The Basics of Social Security Benefits


Most working adults generally have two basic questions concerning Social Security benefits. How much will I draw at retirement if the system works? Will the system still be there when I retire? Let’s take a look at these two questions.


How much will I draw at retirement if the system works?


You must meet certain criteria to draw Social Security benefits. First, you must accumulate 40 work credits during your working life. You earn one work credit for a certain dollar level earned each year. That amount changes from year to year ($1,090 for 2009). You can earn a maximum of 4 credits per year so most folks meet the 40 credit requirement after 10 years of work.


Secondly, you take the average of your highest 35 years of earnings. These years don’t have to be consecutive but $0 earnings years pull down the average. Earnings years before you reached age 60 are adjusted for inflation.  This average earnings amount is multiplied times a percentage based on your prior earnings level. Since Social Security is designed to protect lower income wage earners, they receive a higher percentage of their average than higher income wage earners.


Third, you receive a certain percentage of the calculated benefit depending on the age you start to withdraw.  You draw the highest benefit if you wait until age 70 and the lowest if you start at age 62. For most folks the best age is what is known as “full” retirement age which falls between age 65 and 67.


Here is how it works. If you take “early” retirement (before your “full” retirement age) you are penalized. For the first 36 months that amounts to 5/9ths of 1 percent per month; then 5/12ths of 1% for each additional month. Not only that but you must pay back excess benefits if you earn over a certain level ($14,160 for 2009). If your full retirement age is 66, age 62 benefits would be approximately 75% of your full retirement benefit.


At full retirement you can earn an unlimited amount without having to pay back excess benefits. You may have income tax on your benefits however. If you wait until after your full retirement age your benefits will increase 8% per year until age 70. You should consult your CPA or financial advisor to assist in optimizing the right time for you based on your personal circumstances.


The Social Security Administration will provide you with a benefit estimate each year so you will not have to compute this yourself but an understanding of the method may help you maximize your benefit.


Will the system still be there when I retire?


That is the $1,000,000 question. Although the Social Security system was designed as a “pay-as-you-go” system, we seem to be going faster than we are paying. According to the “best guess” assumptions of the Social Security Administration, the Trust Fund surplus will peak in 2028. The fund will then begin a steady decline until it is exhausted by 2042. If no other changes are made in the interim, benefits would then have to be reduced by 27%. In 2078, they would have to be reduced another 32%.


What are some of the solutions? One could be a total system change. Privatization and private accounts are touted as alternatives. As far as the current system goes there are several ways: an immediate infusion of $3.54 trillion; increasing the payroll tax rate from its current level of 12.4 up to 14.3%; or by reducing currently scheduled benefits 12.6%. (2006 estimates)


Politicians don’t want to address the problem; it is too politically dangerous. But they won’t let it go broke either (opinion). That is equally politically dangerous. It is always prudent to plan for your own retirement benefits but Social Security will likely be there in some form to supplement your plans.



Jim W. Norman, CPA, PFS is a principal with Norman, Johnson & Co., PA, a Spartanburg Certified Public Accounting firm.  This column is intended to provide you with an informative summary of the subject matter covered.  You should consult with your tax and legal advisors for details and assistance in applying this general information to your specific situation.  (


Click here to return to referring page or here to return to the home page.