Social Security

Why is Social Security important?

Social Security, now 72 years old, provides $539 billion in annual benefits to nearly 49 million retired and disabled workers, their dependents and families that have lost their wage earners. It is an all-important "safety net" for the retired, aged, disabled and widowed. In fact, for millions of people, Social Security is their only income.

Most people think of Social Security as a retirement program. However, Social Security pays disability and survivors' benefits as well. Medicare hospital insurance is also financed through Social Security taxes. You can read more about these benefits here.

For more on benefits for children, click here.

How does Social Security work?

Social Security is based on a pay-as-you-go system. The payroll taxes that a 40-year-old worker pays into Social Security today help pay for the benefits being received by her parents and grandparents.

How much money will I get?

Once a year, Social Security mails you a statement containing a record of your earnings and estimates of your retirement and disability benefits. It tells you when you'll reach full retirement age and gives you an estimate of your benefits at age 62, at full retirement age and at 70. Your benefits will be based largely on your earnings during the 35 years in which you made the most money. You can request a copy of your annual Social Security statement online or by calling 1-800-772-1213.

What are my retirement choices?

You can take your Social Security payments at 62, at 65 plus or at 70. These are your options:

Early retirement. If you take your Social Security at 62, your monthly payments will be permanently reduced between 20% and 30%, depending on your date of birth. By retiring at 62, you will get payments for a longer period of time but with fewer dollars than if you had waited until "normal" retirement age of 65 plus. The age 62 reductions for you and your spouse are shown here.

TIP: When a spouse dies, his or her widow may be entitled to a survivor benefit. Often that means a widow will receive her late husband's payment if it is larger than hers. If her husband took a reduced benefit at 62, she will get the reduced payment for the rest of her life.

Example: A husband is entitled to a $1,200 benefit at full retirement age but decides to take his benefits at 62 and thus receives $960 a month. On his death, his widow will get $960 a month instead of the $1,200 she would have gotten if her husband had waited until full retirement age to take his benefits.

Normal retirement. The "normal" or "full retirement age" is slowly moving up from 65 to 67. For instance, a worker who was born in 1942 and will turn 65 in 2007 will not reach full retirement age until she is 65 and 10 months old. You can see a chart showing your full retirement age here.

Late retirement. Social Security offers a bonus to those who wait until 70 to take their benefits. If the worker who was born in 1942 waits until 70 to take her benefits, she will earn a 7.5% bonus for each year she waited. By waiting, she will receive fewer payments but with more dollars in each than if she had retired earlier. A chart showing the bonus payments is found here.

TIP: One other reason to wait: During those extra years of work, you may continue to earn a salary and contribute to Social Security, which may improve both your eventual Social Security benefit and your pension, if you have one.

Which choice is the best financial deal?

That will depend on your individual circumstances. But you can get a good idea of the trade-offs by looking at the "Break-Even" chart.

A description of other factors to consider when making your decision is here.

How will working affect my benefits?

If you continue to work and you are between the ages of 62 and "full retirement age," you will face a possible "earnings penalty." In 2008, for instance, you will lose $1 of benefits for every $2 you earn over $13,560. (A special limit applies in the year in which you reach full retirement age, but after that, the limit goes away.) Read a description of how work will affect your benefits here.

How does a spouse get benefits?

Spouses who work outside the home and pay Social Security taxes generally will be able to draw benefits on their own work record. A spouse who has not worked outside the home will be eligible for a spousal benefit that equals 50% of his or her spouse's benefit. Similarly, a divorced person can draw a benefit based on his or her former spouse's work record—but only if they were married for 10 years. Read details about benefits for your spouse here.

Social Security pays special attention to the needs of women who never work outside the home or who take time off from their jobs to raise their children and care for their families. "What Every Woman Should Know" is an explanation of Social Security's rules concerning benefits for women.

When and how do I apply for Social Security?

Contact Social Security three months before the month in which you want to file for retirement benefits. There are three ways to apply for retirement benefits:

• File your claim at any Social Security office.
• Call 1-800-772-1213 between 7 am and 7 pm ET Monday through Friday. Those who are deaf or hard of hearing may use the TTY number 1-800-325-0778, between 7 am and 7 pm Monday through Friday.
• File your claim on the Internet at www.socialsecurity.gov/planners.

Social Security says you will need certain documents and information when you apply:

• Social Security number;
• Birth certificate;
• W-2 forms or self-employment tax return for last year; and
• Your bank name and account number so your benefits can be deposited directly into your account.

You also will need your discharge papers if you served in the military, your spouse's birth certificate and Social Security number and your marriage license if he or she is applying for benefits, and proof of U.S. citizenship or lawful immigration status if you were not born in the U.S.

What's the rest of the Social Security story?

When most Americans think about Social Security, they think about retirement benefits. But the agency also provides valuable benefits to disabled workers and to families that have lost their wage earners. According to a calculation a few years ago, Social Security disability benefits are equal to a $363,000 disability policy for an average wage earner with a spouse and two children. The income protection given to a worker's survivors is equal to a $378,000 life insurance policy. An explanation of benefits available to people with disabilities is available here.

Meanwhile, a summary of survivor benefits can be found here.

For more information, consult the Social Security Administration's (SSA) Web site at www.ssa.gov.