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Understanding Social Security

By Jason Alderman

Since its creation in 1935, Social Security has provided countless Americans with a degree of financial stability through its retirement, disability and survivor benefits. While never intended to fully support people when they retire, Social Security provides many retirees with their only safety net against poverty. So naturally, concerns about its solvency make headlines.

Whether you're a boomer, already retired, or much younger and paying into the program, here's a brief guide to how Social Security retirement benefits work:

Eligibility. Generally, after you've contributed to Social Security for at least 10 years you become eligible to collect a retirement benefit. Those who haven't worked sufficient years may also qualify based on their spouse's work record.

Spousal benefits. If you're married and your earned benefit is less than 50 percent of your spouse's, you will be eligible for a benefit typically equal to half of his or hers. Spousal benefits also are available if you're divorced, provided your marriage lasted at least 10 years, you remain unmarried and are at least age 62.

Survivor benefits. If your spouse dies and was benefits–eligible, you (and children under age 16) may be eligible for survivor benefits. Benefit amounts vary depending on your age and other factors.

Benefit calculations. Your benefit is based on earnings during 40 years of work. The five lowest–earning years are dropped from the equation – and each year not worked counts as a zero. This often occurs when women stopped working to raise children or care for ailing parents – a triple whammy, since they also typically earn less than men and live longer.

"Full retirement age" increases gradually from 65 for those born before 1938 to 67 for those born after 1959. If you retire at 62 your benefit will be reduced by 20 to 30 percent, depending on your birth year. This percentage reduction gradually lessens the closer you approach full retirement age. In addition, if you retire after full retirement age, your annual benefit increases by 6.5 to 8 percent per year, depending on your birth year.

Annual statement. One tool to help estimate your potential benefits is the annual Social Security Statement mailed each year about three months before your birthday. Check this statement for any errors to your earnings record since that could impact future benefits.

Tax implications. Keep in mind that if you start receiving Social Security benefits but continue working, you may be taxed on a portion of your benefit if your combined income is over a certain amount.

For interactive calculators to estimate your retirement benefit under different earnings and age scenarios, go to "Plan Your Retirement" on the Social Security website ( The site also contains complete information on how Social Security works, eligibility issues, tax implications, how to apply and much more.

For women weighing retirement options, another helpful resource is a program jointly developed by Heinz Family Philanthropies, the Women's Institute for a Secure Retirement (WISER) and Visa Inc. called the Women's Saving Initiative ( This free site features a book called "What Women Need to Know About Retirement" that includes a detailed chapter on Social Security. It's available in an easily printed version, as well as an audio file that can be played online, in the car or on an iPod.

Start researching your Social Security options now, while you have time to explore your options and beef up other retirement savings, if needed.

Jason Alderman directs Visa's financial education programs. Sign up for his free monthly e-Newsletter at

This article is intended to provide general information and should not be considered tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to your situation and about your individual financial situation.

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