It’s no secret that Social Security is our nation’s most treasured social resource. Each month, the benefit checks sent out by the Social Security Administration help lift more than 22 million people above the federal poverty line. More than 15 million of those folks are retired workers, whom the program was initially designed to support when crafted in the mid-1930s.
But the program’s importance is not reflected in how much Americans actually understand about it. Myths and misconceptions abound, and those start with the basic question of who qualifies for a Social Security benefit.
1. Chances are that you’ll have to earn your benefit
There are a number of folks, including elected officials on Capitol Hill, who refer to Social Security’s retired-worker benefit as an “entitlement,” and it does meet the definition of such. The U.S. Senate describes an entitlement as:
A Federal program or provision of law that requires payments to any person or unit of government that meets the eligibility criteria established by law. Entitlements constitute a binding obligation on the part of the Federal Government, and eligible recipients have legal recourse if the obligation is not fulfilled. Social Security and veterans’ compensation and pensions are examples of entitlement programs.
However, this is not an entitlement without strings. The keywords of “eligibility” and “eligible” are what’s important here, because not everyone will qualify for a benefit.
Social Security has a pretty simple formula for determining if you’ll qualify for a benefit later in life.
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In order to receive a retired-worker benefit, you’ll need to have earned 40 lifetime work credits, of which a maximum of four can be earned each year. These credits are divvied out based on your annual earned income (i.e., wages and salary). The good news is that the Social Security Administration sets the bar for those work credits pretty low. In 2019, $1,360 in earned income equates to one work credit. This means that if you earn just $5,440, you’ll also earn all the work credits you can for the year. Do that for 10 years, thereby collecting 40 credits, and you’ll have guaranteed yourself a retirement benefit from Social Security. Just keep in mind that the “bar” tends to go up a bit with inflation each year (it was $1,320 for each credit in 2018).
Although most people will earn their way to a benefit through many years of employment, some do wind up receiving benefits without bringing home a single paycheck. For example, even if a spouse has never held a paying position, they may qualify for a survivors benefit if their partner passes away first. This path, though, is far less common than people earning their benefits through paid work.
Even though most Americans will wind up qualifying for a retired-worker benefit later in life, not all Americans will. For instance, people who worked infrequently throughout their life, such as full-time parents, or caretakers of family members or friends, may not spend enough time in the workforce to earn 40 work credits.
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Legal immigrants who come to this country later in their lives are another good example. Since most immigrants to the U.S. are younger, they’re expected to remain in the workforce for decades, and contribute to Social Security for long enough to earn a retirement payout. But older legal immigrants may not have the time or capacity to work the minimum 10 years required to do that.
In short, your benefit isn’t guaranteed by simply being an American citizen.
2. What you put in isn’t necessarily what you’ll get out
Another benefit misconception to consider is that what you put into the system isn’t necessarily what you’re going to get out of the system.
Social Security is often misconstrued as a direct investment in your future, similar to a 401(k) or Individual Retirement Account, that’s paid for through payroll taxation. In other words, people tend to get annoyed with the idea that they’re not going to get back the exact dollar amount of what they put into the system.
But Social Security was never designed to be a direct investment tool. Rather, it’s a social investment in our nation’s elderly. The money you’re putting in today is what’s ensuring those 15 million-plus seniors can make ends meet each month. When you retire 10, 20, or 50 years from now, a new generation of workers will have stepped in to provide benefits via payroll taxes that support your retired-worker payout. Since the program has two recurring sources of revenue — the payroll tax on earned income and the taxation of benefits for select individuals and couples — it’ll always be able to provide this social investment in our nation’s elderly.
The fact is that what you put into Social Security may be considerably more or less than what you’ll eventually take home. For example, wealthy workers who hit the payroll tax earnings cap each year will pay considerably more into Social Security than they’ll receive over their lifetime. And infrequent workers who fail to earn 40 lifetime work credits may not receive a dime, despite paying into the program with every dollar they earned.
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Conversely, low earners have a greater likelihood of receiving more in benefits from the program than they’ll pay in over their lifetime. The Social Security Administration suggests that the program will replace about 40% of the average worker’s wages during retirement, but because of the formula used to calculate benefits, the percentage will be higher for workers with lower average lifetime incomes.
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