Social Security Administration, the average retired worker will receive estimated monthly benefits of $922 in 2004. These amounts include a cost-of-living adjustment (COLA) of 2.1% for benefits in 2004.

Supplemental Security Income (SSI) provides an additional income benefit for persons who are disabled or lose a spouse. The maximum SSI payment to individuals in 2004 is $564. For couples, the maximum SSI benefit in 2004 is $846.

There are limits to how much you can earn in a year or month without having your benefits reduced. The following table shows the income limits for 2003 and the rate for calculating how benefits are reduced at higher incomes.

You can request a Social Security Statement at the SSA's Web site. If you prefer, you can also download a request form and mail it to the address on the form.

You are eligible to receive partial Social Security benefits when you turn age 62. The trade-off in receiving partial benefits is that the amount of your permanent monthly benefit is reduced.

You should carefully evaluate whether it is better to postpone benefits until you reach the minimum age to be eligible to receive full benefits (see table below). The SSA calculates a lower monthly payment that makes the net present value of either option worth the same. However, if you don't yet need the income, it may be a better idea to postpone applying for benefits.