The government of the United States founded the Social Security Administration in 1935. Along with retirement pension, the administration also offers social insurance program to disable people and survivors of a traumatic event.
The Calculation of Credits
The Social Security retirement benefit plan is a credit-based plan, where you need at least 40 credits to be eligible. As per the rules released in 2018, to earn one credit, you need to earn $1,320 in one year. You can only earn four credits in a year, taking the annual total to $5,280. To earn all 40 credits, you need to work for at least ten years.
Once you qualify, you have to apply to the Social Security Administration. The committee will calculate your monthly payout and adjust it to inflation. They calculate how much you’ve earned in 35 years of work and divide it by 12. If you’ve for less number of years, the remaining are counted as zero.
The calculation gives your average indexed monthly earnings, which is used to calculate the primary insurance amount or initial monthly benefit in other words. The formula for 2018 is:
- 90 per cent of the first $896
- 32 per cent of an amount greater than $896 and less than $5,399
- 15 per cent of an amount greater than $5,399
As you can see if you’re able to earn the full amount you likely have already had the opportunity to have substantial retirement savings.
Full retirement age and modification to Social Security benefit
Your full retirement age depends on the year you were born. For instance, if you were born in 1955, then your full retirement age was 66 years, two months. For people born after 1960, the full retirement age is 67 years.
If you choose to access your social security fund before full retirement age, the primary insurance amount is reduced by six ⅔ per cent per year permanently. If it only less than 36 months early, only five per cent annually is deducted.
The money won’t be as much because you’ll be on government support for a longer time, so they need to have money for those additional years of payment. If you choose to take the pension at a delayed time, the primary insurance amount is increased by eight per cent annually.
Primary insurance amount for current employees
Social Security Administration gives you complete permission to start your pension even if you are currently employed. Unfortunately, the amount you receive monthly will be less than what you would’ve got if you weren’t working. The administration performs two types of earnings tests using your current age.
- If you are going to reach your full retirement age post-2018, a total of $17,040 earnings will be removed from your total annual earnings. Your retirement benefit will decrease by $1 for every $2 over the earnings.
- If you reach the full retirement age in 2018, you can exclude $45,360 from annual earnings. You can remove $1 for every $3 over the earnings. You can consider the second one only if you are a few months from your full retirement age.
Neither of these tests will matter if you’ve reached your full retirement age. Also, how much you earn won’t matter after that. Let’s say you took the pension benefit before full retirement age and the administration withholds the benefits. After you reach the full retirement age, you can ask the administration to release the benefits, so that you can take their advantage.
The Cost of living adjustment or COLA 2020
The Social Security Administration adjusts the cost of living adjustment every year and is directly affected by modifications in the consumer price index. In case of negative inflation or no changes, COLA of the previous year is applicable for the current year. That’s because you cannot downgrade Social Security benefits due to positive changes in the market.
People receiving primary insurance amount received a 1.6 percent increase in COLA in 2020 compared to 2019. Hardly enough to afford a managed retirement community. Unfortunately, it didn’t do much good because the government raise Medicare Part B premium amount in the same year. This amount goes from the primary insurance amount earned by the individuals.
Average earnings from Social Security
As of January 2018, a person usually gets $1,404 from Social Security every month. If you delayed the pension, you receive a little more, and if you took it before full retirement age, you receive a little less. In 2018, the maximum a person received on a monthly basis was $2,788. To get this amount, the person needs to work for at least 35 years. If the person waits until 70 years of age to receive the pension, they receive a monthly benefit of $3,680.
Visit www.ssa.gov to know an estimate of how much benefit you’ll receive once you retire. To claim the benefits, you’ll have visit the same website and fill out the application form. It barely takes 15 minutes of your time. You can also make an application over a phone call between 7 am to 7 pm.