How you qualify
Under the rules, you get credits toward eligibility by earning certain amounts of money. Most workers pick up the necessary credits without even thinking about it. Generally, 40 credits — which you can pick up in ten years of covered employment — does the trick. By covered employment, I mean a job in which you and your employer pay Social Security taxes. (If you’re in business for yourself, you have to pay both the employer and employee shares.) These days, almost all jobs are covered. (For information on which jobs aren’t covered, see the nearby sidebar “Which jobs aren’t covered.”)
In 2020, Social Security awards you one credit for every $1,410 in earnings, and you can get up to a maximum of four credits per year. (The dollar amount typically rises each year to reflect growth in wages.) For example, say you earned $5,640 in 2020. That means you earned a total of four credits ($1,410 × 4 = $5,640). Now, say you earned $100,000 in 2020. You still earn a total of four credits, because four credits is the yearly maximum no matter how much money you make.
How much you get
Although you have to earn 40 credits to qualify for benefits, that doesn’t determine the size of the payment that goes to you or your dependents. The SSA bases the amount of your benefit on your lifetime earnings — specifically (for workers born after 1928), the 35 highest-paid years in which you paid Social Security taxes. Your 35 highest years don’t have to be consecutive, and they don’t have to be the most recent 35 years, but 35 is an important number. If you have fewer than 35 years of earnings, the SSA adds zeros to reach 35. The impact of those zeros varies depending on your earnings history.
As you may expect, more career earnings mean a bigger benefit. Highly paid workers who contributed more taxes throughout their working careers end up with bigger Social Security payments, although the benefit formula is skewed to provide low earners a larger share of their working wages in retirement than high earners receive.
Social Security benefits rise because of cost-of-living increases that are meant to help retirees keep up with inflation. Congress may debate whether to modify the cost-of-living formula to save money or even to increase payouts, but the importance of inflation protection is widely recognized, and it remains one of the most important and popular features of Social Security.
WHICH JOBS AREN’T COVERED
Most work is covered by Social Security today, but that wasn’t always the case. When Social Security was launched in the 1930s, roughly half the economy wasn’t part of it. Largely excluded were fields associated with African Americans, women, and low pay (including agriculture, domestic service, and many jobs in education and social work). Critics said the exclusions reflected bias in favor of white, male breadwinners. The self-employed, professionals (such as doctors and lawyers), and most jobs in government and the nonprofit sector were also initially left out.
Today, 94 percent of American jobs are covered by Social Security. Categories of workers who may still not be covered include the following:
Most federal employees hired before 1984
Railroad workers with more than ten years of experience or who have worked at least five years with the railroads since 1995
Some state and local government employees
If you fall into one of these categories, it’s possible you will get no Social Security benefits or reduced amounts. (Many people who spend part of their working lives in uncovered employment end up with reduced benefits because of the Windfall Elimination provision and Government Pension Offset provision, which I explain later in this chapter.)
How old you are when you start collecting benefits: You can start receiving Social Security as early as age 62, but your payment will be larger the longer you wait to claim, potentially to age 70. (See Chapter 3 for a discussion of when to begin receiving retirement benefits.)
If you worked in any jobs that weren’t covered by Social Security: Your full benefit may be reduced by any periods of your working career in which your job wasn’t covered by Social Security, a reality for many government workers. (See the earlier sidebar “Which jobs aren’t covered.”)
If you’re working while drawing benefits: Social Security may withhold a portion of your retirement benefits if you earn above a certain amount while receiving benefits and you haven’t yet reached the full retirement age, which is currently 66 and 2 months. (See Chapter 13 for a detailed explanation of how benefits may be affected by earnings.)
In the following sections, I cover how to estimate your benefit, and how much your spouse and children can expect to receive based on your work history.
Estimating your retirement benefit
The average monthly retirement benefit is about $1,503 (in 2020), but the amounts vary. Higher-paid workers who start benefits at full retirement age and have paid the maximum taxable amounts for their entire careers receive about twice that amount ($3,011). If you wait beyond full retirement age, you can get a lot more.
www.ssa.gov/oact/quickcalc) or the Retirement Estimator (www.ssa.gov/estimator). See Chapter 6 for more discussion about Social Security calculators, including a helpful tool from AARP.