If you don’t already, someday, you will probably receive Social Security benefits. Currently, over 90% of all retirees receive Social Security benefits. In fact, three out of every five retirees depend on Social Security benefits for at least half of their retirement income.
Understanding Social Security as a Federal Benefit Program
This article provides a high-level educational overview of Social Security benefits, including retirement, disability, and survivor programs. It is intended to explain how Social Security works in general, not to address Medicaid eligibility, asset protection strategies, or case-specific legal planning.
In exchange for payroll taxes that are collected from an employee and employer, the Social Security system provides monthly payments that are roughly based on an employee’s earnings history. The monthly payments are inflation-protected, being adjusted periodically via Cost of Living Adjustments, or COLA’s.
Yet, Social Security is much more than a retirement system. The true name of Social Security is Old Age, Survivors and Disability Insurance, or OASDI.
As that name suggests, Social Security does not simply provide retirement income to individuals of retirement age. In addition, Social Security provides benefits to surviving spouses, children, and even grandchildren, as well as disability income to disabled workers.
In order to receive Social Security benefits, a person must have worked in “covered employment,” which is almost any form of employment, and must have worked a certain number of quarters in that covered employment. The requisite number of quarters depends on when the worker was born and the program from which the worker seeks benefits. For instance, to receive retirement benefits, a worker born after 1928 must have forty quarters of work in covered employment.
Without forty quarters of coverage, a worker will receive no Social Security retirement benefits. The quarter of coverage requirement is an all-or-nothing proposition. If an individual is seeking retirement benefits and has less than forty quarters of coverage, he or she will not receive any benefits.
A “quarter of coverage” is a calendar quarter, although a worker need not work all three months in a given quarter to have that quarter count towards the requisite quarters of coverage. To count as a “quarter of coverage,” the worker must earn the required minimum amount of earnings, which is adjusted annually for inflation. That amount is presently, approximately, $800.
It is irrelevant how many hours a worker needs to work to earn the requisite earnings. If the worker earns the requisite earnings amount, a quarter of coverage is earned.
Unlike private pensions, Social Security can be paid to the retiree’s spouse, the retiree’s ex-spouse if their marriage lasted more than ten years, and the retiree’s children, if the children are in high school or disabled before age eighteen. (Benefits can even be paid to a parent or grandchild, in certain situations.) These benefits are called “derivative benefits,” because they derive from the worker’s earnings history. In all cases, the amount of any derivative benefit is based upon the amount of benefits that the worker receives.
The benefit amount of the worker is called the “primary insurance amount,” or PIA. Unless a worker retires before his or her full retirement age (traditionally, age 65, although full retirement age is slowly edging higher), the worker receives a full PIA, which is based upon his or her earnings history.
The spouse of a worker is entitled to one-half of the worker’s PIA; however, this amount will increase to the worker’s full PIA, after the worker’s death. A divorced spouse, who was married to the worker for at least ten years, is also entitled to receive one-half of the worker’s PIA.
The divorced spouse will be disqualified from receiving derivative benefits from the worker, if he or she remarries – unless the divorced spouse is over age sixty, in which case remarriage does not affect the derivative benefits.
Certain children are also entitled to receive one-half of the worker’s PIA. These children include children under the age of eighteen, children under nineteen years of age who are still attending high school, and children over age eighteen who became disabled prior to age twenty-two. To receive benefits, the child must be unmarried and dependent on the worker.
Needless to say, there is much more to Social Security than has been mentioned here. I hope that what has been mentioned here gives you some idea of a program of which we all have heard, yet few fully understand.
For Medicaid planning or asset protection strategies, different rules apply and should be evaluated separately from Social Security benefits.