Social Security Basics

Who qualifies

You need 40 "quarters of coverage" — essentially 10 years of earnings covered by Social Security. In 2026, you earn one quarter for every $1,890 of covered earnings, up to four quarters per year (max quarters at $7,560 of earnings).

Self-employment income counts if you paid self-employment tax on it. Some government employees (state/local in certain systems) don't pay into Social Security and instead have separate pensions — they may be affected by the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO).

How benefits are calculated (roughly)

Three steps:

1. Average Indexed Monthly Earnings (AIME). SSA takes your highest 35 years of earnings, indexes them for wage growth, averages, and divides by 420 (months in 35 years). If you worked fewer than 35 years, zeros are used for missing years — which dramatically reduces AIME.

2. Primary Insurance Amount (PIA). A progressive formula is applied to AIME:

• 90% of the first $1,286 of AIME (2026 bend point)
• Plus 32% of AIME between $1,286 and $7,749
• Plus 15% of AIME above $7,749

PIA is your benefit if you claim at Full Retirement Age (FRA).

3. Adjustments for claiming age. Your actual benefit depends on when you claim relative to FRA:

• Claim at 62 (earliest): typically 70–75% of PIA
• Claim at FRA: 100% of PIA
• Claim at 70 (latest beneficial): typically 124–132% of PIA

Full Retirement Age

FRA varies by birth year:

For most people currently planning, FRA is 67.

Claiming options

Age 62: earliest eligibility. Benefits reduced permanently (around 30% less than FRA benefit).

Between 62 and FRA: benefits reduced, but less so as you approach FRA.

At FRA: 100% of PIA.

After FRA up to 70: delayed retirement credits add about 8% per year to the benefit. At 70, the benefit is about 132% of PIA (for FRA of 66) or 124% (for FRA of 67).

After 70: no further increases. Claim at 70 or later is the same.

The claiming decision

Most retirees fall into one of three strategies:

Claim at 62. Immediate income. Good if you need the money, have a short life expectancy, or are confident about investing the benefit.

Claim at FRA. Middle ground. Good if you want predictable income timing without maximizing upside.

Claim at 70. Maximum monthly benefit. Good if you expect a long life, have other income sources to bridge the gap, and want to maximize lifetime income.

Break-even analysis typically puts 62-vs-70 at around age 80–82 — meaning if you live past 80, claiming at 70 delivers more total dollars. Past 85, the gap is substantial.

Inflation adjustment

Social Security benefits receive an annual Cost-of-Living Adjustment (COLA) based on CPI-W. For 2026, the COLA is 2.8%. COLAs apply regardless of claiming age — your benefit grows in nominal terms every year.

This inflation adjustment is extraordinarily valuable. Few commercial annuities offer comparable protection.

Taxation

Up to 85% of Social Security benefits can be subject to federal income tax, depending on your "combined income":

• MFJ below $32,000 combined income: 0% taxable
• MFJ $32,000–$44,000: up to 50% taxable
• MFJ above $44,000: up to 85% taxable

Combined income = AGI + nontaxable interest + 50% of Social Security benefits.

These thresholds are not inflation-adjusted and haven't been updated since the 1980s/1990s, so more retirees are subject to tax on benefits each year.

How Horizons uses this

Horizons uses your earnings history (or estimated PIA) and your chosen claim age to calculate your Social Security benefit each month. The engine applies COLA annually, integrates benefits with your other income for tax calculations, and shows the impact of different claiming strategies on your overall retirement plan.

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