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Social Security benefits

Lesson 29 of 92 · All lessons · Up next: Tax treatment of life insurance premiums, proceeds, and MECs →

A federal floor, not a full income

Social Security, formally Old-Age, Survivors, and Disability Insurance (OASDI), is a federal social insurance program. Workers and employers fund it through payroll taxes (FICA), and self-employed people pay the combined share through self-employment tax. Nobody buys a policy: a worker earns protection by working in covered employment and earning credits, also called quarters of coverage. At most four credits can be earned in a year.

Social Security is designed to replace only part of working income. For an insurance producer that makes it the base layer of a client's plan: you estimate what it will pay, and private life insurance, annuities and retirement plans fill the gap above it.

Insured status decides who can collect

  • Fully insured: generally 40 credits, about ten years of work. Fully insured status is

what retirement benefits require, and it is permanent once reached.

  • Currently insured: at least 6 credits in the 13 calendar quarters ending with death.

This short-term status is enough for some survivor benefits, including the benefit for a surviving parent caring for the worker's child.

  • Disability insured: fully insured plus recent work, the extra test for disability

benefits.

Retirement benefits and claiming age

A fully insured worker can start an old-age benefit at 62 by filing an application, and it is paid monthly until the month before death. The primary insurance amount (PIA) is the benefit at full retirement age (FRA), figured from the worker's highest indexed covered earnings through a formula that replaces a larger share of pay for lower earners. FRA is 67 for anyone born in 1960 or later.

  • Early: claiming before FRA permanently reduces the benefit by five-ninths of 1% per

month for the first 36 months and five-twelfths of 1% per month after that. For an FRA of 67, claiming at 62 pays 70% of the PIA.

  • At FRA: 100% of the PIA.
  • Delayed: each year past FRA adds 8% in delayed retirement credits, up to age 70, so

waiting from 67 to 70 pays 124%. A worker who has already started benefits can voluntarily suspend them between FRA and 70, but while suspended, no one else can draw benefits on that worker's record.

Before FRA, an earnings test applies: a beneficiary still working who earns more than an annual limit has some benefits withheld. From FRA on, work no longer reduces the check. Benefits rise each year with cost-of-living adjustments.

The diagram has two parts. The top part is a bar chart of the Social Security retirement benefit by claiming age for a worker whose full retirement age is 67. The bar for claiming at 62 is the shortest, at 70 percent of the primary insurance amount. The bar for claiming at 67 reaches a dashed reference line at 100 percent. The bar for delaying to 70 is the tallest, at 124 percent. The bottom part is a timeline for a surviving spouse after a young worker dies. It begins at the worker's death with a blue block for the mother's or father's benefit, 75 percent of the primary insurance amount, which ends when the youngest child turns 16. Then comes a red dashed block labeled blackout period, where the spouse receives no survivor benefit. At the point where the spouse turns 60, a green block begins for the widow or widower benefit. A note under the timeline says life insurance is the classic way to fund the blackout period.
Claiming age changes the retirement check for life, and a young family's survivor benefits leave a blackout period.

Benefits for the family

  • Spouse: up to 50% of the worker's PIA at the spouse's own FRA, and reduced if

taken earlier. A spouse caring for the worker's child who is under 16 or disabled can collect at any age.

  • Divorced spouse: same basis if the marriage lasted at least 10 years and the divorced

spouse is unmarried.

  • Child: 75% of the PIA for children of a deceased worker, and up to 50% while the

worker is alive. Eligible children are unmarried and under 18, under 19 if still in high school, or disabled before 22.

  • Widow or widower: 100% of the PIA at the survivor's FRA, or reduced by up to 28.5% as

early as 60. A disabled survivor can start at 50. Remarriage before 60 generally ends eligibility.

  • Mother's or father's benefit: 75% of the PIA, at any age, while caring for the

deceased worker's child under 16 or disabled.

  • Lump-sum death payment: a one-time $255 payment to an eligible spouse or child.

A family maximum caps the total paid on one worker's record.

Disability benefits

Social Security Disability Insurance (SSDI) uses a strict definition: the worker must be unable to do any substantial gainful work because of a condition expected to last at least 12 months or to end in death. There is a five-month waiting period before benefits begin, and Medicare eligibility follows after 24 months of disability benefits. Because this definition is far stricter than most private disability policies, producers treat SSDI as a possible supplement, never as the whole plan.

The blackout period

When a young parent dies, the surviving parent receives the mother's or father's benefit only until the youngest child turns 16. The survivor's own widow or widower benefit cannot start until 60. The years in between pay no survivor benefit to the spouse, and this gap is called the blackout period. Life insurance is the classic way to fund it, and it is one of the most tested Social Security points on the producer exam.

Key terms

Sample questions

How is Social Security primarily funded?

  • Premiums each worker pays to a private insurer chosen by the employer
  • State general revenue appropriated each year by the legislature
  • Payroll taxes on covered wages paid by workers and employers, plus self-employment tax
  • A one-time enrollment fee paid when a worker first applies for benefits
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