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Social Security – How Much Do You Really Know (Part 2)?


In this Blog series, we are covering a range of topics designed to educate Americans on the details of Social Security. The System is designed for Americans, and is rightfully theirs, assuming they qualify under the rules. Earning that right is the focus of today’s blog. It is not a rite of passage for a U.S. citizen to receive a Social Security benefits; it must be earned. There are no Participation Trophies.

Last week we covered the forty (40) “Quarters of Coverage” qualification period. Current recipients have already qualified, and future claimants must qualify under the 40-Quarter Rule, unless they are granted one of a few exceptions. The primary exception is for non-working spouses who have been married to a qualified participant for a requisite period of time (a critical provision for an orderly society).

We have previously written about the hundreds of thousands of Americans who have not qualified for Social Security benefits. These are largely workers who apply their skills and perform work as independent contractors. Whether paid in cash or by check, their wages are difficult for the government to track. Therefore, many of these workers simply ignore the reporting and tax-paying demands of the Internal Revenue Service and, by inference, Social Security and Medicare. They will not qualify for benefits unless they start paying taxes.

Citizens who are currently receiving Social Security benefits every month know many of the ins and outs of the System. We understand how some other people have let time slip away; it happens in the blink of an eye. Most of us, at least in our more contemplative moments, have compassion for these people. Most of them did not know what a future without Medicare and Social Security would bring. Society should be better at educating people about their financial futures and the rules to get there.

Modern American society has transformed from a pension-driven retirement system to a retirement system based mostly on individual responsibility (401(k), 403(b), etc.). Social Security, which was never designed to provide a stand-alone retirement income annuity, is an extra cushion or safety net. Without Social Security benefits, most older Americans would have trouble retiring at all, or at least would not be as comfortable. That is why qualifying is so important.

Given the high priority placed on qualifying for Social Security benefits, Americans should also understand how benefits are calculated. Unlike generic annuities, every person’s Social Security benefit is customized exactly to that person’s circumstances. The system rewards hard work and success, and so does not create disincentives to work.

Starting with the individual’s 41st quarter of paying into the system, benefits are calculated using the top 40 quarters of earnings. If a recent quarter’s earnings exceed any previous reported quarterly income, the new quarter replaces the smallest old quarter. This means that benefits increase as people work and pay more into the system. As I frequently point out to listeners and readers, Social Security is one of the best-designed systems I have ever studied. It is, however, extremely complex, and we all benefit as our understanding grows.

In the next few weeks, we will be covering more and more details about Social Security. Our efforts are aimed at teaching people about options existing within the System, and how to plan for their personal “best” ways to collect.

Van Wie Financial is fee-only. For a reason.