The US Social Security system is the largest pension system in the world. We discuss the main characteristics of public retirement pensions in the US and the parameters taken into account for their recognition and calculation.
Social Security, What is it and how does it work?
Social Security in the United States provides workers with a source of income when they retire or if they are unable to work due to a disability. It also supports their legal dependents (spouse, children, or parents) with benefits and death benefits.
Social Security is a program administered by the U.S. Federal Government (i.e., the central government) through the Social Security Administration (SSA). The program works by paying contributions into a trust fund to provide benefits to people who are eligible for the pension.
Every person who wants to work will need to have a Social Security number.
Main benefits offered by the SSA (Social Security)
There are four types of benefits:
- Retirement pensions
- Disability pensions (incapacity)
- Benefits for spouses or other survivors of a family member who has died
- Supplemental Security Income (SSI): For people with limited income and resources, or who are 65 years of age or older and have certain disabilities
How is the right to receive these benefits generated?
While you are an active worker, you pay Social Security taxes (i.e., you pay Social Security contributions). This contribution money goes into a trust fund that pays benefits. Each year that a person works, he or she will get credits to help him or her qualify for benefits when retirement (or another contingency) comes around.
The contributions paid to Social Security are used to pay benefits ( pensions). It is therefore a pay-as-you-go system: the contributions collected are used to pay the benefits of current retirees.
Any contribution money not used to pay benefits goes to the Social Security trust fund, which pays monthly benefits to the worker when he or she begins receiving retirement pensions.
Public retirement pensions
Social Security pensions replace a percentage of workers’ pre-retirement income, based on their earnings throughout their working lives. On average, beneficiaries of public retirement pensions receive 40% of their pre-retirement income from their pensions (replacement rate).
Social Security advises that, in general, a public pension should be only one part of retirement income planning. When a worker plans for retirement, knowing the approximate amount he or she will receive in Social Security benefits helps him or her determine how much other retirement income (from employer benefits and private savings) he or she will need to reach his or her goals.
How is it calculated?
The retirement pension is calculated based on your highest earnings over the last 35 years and varies depending on how much you earn and when you choose to start collecting the pension (retirement age).
Eligibility
When you work and pay into Social Security, you earn “credits” toward your Social Security benefits. The number of credits you need to qualify for retirement benefits depends on when you were born. If you were born in 1929 or later, you need 40 credits (usually this represents 10 years of work).
If you stop working before you have enough credits to qualify for benefits, the credits will remain on your Social Security record. If you return to work later, you may be able to add more credits.
How do you get credits?
Since 1978, workers have earned up to a maximum of four credits per year.
Credits are based on total wages during the year, in the case of employees, and on self-employment income in the case of self-employed workers.
You may have to work all year to earn those four credits, or you can earn enough in much less time to get them.
The amount of income you need to earn a Social Security credit can change each year. In 2021, you get one credit for every $1,470 in earnings you earn. You must earn $5,880 to get the maximum of four credits for the year.
If during working life the person earns more credits than the minimum number needed to qualify for a pension, these additional credits do not increase the amount of the worker’s pension. It is the average of the earnings during the working years that determines how much the monthly benefit will be when the person receives the pension.
Income history
The amount of Social Security pensions that a worker or his or her family receives depends on the amount of earnings shown on his or her personal record.
Each worker can find his or her earnings history through his or her personal account on the My Social Security online site.
Retirement age
The age at which each person begins receiving their retirement pension affects the amount of their monthly benefits.
When to start receiving a retirement pension is a personal decision for each worker. If you choose to retire and start receiving your pension when you reach your ordinary retirement age (called “full retirement age”), you will receive the full amount of your benefit. If you decide to start receiving your pension before you reach full retirement age, your pension amount will be reduced.
“Full retirement age” (ordinary age)
This is the age at which you can start receiving the full amount of your retirement pension. This ordinary retirement pension is:
| 66 years if born between 1943 and 1954. It increases gradually if you were born between 1955 and 1960 until you reach age 67. For those born in 1960 or later, full retirement benefits are paid at age 67. |
Early retirement age
You can access your retirement pension from the age of 62. However, the amount of your pension is reduced if you start receiving it before your full retirement age. The following table shows the impact of bringing forward your pension to age 62:
Delayed retirement age
If the collection of the pension is delayed beyond the full retirement age, the amount of the retirement pension will continue to increase until the age of 70, although not after the age of 70.
Calculating benefits: My Social Security account
Knowing what they will get each month in public retirement benefits helps workers plan for their retirement. Through their My Social Security account, Americans can get a personalized estimate of their retirement benefits and see the effects of different retirement age scenarios. It also allows retirees to track and manage their Social Security (SSA) benefits, as well as make changes to personal information on their Social Security records.
There is also an online Retirement Estimator available at www.ssa.gov/benefits/retirement/estimator.
