Understanding Social Security: What You Need to Know

Social Security, enacted in 1935, is a foundational government program that provides income to eligible individuals through retirement, disability, and survivor benefits. For most clients, the retirement benefit is the most relevant when planning for the future. But deciding when and how to claim your benefit involves trade-offs that can significantly impact your long-term income.

Earning Benefits

To be eligible for Social Security based on your own employment history, you need to earn 40 credits. In 2025, you earn one credit for every $1,810 of income subject to Social Security tax, up to 4 credits per year. That means most people become eligible after about 10 years of work.

Note: Not all jobs pay into Social Security. Some government employees, for example, may be covered by a separate pension system and not contribute to Social Security.

Benefit Calculation

Your benefit is based on your highest 35 years of earnings that were subject to Social Security tax. These earnings are adjusted for inflation and averaged to calculate your Average Indexed Monthly Earnings (AIME). A formula is then applied to your AIME to determine your Primary Insurance Amount (PIA). The formula is designed to replace a higher percentage of income for lower earners by applying the greatest weighting to the first portion of your average monthly earnings. As your income increases, each additional dollar contributes less to your benefit, creating a progressive structure that favors those with lower lifetime earnings.

The 2025 PIA formula is:

• 90% of your first $1,226 of AIME
• 32% of AIME between $1,226 and $7,391
• 15% of AIME above $7,391

So, the PIA for an individual with an AIME of $5,500 would be calculated as:

Note: This PIA is the monthly benefit you would receive at your full retirement age (FRA). This amount is reduced when starting benefits earlier than FRA, and are increased if you delay taking benefits. You can begin benefits any month between age 62 and 70. For most individuals, starting benefits at age 62 would result in a benefit equal to 70% of their PIA while starting at age 70 would result in a benefit equal to 124% of their PIA.

Spousal Benefits

If you're married (or were married), you may be eligible to receive the greater of your own benefit (assuming you've earned one) or half of your spouse's. So, if you didn't earn a benefit on your own or your own benefit would be small, spousal benefits may provide a welcomed boost to retirement income.

In order to receive spousal benefits, you must be at least 62 years of age, and your spouse must have started receiving their own benefit. Your spousal benefit will be no more than 50% of your spouse's FRA benefit but will be reduced further for each month you claim prior to your own FRA. In other words, your benefit will be between 32.5% (age 62) and 50% (FRA) of your spouse's FRA benefit.

The rules for ex-spouses are similar, except that the marriage has to have lasted at least 10 years and the requirement that your former spouse has already applied for their own benefit no longer applies.

Note: There are also spousal benefits available, regardless of age, if you're caring for a child age 15 or younger or a child with a disability.

Survivor Benefits

Survivor benefits are potentially available for the spouse, divorced spouse, child, or dependent parent of a worker who paid Social Security taxes prior to death. Spouses qualify if they are age 60 or older (or over age 50 with a disability), were married for at least 9 months and didn't remarry before age 60 (or 50 with a disability). Ex-spouses qualify if they were married for at least 10 years and didn't remarry before age 60. You can also qualify if you're caring for a child of the person who died. Generally speaking, surviving spouses receive the greater of their own benefit or their late spouse's assuming they've reached FRA, otherwise benefits will be reduced starting with a payout of 71.5% at age 60.

Unmarried children under the age of 18 (or 20 if they are full-time students) or those with a disability that developed prior to age 22 are also eligible. Children generally receive 75% of their late parent's benefit. Lastly, parents aged 62 or older who qualify as a dependent of a deceased child are also eligible for a survivor benefit.

Note: There is a family maximum benefit that will be paid out, regardless of how many children there are. Ex-spouses do not count toward the family maximum.

Taxation Considerations

The federal government along with nine states tax Social Security benefits. At the federal level, the amount of your benefit subject to taxation is dependent on your provisional income.

Depending on your filing status and provisional income, up to 85% of your Social Security benefit may be subject to taxation.

Note: These percentages refer to the portion of your benefit that is taxable, not the rate at which it is taxed.

Your actual tax depends on your marginal tax bracket. More information is provided in IRS Publication 915.