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SOCIAL SECURITY

Security means knowing there's money coming in every month.

If retirement and Social Security seem one and the same to you, there's good reason. More than 90% of US households with someone over 65 are part of the system. And their monthly benefits check is the primary source of income for almost 67% of those households.

Since its introduction in 1935, in the wake of the Great Depression, Social Security has evolved from a safety net designed to relieve poverty to the mainstay of a secure retirement. But the role it will play for future generations is less certain. Fewer workers will be putting money into the system in the 21st century while more will be collecting benefits.

WHAT YOU CONTRIBUTE

If you're in the Social Security system — and more than 96% of the workforce is — you currently contribute 7.65% of your salary every year, 6.2% for retirement and disability benefits and 1.45% for Medicare coverage. Your employer contributes an equal amount, and if you're self-employed you pay both shares. There's an annual cap on contributions for retirement and disability — it's $6,324 in 2008, or 6.2% of $102,000 — but no cap on Medicare contributions.

FIGURING BENEFITS

The formula the Social Security Administration (SSA) uses to calculate your primary insurance amount (PIA) — the base on which your benefit is figured — is designed to give you credit for your 35 highest paying years, thereby increasing the amount you'll receive.

Here's how it works:

1. Your lifetime earnings (to age 60) are adjusted for inflation, so they're counted at their current value.


2. Your total earnings are divided by the number of months you worked, to find what's known as your average indexed monthly earnings.


3. Your permanent base benefit is figured on your average indexed monthly earnings.

Generally speaking, the more you've contributed, the larger your monthly benefit. In 2008, for example, the average benefit for a single person is $1, 079, but a person at the top of the scale receives $2,185 if he or she begins collecting at full retirement age (FRA).

HOW YOU QUALIFY

You qualify for Social Security benefits in two steps:

• You contribute to the Social Security system, usually with money your employer withholds from your salary



• You accumulate 40 credits during the years you work. You can get up to four credits a year, one for each time you earn the minimum required for that year. For 2008, that amount is $1,050.

So a person who earns $4,300 a year and a person who earns $100,000 a year each accumulates four credits. If you work full time, you'll be fully qualified in ten years, but you'll also qualify if you gain the credits more sporadically.

However, the benefits you receive depend more on the amount you contribute to the system than on simply accumulating the credits to qualify.

WHERE YOU STAND

The SSA will tell you what you've paid in, and give you an estimate of what you can expect to receive when you retire. You'll be sent an updated Social Secruity Statement each year about three months before your birthday. And you can request a copy at any time by visiting the Social Security website at www.ssa.gov.

You should review your updated statement carefully to be sure your records are correct. If you find an error — which can happen if you've had more than one employer, for example — you can send the SSA copies of the relevant W-2 forms and have the mistake corrected. The sooner you uncover a problem, the more easily it can be addressed.

The information on your Social Security statement also helps with your financial planning. If you know what you can expect each month from Social Security, you've got a much better sense of what you'll need from other sources.

YOU HAVE TO APPLY

You don't get your benefits automatically. You have to apply to the SSA, and the time to begin is in the year before you plan to retire. One reason to plan ahead is that you may be able to adjust your start date and increase the overall amount of your benefits.

TAXES ON BENEFITS

You may have to pay tax on part of your Social Security benefits, reducing the amount you'll have available to live on. That happens when your total income for the year, including half your Social Security payment, is more than the levels set by Congress.

What's perhaps surprising is that you might find yourself in this situation even if your income seems modest. That's because the income limits are relatively low and practically all of your income is counted, even earnings on tax-exempt investments.

Disclaimer: This information is provided with the understanding that the authors and publishers are not engaged in rendering financial, accounting or legal advice, and they assume no legal responsibility for the completeness or accuracy of the contents. Some charts and graphs have been edited for illustrative purposes. The text is based on information available at time of publication. Readers should consult a financial professional about their own situation before acting on any information.