The Wall Street Journal Guide to Planning Your Financial Future: The Easy-To-Read Guide to Planning for Retirement by Kenneth M. Morris, Virginia B. Morris

From the Publisher

The Wall Street Journal Guide To Planning Your Financial Future

provides clear explanations of the things you need to know and guidelines for the decisions you have to make to enjoy a comfortable retirement. It covers the advantages of salary reduction plans, clarifies the difference between Roth and traditional IRAs, and describes the benefits of effective tax planning. And it provides practical, helpful ideas to get you started.

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Table of Contents

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From Chapter 4: Social Security

Social Security

Social Security is an American institution -- now. But it was controversial at the start.

Social Security is a safety net, designed to provide a financial foundation for retired and disabled workers and their families. People without other sources of income get by entirely on their Social Security benefits. But for many Americans, the monthly payment supplies just a part of their retirement budget.

Before Social Security, veterans -- disabled ones in particular -- got pensions. And in the early 20th century, payments to civilian government workers and to needy widows and orphans expanded the notion that social welfare was a government responsibility. But public opinion was widely split, not only on providing benefits, but on who deserved support.

RELIEF FOR DEPRESSION

President Roosevelt introduced the Social Security Act in 1935 as part of his New Deal, a controversial recovery plan designed to cope with the devastating aftermath of the Great Depression and its particularly chilling effect on the financial situation of the elderly and the unemployed.

Today, benefits for retired and disabled workers and their survivors have evolved into the most elaborate and most popular social program in the U.S. Unemployment compensation is also firmly in place. But the other two elements of Roosevelt's original program -- public assistance, or welfare, and universal health care insurance -- remain controversial.

A COMPULSARY PLAN

Since other countries had tried voluntary retirement income plans without success, Congress decided that everybody who was going to be elated in the system.

DOING THE JOB

Social Security insures the financial security of a large -- and growing -- segment of the population. More than 95% of all households that include someone over 65 get benefits. It provides the main source of income for 67% of the households receiving retirement benefits. And it has achieved one of its primary goals, dramatically reducing poverty rates among people over 65. Without their Social Security income, more than half of the elderly population would be poor according to government standards. But because of the benefits, only 11% fall into that category.

A WIDE NET

There are very few people eligible for Social Security benefits who aren't collecting them. If you move frequently or don't have a permanent address, there's sometimes a delay in getting your payment. But you can collect Social Security almost anywhere in the world -- except in jail.

The one group of people who may not be collecting, but should be, are those over 70 who are still working full time. Social Security rules let you collect your full benefit no matter how many hours you work or how much you earn once you reach 70. It doesn't make sense to delay collecting either, because the basic benefit you're entitled to then is the highest it will be.

GET IN TOUCH

You can get recorded information about Social Security coverage 24 hours a day by calling 800-772-1213, and you can speak to a representative if you call between 7 a.m. and 7 p.m. on business days. Or you can visit the Social Security Website at www.ssa.gov

Changing for the Better

A big part of the system's strength has been its flexibility.

Signing the legislation was only the first step in creating the enormous institution that Social Security has become. Today, it's a comprehensive program that administers retirement, survivor and disability benefits, plus a Supplemental Security Program (SSI) for low income elderly and disabled people.

We've got your number

Identifying the people putting money into the Social Security system -- and expecting to get money back -- posed another challenge. Names and addresses wouldn't work: people change their names, and they move. How could the government be sure they had the right Charles Smith or Maria Rodriguez? Or that River Road was in Grandview, Ohio, not Grand View, New York?

The solution was assigning everyone a nine-digit number that would last a lifetime, through name changes, job changes, and new addresses. And the system could identify 999,999,999 people without ever having to use the same number twice.

EXPLODING USES

Once, you needed a Social Security number to open a Social Security account and keep track of your contributions. Now, you need one for almost anything you want to do:

• Get a job
  
• File income-tax returns
  
• Enroll as a student
  
• Open a bank, brokerage or mutual fund account
  
• Get a passport or a driver's license
  
• Ask for an insurance payment
  
• Apply for a loan
  
• Request your credit rating
  

BY THE NUMBERS

The IRS requires everyone to have a Social Security number if he or she is going to be claimed as a dependent on a tax return. In fact, in many states, babies are given a number when their births are registered.

Your number -- one of the 36 5 million that's been assigned so far -- can be changed, usually if your records have been confused with someone else's who has the same name and birthdate, or if someone has used your number illegally.

CHANGING YOUR NAME

If you change your name when you get married or divorced, or if you change it legally for any other reason, you can file form SS-5 and have the change made on your Social Security account. You'll have to provide your marriage license, divorce decree, or other legal proof. Your Social Security number doesn't change, though, and your credits are intact.

THREE TYPES OF CARDS

While we talk about Social Security cards as if they were all alike, there are actually three types. The basic cards go to citizens and people living permanently in the U.S. You need the card -- or at least the number -- to get a job, collect benefits, and, increasingly, as a universal ID number.

People who are in the country legally, but for a limited time, may get Social Security cards to open bank accounts, for example, or enroll in college. Their cards are stamped Not Eligible For Employment, and they're not eligible for benefits. In 1992, a third card was added, stamped Valid For Work Only With INS (Immigration and Naturalization Service) Authorization. Those cards permit legal immigrants to get jobs and qualify for benefits.

Legally, it's up to a potential employer to be sure that anyone who's hired to work is eligible -- and checking for a valid Social security card is the primary method.

Benefit Ins and Outs

One of every six Americans -- about 44 million people -- gets Social Security benefits.

The core of the Social Sec urity program is a guaranteed monthly income designed to insure a basic level of financial support for retired or disabled people, their families, and their survivors. It's funded by money withheld from your paycheck, and the paychecks of 148 million other working Americans.

SETTING YOUR CONTRIBUTION

The amount you owe for retirement, survivor, and disability insurance is 6.2% of your earned income (including salary, tips, commissions and bonuses) up to a specific limit that's adjusted each year to reflect increases in the cost of living. For 1998, the income limit was $68,400, in comparison to $45,000 for 1988, and $7,800 for 1968.

If you earn less than the limit, 6.2% of your gross, or pre-tax, earnings is withheld from each paycheck throughout the year. If you earn more, the deduction disappears when you've paid the full amount, $4,240.80 (6.2% of $68,400) for 1998.

Your income from pensions, investments (including annuities), capital gains, sick pay, unemployment insurance or alimony isn't considered earned, so it escapes the long arm of withholding.

MEDICARE COSTS MORE

There's more, though. Since 1966, an additional 1.45% has been withheld to fund Medicare benefits for people over 65. And since 1994, there's been no cap on your Medicare obligation, which means that 1.45% of whatever you earn is withheld throughout the year.

WITHHOLDING TOO MUCH

If you have more than one job, or if you work on your own in addition to holding a job, you may have too much Social Security withheld. For example,

• If you earned $66,000 in 1997 at your regular job, $4,054.80, the maximum amount, was withheld.
• If you earned another $15,000 workin g nights and weekends, your employer withheld $930 (or 6.2% of $15,000).
• That made your total withholding $4,984.80, or $930 too much.

Both employers must withhold at the regular rate, as if each of them were your only employer -- even if they know you're working two jobs. The same thing happens if you're self-employed. You owe Social Security tax on what you earn even if you have the maximum withheld at another job.

But, you won't end up overpaying. The excess is credited toward the income tax you owe when you pay your taxes. But you'll be out the money in the meantime.

The only exception occurs when you have too much withheld by one employer, which can happen if you get back pay or a bonus. Then it's your employer's job to repay the extra withholding directly to you.

WHAT THE FUTURE HOLDS

Nobody can say for sure what will happen to Social Security in the 21st century. But its history has been evolutionary from the start, and that's likely to continue. Changes that caused major uproars when they were enacted -- like taxing retirement benefits -- have become the norm. The only thing that seems impossible is abandoning the system altogether.

We do know that the people collecting benefits will eventually outnumber the people putting money into the system. That may mean that wealthy retired people will get less than they expected, or nothing at all. Or all benefits may be taxed. Or cost-of-living increases might be smaller.

Social Security Up Close

Representatives at your local Social Security office provide advice and assistance face-to-face.

Much of the time, you deal with the Social Security Administration from a distance, us ing the phone or mail to get information, open an account, or even apply for benefits. But sooner or later, you'll probably visit your local Social Security office, one of 1,300 in the country. The offices can be quite different physically, but they're all equipped to handle the same things, helping you to join the system or take advantage of the benefits it provides. In particular, they can provide up-to-date estimates of what your benefits would be if you chose different options, like retiring early, or getting benefits as a survivor instead of based on your own work history.

OPENING A SOCIAL SECURITY ACCOUNT

If you got a Social Security number when you were young, your account is open even if you've never worked. But if you don't have a number, you don't have an account. Getting one is relatively simple, though. You fill out form SS-5 which you can get at your local Social Security office and submit it along with evidence to prove your age, identity, and citizenship. You need your birth certificate (or a hospital record or baptismal certificate if you don't have one), plus one other piece of identification, like a passport, driver's license, or school record. The SS-5 application includes a list of the documents Social Security will accept. Parents opening accounts for their children must also prove their own identity and parenthood or guardianship.

If you're over 18, you must appear in person to open your account. If you're younger, you can do the whole thing by mail, but you may not want to. You have to provide Social Security with original copies of your birth certificate and other documents, and you probably don't want to risk having them lost or misplaced.

Don't worry if the n earest office is too far for you to travel to. Social Security representatives visit contact stations in rural areas on a regular schedule. And, if you're unable to get to the office because you're too ill or infirm, and can't get your case resolved over the telephone, they will come to your home.

IDENTIFYING YOURSELF

U.S. citizens born in hospitals within the country's boundaries usually have no trouble providing a birth certificate. But if you were born outside the U.S., you may have to produce extra identification, even if your parents are U.S. citizens. If you're a naturalized citizen you'll need your citizenship papers as well as a birth record. And if you're not a citizen, you'll need either a birth certificate or passport and documents from the Immigration and Naturalization Service.

Got You Covered

It pays to be one of the Social Security crowd.

You have to qualify for Social Security benefits, but it's not hard to do. If you work for a total of ten years -- even if you do it a few months at a time, and never earn more than the minimum amount -- you'll be entitled to Social Security benefits when you retire. You qualify for Medicare the same way.

People who've worked early in their lives and then left the work force, like women raising families, can return to work after a long break and still accumulate enough credits to qualify for the various programs. Though the dollar amount of a late qualifier's benefit is usually smaller than someone's who has worked all along, the security of knowing you have coverage is the same.

PUTTING IN YOUR TIME

Social Security is based on a system of credits you earn while you're working. T o receive retirement benefits, you need to accumulate 40 credits if you were born after 1928 (and fewer if you were born before that). In 1998, you earned one credit for each $700 you made. But you earn only four credits a year, no matter how much you make. For example, a college student who earns $2,800 painting houses during the summer accumulates four credits. So does a bond trader who earns 100 times that amount.

TRACKING YOUR RECORD

The Social Security Administration (SSA) tells you where you stand on the number of credits you have and how much you've paid into the system. They'll even estimate the kind of benefits you can expect. Just request a Personal Earnings and Benefit Estimate Statement. You use Form SSA-7004-SM (which you can get by calling 1-800-772-1213 or visiting the Social Security site on the World Wide Web).

In fact, the SSA encourages people to check their records regularly -- every three years or so -- to be sure that the details are right. If they're wrong -- and they sometimes are -- you can submit copies of your W-2 withholding statements and your tax returns to get them corrected. The more quickly you realize there's a problem, the easier it will be to resolve.

The minimum dollar amount per credit is increased every year to reflect changes in the cost of living, just as the maximum income on which you pay Social Security taxes is. But once you hit forty credits, you're set. Working longer may mean your benefit is larger, but you don't need more credits.

RAPID INCREASES

The amount of your salary that gets taxed for Social Security has increased dramatically in recent years. In its first 35 years, the SSA raised the ceiling only five times, from $3,0 00 in 1937 to $7,800 in 1972. Since then, when the amount that's taxable was indexed to inflation, it has gone up every year, with the biggest jump between 1980 and 1981, from $25,900 to $29,700, a whopping $3,800, or 14.7%, increase.

Figuring What You Get

Figuring out how much you'll get is a lot harder than qualifying.

Chances are you'll take the SSA's word for the size of your benefit. Figuring it out is complicated, because your career-long earnings must be adjusted to their approximate current value to determine the wage base on which your benefit is figured. The $5,000 you made in 1963, for instance, isn't averaged in as $5,000.

WHAT COUNTS

Unlike most pensions, which are based on what you're earning at the end of your earnings career, Social Security counts what you've earned during most of your working life, specifically five years fewer than the number of credits you need to qualify. So if you were born after 1928 and need 40 credits to be eligible for benefits, your 35 highest paying years are the ones that count in figuring what you will receive.

Like other pensions, though, the more you've earned, the more you get. If you've paid the maximum tax each year and wait until you reach full retirement age to start collecting, you'll get the largest benefit Social Security gives.

WHAT YOU CAN EXPECT

Although the dollar amount of your benefit reflects your average earnings, the percentage of earnings your benefit will replace goes down as your earned income goes up. That's in keeping with Social Security's mission of providing a basic level of financial support.

You can use the chart below to find an estimate of the dollar benefit you would get, based on your age and salary. If you were 65 in 1997 and had steady earnings of $30,000 a year, you'd receive a benefit of $998, or about 40% of your salary. You can project the percentage of your income that will be replaced using the following formula:

Monthly Benefit x 12/Annual Wage = % annual income

For Example:

$998 x 12/$30,000 = $11,976/$30,000 = 39.9%

Or, you can compute your own benefit estimate if you visit the Social Security home page.

Of course, the younger you are, the less accurate the benefit projections may be because it's difficult to predict what will happen to the economy.

THE INFLATION ISSUE

Unlike most pensions, Social Security benefits are adjusted for inflation. As well as increasing the amount of earnings subject to tax and the amount you have to earn to qualify for credits, the SSA also recalculates the amount you get every year, using a percentage of your basic benefit amount. The new amount is never less than the year before, though the rate of increase varies to reflect changes in the cost of living.

These cost of living adjustments, or COLAs, begin when you're 62. If you wait until you reach full retirement age to start collecting, those COLAs are added to the base amount on which your benefit is figured. The larger benefit payments you will receive can be an incentive to wait to apply for your benefits.

When to Apply

When you're ready to collect, you have to ask for your money.

Your Social Security benefit won't automatically appear in your mailbox the day you're eligible. You'll have to ask the SSA to start paying, and you'll have to provide evidence that you qualify. The sa me material you used to open your account can be used here, too: birth or baptismal certificates, passports, naturalization papers, or other official documents. You may also need a copy of your most recent W-2 form or tax return. Your local Social Security office can answer the questions you have, or you can call 800-772-1213. The SSA advises you not to delay your application because you don't have the right documentation or aren't sure what you need. Once you start the process, they'll help you get hold of the information.

SPREADING THE WEALTH

You can start collecting Social Security as early as 62 or as late as 70. The earlier you begin, the smaller the annual amount you get. And the later you start, the larger your payments. The underlying principle the SSA has adopted in providing these options is trying to equalize the lifetime value of the benefits.

If you must be older than 65 to receive full benefits, you can still start collecting at 62, but the percentage of full payment gradually drops from 80% to 70%. Just the opposite is true if you wait until 70. Your benefit is larger, but chances are you will collect for fewer years.

The general feeling is that you should be collecting as soon as you're eligible. It will take between 12 and 17 years -- until you're nearly 80 -- for the larger amount you would have gotten at full retirement age to add up to more money.

Of course, if you have the option of continuing to work, the added income during those extra years will probably be more than the Social Security payments you would have received. And if your salary increases, the base amount of your benefit will increase as well.

A LONGER ROW TO HOE

In 1983, the SSA increase d the age for getting full benefits. If you were born before 1938, you still qualify for full benefits at age 65. But anyone born in 1938 has to be 65 and two months, anyone born in 1939 has to be 65 and four months, and so on. As this chart shows, full retirement age inches up to 66 for people born between 1943 and 1954 and to 67 for anyone born after 1960.

PATIENCE HAS ITS REWARDS

People who wait to begin collecting because they are still working get a bonus. If they were born before 1938, they get between 3% and 4% a year added on to their basic benefit for each year they wait between age 65 and age 70. But people born after 1943, who have to be age 66 to get full benefits, will get an extra 8% a year more than their primary insurance amount (PIA), or full benefit. There's no point, though, in waiting past 70, because the amount you're eligible for won't increase any more.

THE OTHER ISSUES

Chances are there are several factors behind choosing the age at which you apply for retirement benefits. Your health, your plans for the future, or an incentive your employer offers for leaving your job early can make a difference. So can the type of job you have and whether or not you plan to go on working.

On the other hand, once you start collecting Social Security there are limits on the amount you can earn before you start losing some of your benefit. For many people, who need or want to go on working, postponing taking the benefits makes sense. But, once you retire, you should apply right away. if you don't need the money for living expenses, you can invest it and earn more.

Working after Retirement

There's no law against working after you retire -- but there are limits on what you can earn.

To insure Social Security's integrity as a source of basic financial support after retirement, there are limits on what you can earn while collecting your payments. The basic exception is for people over 70: they can earn as much as they want and still get the full amount they're entitled to.

You can also collect your full benefit if you receive special payments after you retire that you actually earned beforehand. Typical examples include accumulated vacation pay, sales commissions, and deferred salary. The same rule applies to some self-employment income. According to Social Security, some people entitled to receive benefits postpone them unnecessarily because of payments like these.

LETTING SOCIAL SECURITY KNOW

If you're working, you're required to let the Social Security Administration know. You have to estimate your earnings using a special form called Annual Report of Earnings. The Social Security Administration reduces the number of monthly checks you get in the following year, based on that earnings estimates.

If you earn less than you estimated, you'll get a check to cover what you're owed. But if you earn more, you have to pay back the difference between what you got and what you were entitled to, either in a lump sum or installments. When your taxes are due in April, you still submit form SSA-777 and a copy of your tax return to the Social Security Administration to verify your earnings.

The worst-case situation is failing to report that you're working and then going over the limit. You'll have to pay a penalty as well as send back any overpayment you got.

CHANGING YOUR MIND

It is true that once you begin receiving your Social Security payments you're locked into the base amount. But you can change your mind about getting the payments, pay back the total amount you've received and start over again -- at a higher base -- later on.

For example, if you retire and begin to receive benefits when you're 62 but are offered a position that's too good to turn down, you can stop your Social Security payments. As long as you repay any benefits you got, you can start again with a clean slate when you're ready to call it quits for good. Whatever you've earned in the period when you returned to work can increase the amount you're eligible to receive.

SPECIAL RULES

If you retire in the middle of the year, you might have already exceeded the annual earnings limit. So in the year you retire, special rules apply. You can get the full benefit you're entitled to in any month that you're actually retired, no matter what you earned earlier in the year.

But once the Social Security payments start, you can't earn more than 1/12 of the maximum earnings limit for your age. If you go over that limit in any month, you lose the entire benefit for that month. But the next month you start over.

WHAT RETIRED MEANS

When your income is from self-employment, defining retirement is a little tricky. The SSA uses the number of hours you spend working during a month as the measuring stick. If you work fewer than 15 hours, you're considered retired. If you work more than 45 hours, you're definitely not. And then there's the gray area in between, when the quality of the work you do, as well as the time you spend doing it, has to be considered.

The rules are complex. The SSA invites people in that situatio n to get in touch with them for specific information about the way their benefits are calculated.

Family Coverage

Social Security benefits are a family affair, as long as one person qualifies for coverage.

When you qualify for Social Security retirement benefits, you get them for as long as you live. What's more, your spouse and certain dependents, including your young or disabled children can collect as well, both while you're collecting and after your death.

SWITCHING GEARS

The choice between getting your own or your spousal benefits is one of those rare situations in retirement planning where you can change your mind. Your initial decision doesn't lock you in, even after you've begun receiving benefits.

If you'd get a larger payment by switching, usually from what you get on your own to what you'd get as your spouse's survivor, all you have to do is request the change and be able to prove your marital status and age.

When you switch, your new benefit is reduced by the amount you've already received in your own name. The SSA will tell you what the new amount is, so you can decide whether switching pays.

FORMER FAMILIES

If you're divorced, you are eligible for Social Security retirement benefits based on your former spouse's earnings. You're entitled to the same benefits you would have received -- 50% at 65 and 37.5% at 62 -- if you'd stayed married. You may also be able to start collecting at 62 even if your ex-spouse is still working, provided you have been divorced for at least two years, and the worker is 62.

The SSA imposes these conditions to collect on a divorced spouse's earnings: you were married for at least ten years, yo u aren't remarried, and you're not eligible for an equal or larger benefit, based on your own or someone else's earnings.

YOU'RE ALL COVERED

If your ex-spouse is getting Social Security benefits based on your record, it doesn't reduce the amount you and your current family, if you've remarried, are entitled to. And there are no limits to the number of former spouses you're entitled to support, as long as you've been married to each of them the required length of time.

Survivor Benefits

The Social Security you leave behind is a legacy your survivors can be sure they'll receive.

While Social Security is designed to provide basic financial security after you retire, an equally important role is providing an income for your survivors no matter what age you are when you die. Your widow or widower, your young or disabled children, parents who were dependent on you, and, in certain circumstances, your divorced former spouse are entitled to survivor benefits.

QUALIFYING FOR BENEFITS

To provide benefits for your survivors, you must accumulate enough credits while you're working. You qualify either by having the full number required for your age, or by being currently insured, having earned at least six credits in the three years before your death.

Your age determines the number of credits you need to be fully qualified. It's one for every year between the year you turn 21 and the year before you die or turn 61, whichever comes first. For example, if you were born in 1945, and died in 1998, you'd need 31 credits. (Subtract 1966, the year you turned 21, from 1997, the year before you died: 1997-1966=31). When you turn 61, in 2006, you'll need 40 credits.

APPLYING FOR BENEFITS

If you're a survivor who's eligible for Social Security benefits, you should apply immediately. You'll need a copy of the insured person's death certificate, and evidence of your age, relationship, and marital situation.

Your deceased spouse or parent is not entitled to a Social Security benefit for the month he or she dies. When the payment is made, on the third of the next month, you should return it to the SSA.

DEATH BENEFIT

If you have the credits you need to provide benefits for your survivors, Social Security also makes a one-time payment of $255 to your spouse or minor children at the time of your death. Although there are no rules about what the money must be used for, it's often described as a funeral benefit.

WHAT ABOUT REMARRIAGE?

If you're getting survivor benefits, you won't lose them if you remarry after you're 60, or 50 if you're disabled. But if you're eligible for a larger benefit based on your new spouse's earnings record, that takes precedence. It isn't a question of loyalty or affection so much as one of economics. With Social Security, the smart decision is the one that pays the most.

If you remarry when your children are younger than 18, they will continue to receive benefits until they are too old to be eligible. Their status as survivors is not affected by your marriage.

BENEFITS AFTER RETIREMENT

If your spouse is receiving retirement benefits when he or she dies, you're entitled as a survivor to 100% of your spouse's Social Security payment. For example, if the basic benefit was $1,200 and you were getting an additional $600, you're eligible for $1,200 as a surviving spouse.

At your spouse's de ath, you can switch from collecting on your own account to collecting as a survivor if it means you're eligible for a larger benefit. The SSA will calculate the amount for you.

Disability Benefits

Disability insurance is the most complicated Social Security program.

Controversy swirls around the disability insurance program. Some people argue that it's too expensive because it's too generous. Others insist that people who ought to be receiving benefits are left out in the cold.

For example, rules governing benefits paid to disabled children and to people who are disabled because of drug addiction and/or alcoholism are more restrictive than they once were. In the latter, example, rehabilitation treatment is required and there's a time limit for receiveing benefits.

DEFINING A DISABILITY

The SSA calls its definition of disability "fairly strict." No benefits are paid unless you're unable to earn more than $500 a month, or you're so sick that you're expected to die. Just because you're considered disabled by your employer doesn't mean you're eligible for Social Security benefits. The same is true if your doctor says you can't work. The decision rests with the Disability Determination Service in the state where you live.

Despite the restrictions and the red tape, disability applications and awards are increasing and the average age of the disability recipients is declining. In 1997, more than 1 million disabled workers and their dependents qualified for new awards.

APPLYING FOR BENEFITS

The more quickly you apply for disability benefits, the better. It takes longer to process a disability claim -- about four months -- than a claim for retirement or survivor benefits. Plus you have to supply detailed medical and work records. The SSA wants to know, for example, where you worked for the 15 years before you were disabled.

If your claim is approved -- and only about half are the first time around -- payments can begin in the sixth full month after you were disabled. For example, if you have a stroke in June, you would be eligible for benefits in December and the payment would arrive on January 3. Disability claims for children, or for people eligible for SSI benefits, have no waiting period.

BEING ELIGIBLE

You are eligible for benefits if you have earned enough credits while you're working. You need one credit every year after you turn 21, to a maximum of 40 at age 62, just as you do survivor benefits. But to qualify for ability coverage, you must earn 20 of those credits in the ten years immediately before you are disabled. If you're disabled but don't have enough Social Security credits, you might qualify Supplemental Security Income (SSI) if you have a small income and few assets.

FIGURING YOUR BENEFIT

Social Security estimates the disability benefit you'd be eligible for when you ask for an Earnings and Benefits statement. The amount is based on:

• Your age at the time you're disabled
• Your earnings record

Once you've begun to receive payments, your basic benefit doesn't change no matter how many years you're eligible to collect. You do get cost of living adjustments though. Social Security doesn't recognize a partial disability, or make partial payments. If you qualify, you get the amount you're entitled to until you recover or improve enough to go back to work.< p>If you're eligible for other benefits, like Workers' Compensation, you may get less from Social Security (or the other way around). That's because all your disability payments together can't add up to more than 80% of your average recent earnings. But after 24 months of disability benefits, you are eligible for Medicare.

THE APPEALS PROCESS

If the SSA rules you're not eligible for disability benefits, you can appeal the decision. Historically, the administrative law judges working for the SSA have reversed 60% of the rejected applications. If the ruling goes against you internally, and you believe you have a case, you can take it to a Federal District Court.

Taxing Benefits

The tax on benefits makes economic sense, but it's not very popular with the 20% who pay it.

The law on taxing benefits is fairly simple: if your total income for the year hits a certain level, you owe income taxes on 50% of your Social Security benefit. And if your income hits an even higher level, you owe taxes on 85% of your benefit.

Since your Social Security contribution, or payroll tax, is deducted from your salary before income taxes are taken out, paying taxes on your benefit is like paying taxes on your IRA or other retirement plan. But since contributing is mandatory, it seems like a double hit when you have to pay income tax on your benefit.

WHAT IS THIS BENEFIT ANYWAY

The underlying question is, should everybody who pays Social Security taxes get retirement benefits? Or should the benefits go only to people who need them to live on?

Because everyone who works must contribute to the system, the idea of using a means test to decide who gets benefits ha s been rejected -- at least so far.

Using a means test, only people whose income falls below a certain level would qualify for benefits. If you're in good financial shape, the argument goes, why do you need the benefits? But if you're not going to get anything back, why should you put anything in? And doesn't using money that everyone must contribute to support only some of the people change the nature of the whole Social Security program? The current solution has been to tax some of the benefits of some of the people, but it hasn't answered the pressing questions.

COUNTING YOUR INCOME

In figuring whether you owe tax on your benefits, you add everything you receive including tax-exempt interest on municipal bonds and certain other income that you don't normally have to include in your taxable income, like money you earn outside the U.S., but not annuity income:

• Salary
• Pensions
• Taxable investments
• Tax-exempt investments from municipal bonds
• Overseas earnings
• Gambling, lottery winnings
• Tips
• Royalties, rents
• IRA withdrawals

OTHER OPTIONS

If your income falls close to or within the limits that would subject part of the benefit to taxation, you may be able to plan ahead so that some years you're subjected to tax and other years you're not. For example, by timing the date that U.S. Treasury bills mature, or postponing selling some stock, you might be able to bunch income in one year -- and pay the tax -- while keeping it under the limits in another.

A WORKING SPOUSE

When you apply for retirement benefits based on your work record, your right to colle ct is unrelated to whether or not your spouse is working. When you reach retirement age you can collect. But when it comes to figuring whether or not part of your Social Security benefit will be taxed, your spouse's income makes a big difference.

For example, if a man retires at 65 and is entitled to a benefit of $1,128 a month, that's what he gets even if his wife is earning $65,000. But at tax time, their joint income will be way over the level that requires them to pay tax on 85% of his Social Security benefit.

Unless they're married but permanently living apart, there's no way to avoid the tax by filing separate returns. Married couples filing separately pay tax on half their Social Security benefit no matter what their income -- just to eliminate this tax-saving option.

When a spouse is eligible for benefits and earning only enough to push the joint income over the limit, it might pay to calculate tax liability both ways, to figure out if it makes more sense financially for both to retire because their taxes will be significantly less.

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