The ability to retire comfortably or the knowledge that should you become disabled, you would not automatically be unable to pay the bills is a security that is afforded to many Americans by virtue of their participation in Social Security.
Why Do People Contribute to Social Security?
Social Security is a type of income insurance. An amount is deducted from your paycheck (or you pay out of pocket if you are self-employed), and in exchange, you are eligible to receive Social Security benefits when you reach a certain age or develop a qualifying condition.
Social Security is designed to help older people and disabled persons, as well as the surviving family members, after a wage earner passes to make ends meet. “About 168 million people work and pay Social Security taxes and about 60 million people receive monthly Social Security benefits,” explains the Social Security Administration. “Most of our beneficiaries are retirees and their families — about 42 million people,” with the balance made up of disabled persons and serving dependents.
How Much Do People Have to Contribute to Social Security?
All Americans who work are required to pay Social Security taxes, as well as Medicare taxes. Medicare is a type of health insurance for people who qualify for Social Security. The amount you pay is based on your earnings, up to $118,500 per year as of 2016. If you are self-employed, you will need to pay 12.4 percent of your income towards Social Security benefits and 2.9 percent of your net earnings towards Medicare. If you work for someone else, the tax burden is divided. You would have 6.2 percent for Social Security and 1.45 percent for Medicare deducted from your paychecks, and your employer would pay the remaining 6.2 percent and 1.45 percent respectively.
In addition, you may have to pay an additional 0.9 percent tax towards Medicare if your income exceeds a certain threshold. In 2016, the threshold amount for a couple married and filing jointly is $250,000 and $200,000 for a single person.
These sums are paid throughout your working life.
What Do You Get From Social Security?
The short is answer is that is depends upon when you retire. Full retirement age is 65 for people born before 1943, 66 for people born 1943 to 1954, and 67 for people born in 1960 or later. Those born in 1955 to 1959 are able to reach full retirement benefits after turning 66 and some months; it depends on the year of birth.
However, you may still be able to collect Social Security retirement benefits starting as early as age 62. In this case, your benefits will be reduced, as you are under the full retirement age for a person born in your birth year. The Social Security Administration will “reduce your benefit about one-half of 1 percent for each month you start your Social Security before your full retirement age. For example, if your full retirement age is 66, and you sign up for Social Security when you’re 62, you would only get 75 percent of your full benefit.” On the other hand, you may opt to delay collecting your Social Security retirement benefits until you are past your full retirement age, up to age 70. In this case, the Social Security Administration increases your monthly benefit each month you delay filing for retirement benefits.
For many people, Social Security benefits are a necessary lifeline, but they are not meant to replace earned income entirely. In fact, it typically replaces only 40 percent or so of a person’s income upon retiring, whereas most analysts agree that in order to live comfortably in retirement, you would need closer to 70 percent of your pre-retirement earnings — and that is at a minimum. A strong retirement plan includes Social Security retirement benefits, as well as investment income and savings.
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