Social Security: The Basics

How it works: Established in 1935 by the Social Security Act, the U.S. Social Security program is based on contributions paid into the system by working Americans. While you're earning income, you pay a portion of it into Social Security, and after you retire, you receive benefits. Contributions are withheld from paychecks as Federal Insurance Contributions Act (FICA) taxes.

Who's eligible: If you've paid into the system for at least 10 years, you will be eligible to receive benefits when you reach age 62.

When should you request benefits? That depends on your individual financial situation, but generally you can expect to receive higher monthly payments and more money in the long run if you wait to start payments around age 66 or even 70, rather than at 62 when you first become eligible. Mark Miller did the math in a recent column: "Under the Social Security rules, your lifetime benefits will be reduced based on an actuarial projection of your longevity, if you file before the current full retirement age of 66. Starting at 62 means you retired four years early. The net effect: Your annual benefits will be reduced permanently by a total of 25 percent." Keep reading here.

2012 changes: Social Security beneficiaries received a 3.6 percent cost-of-living increase in 2012, the first such increase since 2009. In addition, the maximum amount of earnings subject to Social Security taxes increased from $106,800 in 2011 to $110,100 in 2012, meaning about 10 million high earners will pay higher taxes as a result. The 2 percent payroll tax cut that workers received in 2011 was extended for some workers through the first two months of 2012 by the Temporary Payroll Tax Cut Continuation Act of 2011, but as of March 1, all workers pay 6.2 percent in Social Security taxes.

The Social Security Administration has eliminated the option for retirees to receive interest-free loans from Social Security. And, as of May 1,2011, people who apply for Social Security benefits no longer have the option of receiving paper checks; benefits will be directly deposited into their bank accounts instead.

Cost of Living Adjustments: For the second year in a row, Social Security recipients did not receive cost-of-living raises in 2011.

Tools:
• Social Security Administration's Retirement Benefit Estimator
• Retirement Benefit Table by Year of Birth

Resources: SecondAct's Retirement Savings Center

Related stories:
State of Social Insecurity
What's Next for Social Security, Medicare?
Medicare to Take Smaller Bite of Social Security
Social Security Increases, but Medicare Costs Rise, Too
Lawmakers Focus on Raising the Retirement Age
How to Boost Social Security Benefits For Spouses, Survivors
10 Things You Didn't Know About Social Security
How to Retire on Social Security Alone
Can You Count on Social Security in Your Retirement Plan?
Why Raising Social Security's Retirement Age Is a Benefit Cut For All
Why Social Security Payments Will Be Flat in 2011
How to Maximize Your Social Security Benefits
Doing the Math on Social Security