How does Social Security work? Social Security is a crucial program that touches the lives of most Americans. The Social Security system provides retirement, disability, and survivor benefits to millions of people.
This article will explain how Social Security works from understanding the basics of the program to eligibility, benefits, and planning for your financial future.
Nearly every American will interact with Social Security during their lifetime, whether they collect benefits themselves or their family members do. Understanding how the program works is key to getting the most out of the system.
Understanding Social Security
What is Social Security?
Social Security is a federal program established in 1935 during the Great Depression. It operates as an intergenerational transfer system, taking payroll taxes from current workers to pay benefits for current retirees and their family members as well as survivors of deceased workers.
How does Social Security work?
Workers pay 6.2% of their income and employers match that amount in Social Security taxes, up to an annual cap. The money goes to the Social Security Trust Funds. Benefits are calculated based on lifetime earnings.
- Social Security is funded by payroll taxes paid by workers and employers. The money goes into trust funds that pay out benefits.
- You pay 6.2% of your wages up to a limit ($160,200 in 2023). Employers pay a matching 6.2%.
- Self-employed people pay 12.4% up to the wage limit.
Social Security Trust Fund
The Social Security Trust Funds are made up of the Old-Age and Survivors Insurance (OASI) trust fund that pays retirement and survivor benefits, and the Disability Insurance (DI) trust fund that pays disability benefits.
- Payroll taxes go into two Social Security trust funds – one for old-age and survivors benefits (OASI) and one for disability benefits (DI).
- In 2023, about 85% of taxes go to OASI and 15% go to DI.
- Funds are invested in special Treasury bonds that earn interest.
Types of Social Security Benefits
Social Security pays monthly benefits to:
- Retired workers
- Disabled workers
- Spouses of retired or disabled workers
- Surviving spouses and children
- Dependents
Social Security Retirement Benefits
To get retirement benefits, you must:
- Have at least 40 credits (10 years of work)
- Be at least age 62
Your benefit amount is based on your average lifetime earnings. The later you start benefits, the higher they are.
Full Retirement Age
The full retirement age is when you can get full benefits:
| Year of Birth | Full Retirement Age |
|---|---|
| 1943-1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 or later | 67 |
Survivor Benefits
If a worker dies, certain family members may get survivor benefits:
- Widows or widowers at least age 60 (or 50 if disabled)
- Surviving divorced spouses if married 10+ years
- Unmarried children under age 18 (or disabled before 22)
Social Security Quick Retirement Calculator
You can get an instant, personalized estimate of your future Social Security retirement benefits by using the Social Security Quick Calculator available online at Social Security Quick Calculator here.
This calculator provides estimates based on your actual Social Security earnings record and allows you to compare different retirement age scenarios. It’s a helpful tool when thinking about the best age to start taking retirement benefits. Within minutes, you can see how your estimated payments change based on the age you want to begin receiving benefits.
Knowing your full retirement age, the effect of early or delayed retirement, and using the Quick Calculator can help maximize Social Security income. It’s easy and takes just a few minutes to get a tailored estimate.
Disability Benefits
If you can’t work due to a disability expected to last 1+ years, you may get benefits. You must meet strict medical criteria.
Applying for Disability Benefits
- Apply as soon as possible at www.ssa.gov/benefits/disability.
- Having a doctor’s note doesn’t guarantee approval. SSA makes the determination.
Qualifying for Disability Benefits
To get disability benefits, you must:
- Be unable to do substantial work due to a medical condition.
- Have worked long enough to qualify (work credits).
- Meet medical criteria set by SSA.
Supplemental Security Income (SSI)
SSI pays benefits to disabled adults and children with limited income and resources. Funded by general tax revenues, not payroll taxes.
The Future of Social Security
Social Security faces challenges to long-term solvency. Policy changes will likely be needed.
Challenges to the Social Security System
- Increasing number of retirees compared to workers paying taxes
- People living longer in retirement
- Lower birth rates meaning fewer workers
Increasing the Social Security Retirement Age
- One proposal is to raise the full retirement age beyond 67.
- Would reduce benefits paid over a lifetime.
- Gradual phase-in over decades.
Impact of Increases in the Cost of Living
- Benefits are adjusted annually for inflation based on the COLA (Cost of Living Adjustment).
- Bigger COLAs mean faster benefit growth, putting more strain on trust funds.
Importance of Social Security
For most Americans, Social Security provides a critical source of retirement income.
Social Security as a Source of Retirement Income
- Makes up 30-40% of income for elderly.
- Largest source of income for most seniors.
- Provides guaranteed inflation-adjusted income that lasts a lifetime.
How Social Security Increases Financial Security
Benefits help:
- Allow older Americans to live independently.
- Pay for basic needs like food, housing, medicine.
- Support spouses who earn less.
Social Security and Retirement Planning
- Social Security was never meant to be the only source of retirement income.
- Workplace retirement plans and private savings are also key.
- Use Social Security benefit estimates when planning.
Social Security in the United States
Social Security has become an essential thread in the country’s social safety net.
History and Development of Social Security
Major milestones:
- 1935 – Social Security Act signed into law by FDR
- 1937 – First Social Security taxes collected; first benefits paid
- 1956 – Disability insurance added
- 1965 – Medicare health insurance added
- 1972 – Supplemental Security Income (SSI) added
Social Security Administration
- Independent government agency oversees Social Security.
- Has field offices across the country.
- Manages programs judiciously – less than a penny to administer each dollar of benefits.
Social Security Numbers and Benefits
- Your 9-digit SSN links your lifetime of work and taxes paid.
- SSN used to track earnings and determine benefit eligibility and amounts.
- Protect your SSN carefully to prevent identity theft.
This guide summarizes key aspects of Social Security and how the program works. Understanding Social Security is crucial as it impacts the lives of nearly every American.
Frequently Asked Questions
Q: How does social security work?
A: Social security is a social insurance program that provides financial benefits to people who qualify for benefits. It is primarily funded through taxes paid by workers and their employers.
Q: What is the purpose of social security?
A: The purpose of social security is to provide economic security and financial assistance to individuals and their families in times of retirement, disability, or the death of a worker.
Q: How do I become eligible for social security benefits?
A: To become eligible for social security benefits, you must pay social security taxes and accumulate enough work credits. The number of work credits required depends on your age and the type of benefits you are seeking.
Q: What types of benefits can I receive from social security?
A: Social security provides several types of benefits, including retirement benefits, disability insurance, survivor benefits, and supplemental security income.
Q: When can I start receiving social security retirement benefits?
A: You can start receiving social security retirement benefits as early as age 62, but your monthly benefits will be reduced if you start before your full retirement age. Your full retirement age depends on the year you were born.
Q: How does the social security trust fund work?
A: The social security trust fund is a reserve of funds that is used to pay social security benefits. It is funded through the taxes paid by workers and their employers, and the money is invested in special U.S. Treasury bonds.
Q: Will social security benefits be enough to live on in retirement?
A: Social security benefits are designed to be a source of retirement income, but they may not be sufficient to cover all of your expenses. It is recommended to have additional savings or pensions to supplement your social security benefits.
Q: How are social security benefits calculated?
A: Social security benefits are calculated based on your average indexed monthly earnings over your 35 highest-earning years. The formula for calculating benefits takes into account your earnings history and the age at which you start receiving benefits.
Q: Can I receive social security benefits if I become disabled?
A: Yes, if you become disabled and are unable to work, you may be eligible for social security disability benefits. You must meet certain criteria and have a disability that is expected to last for at least one year or result in death.
Q: What happens if the social security trust fund runs out?
A: If the social security trust fund depletes its reserves, it does not mean that social security benefits will stop altogether. The program is funded through taxes paid by workers, and adjustments may be made to ensure the program’s sustainability.
