Bank of America Merrill Lynch

Taking the mystery out of Social Security

We all know about Social Security—or do we? If you’re feeling a little in the dark about how Social Security actually works, you’re not alone. Read on to learn more about this important benefit.


First, a little history

President Franklin D. Roosevelt signed the Social Security Act of 1935, creating a social insurance program covering a variety of individuals. It was a troubling time in the country, considering the Great Depression and stock market crash. This program not only provided a monthly benefit to individuals age 65 and older and no longer working, but it also provided unemployment insurance, aid to dependent children, and grants to states for medical care.


How does Social Security fit into an average retiree’s income plan?

Social Security makes up one leg of the “three legged stool” of retirement income. Retirement income generally comes from three sources: Social Security benefits, defined contribution and/or pension plans and other assets.

Here’s how Social Security benefits are determined:

1 Employees pay taxes per the Federal Insurance Contributions Act (FICA) guidelines, which earns them “credits” toward Social Security retirement benefits. The credits are based on annual earnings, with a maximum accrual of four credits per year.
2 Once 40 credits have been acquired (approximately 10 years of employment), an individual is fully insured and eligible to receive Social Security retirement benefits. In 2018, a quarterly credit is equal to $1,320 of earnings, but may be adjusted each year.
3 The primary insurance amount is the monthly benefit for which an individual is eligible at full retirement age. To determine the primary insurance amount, the Social Security Administration uses the best 35 years of employment to arrive at an individual’s average indexed monthly earnings.
4 If someone continues working after reaching full retirement age, the Social Security Administration will automatically recalculate benefits each year, increasing the benefit amount if income increases.


What’s age got to do with it?

Full retirement age is one of the most important concepts to understand when considering Social Security benefits. This is the age that the Social Security Administration establishes for an individual to be entitled to receive full retirement benefits. It is based on the year you were born:

Born between 1943 and 1954, full retirement age is 66 years old.
Born between 1955 and 1959, full retirement age is 66 plus two months per year after 1954 until 1960.
And for those born 1960 or later, it is age 67.
Full Retirement Age

People can begin taking benefits at age 62, but it will be a permanently reduced amount. A delay starting benefits past full retirement age results in an increase to benefits for every year up to the maximum benefit at age 70.


Working while receiving early Social Security benefits

Social Security benefits will be reduced if an individual’s earned income is more than the threshold amount set by the Social Security Administration. The threshold is generally adjusted each year.

If you are under Full Retirement Age: $1 of benefits is withheld for every $2 earned above the $17,040 per year limit.
The year you reach Full Retirement Age: $1 of benefits is withheld for every $3 earned above the $45,460 per year limit for the months prior to the month of your birthday.
The month you reach Full Retirement Age and beyond: Reduction no longer applies.

Only your wages are considered. Spouse’s wages are not considered. Source: Fact Sheet Social Security.

Another consideration to working while receiving early Social Security benefits includes the fact that the income may be taxable, based on a formula.

The formula combines adjusted gross income plus nontaxable interest plus one-half of total Social Security benefit. If the combined income exceeds the “base amount” as defined by the Social Security Administration, then the Social Security benefits are taxable.

For a single income tax filer or head of household, the base amount is $25,000. If combined income, using the above stated formula, is between $25,000 and $34,000, up to 50% of the benefit is taxable. Above $34,000, up to 85% of the benefit is taxable.
For a married person filing jointly, the base amount is $32,000. If the combined income of the individual and their spouse, again using the formula above, is between $32,000 and $44,000, up to 50% of the benefit is taxable. Above $44,000, up to 85% of the benefit is taxable.

The Combined Income limits have not been indexed for inflation and are not scheduled to be indexed.


The longevity factor

Life expectancy considerations play a major role in Social Security. Today, people are living longer, healthier lives, which in turn means they are collecting Social Security benefits for much longer than the program originally intended. Over the last two decades, the life expectancy of Americans has risen dramatically.

Today, 92% of healthy 65-year-old couples can expect that at least one member will live to age 85.1
More than three-quarters (79%) will have at least one member live to age 90.1
Over half (53%) will have one member live to age 95.1


Helpful resources

Understanding what is needed for income in retirement and the sources of that income can be confusing, but our Bank of America Merrill Lynch representatives can help employees identify their retirement income goals and a plan of action. In addition, the Education Center on Benefits OnLine® hosts a variety of articles, seminars, videos and interactive tools that can be helpful to employees as they prepare for retirement.

1 Social Security Administration, Monthly Statistical Snapshot, November 2017.

This discussion of Social Security is general in nature, is intended for informational purposes only, and is not all-encompassing. The circumstances surrounding each situation differ, and additional eligibility requirements or restrictions may apply.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.