Almost everyone has heard of Social Security—it’s a term that frequently comes up in conversations about financial security and retirement planning. Yet, despite its widespread recognition, many people know very little about how it works.

At its core, Social Security provides crucial financial support to retirees and individuals with disabilities. Although debates about its future persist, Social Security remains a critical lifeline for millions of Americans.

So, what are the fundamentals of Social Security? How did it begin? What does its future look like, particularly in the United States? We will delve into these questions and more, sharing with you what you need to know about Social Security.

The Basics: History and Key Concepts

The United States Social Security system was established by the Social Security Act of 1935. Signed into law by President Franklin D. Roosevelt as part of the New Deal, this legislation was designed to offer economic relief during the Great Depression.

But what exactly is Social Security? It’s a federal program that provides a stable source of income for retirees, disabled individuals, and families of deceased workers. Primarily funded through the Federal Insurance Contributions Act (FICA), payroll taxes are deducted from employees’ wages to finance the program. These contributions accumulate over a worker’s lifetime to offer financial stability during retirement or in the event of disability or death.

Social Security benefits are calculated based on earnings history rather than financial need. This means that individuals with higher lifetime earnings generally receive greater benefits. Additionally, the age at which benefits are claimed also impacts the amount you receive. You can begin claiming benefits at age 62, but your monthly payments will be reduced compared to waiting until your Full Retirement Age (FRA), which is 66 or 67 depending on your birth year.

Calculating Benefits

Understanding how Social Security benefits are calculated is crucial for making informed decisions about your retirement. The process involves several key steps:

Determine Eligibility

First, check your eligibility, which is based on Social Security credits. These credits are earned through your income, and you need a specific number to qualify for benefits. Review your Social Security Statements to track how many credits you have accumulated. Generally, you need 40 credits to qualify for retirement benefits, and you can earn up to 4 credits per year.

Calculate Average Indexed Monthly Earnings (AIME)

Next, review your earnings history to calculate your Average Indexed Monthly Earnings (AIME). AIME is the average of your highest 35 years of earnings, adjusted for inflation. While the Social Security Administration (SSA) will calculate this number for you when you apply for benefits, you can also do it yourself by summing your highest 35 years of earnings and dividing the total by 420.

Identify Primary Insurance Amount (PIA)

Finally, calculate your Primary Insurance Amount (PIA). AIME serves as the basis for your PIA, which is the amount you are eligible to receive each month at your FRA. The SSA calculates this number, and your benefits will vary depending on the age at which you start receiving them.

The SSA has many helpful online calculators for you to explore--check them out here.

Now you know the basics of Social Security and how to calculate benefits. But how can you maximize these benefits? Here are a few strategies to consider:

Delay Benefits: Delaying your benefits past your FRA can increase your monthly payments, which continue to grow annually until age 70.

Coordinate with Your Spouse: For example, one spouse might initially claim spousal benefits based on their partner’s work history, later switching to their own benefit if it offers higher returns.

Minimize Taxes: Managing other sources of income can help reduce the tax burden on your Social Security benefits.

It is important to recognize that the most effective strategies vary based on individual circumstances. Factors such as life expectancy, financial needs, and additional retirement income sources all influence the best approach for maximizing Social Security benefits.

The Future

In the 21st century, the long-term viability of Social Security has become a subject of ongoing debate and concern. Challenges such as increasing life expectancy, rising health care costs, and economic fluctuations threaten the future of Social Security. Strategies to maintain the program and its effectiveness have been discussed at length by policymakers and economists. These strategies include changes to funding, eligibility criteria, and benefit levels.

Ultimately, the future of Social Security depends on legislative decisions, societal priorities, and the economy. While the future is uncertain, it remains imperative for you to understand its role in retirement planning and your financial future.

Be proactive in educating yourself about Social Security and other income sources. Additionally, take the time to thoroughly understand your finances. Knowing how to calculate and maximize your earnings--whether from Social Security or other income sources--is essential for long-term financial stability.

HORAN Wealth is here to help you grow, sustain and safeguard your wealth. We offer a variety of wealth management services, and we have a team of experienced advisors ready to assist you. Visit https://horanwealth.com/contact to contact us today!

HORAN Wealth is the marketing name of HORAN Securities, Inc. (“HSI”) and HORAN Capital Advisors, LLC (“HCA”). Securities offered through HSI, a dually registered investment firm, member FINRA | SIPC. HORAN Wealth Management (“HWM”) is the associated investment advisory firm. HCA is an affiliated investment advisory firm.