How Social Security Works: A Guide to Social Security Benefits

If you’ve held a 9-5 job, you’ve likely heard of social security. This federal program serves as a sort-of savings account that older Americans can tap into to provide income for their retirement. While most people associate social security with retirement benefits, it also provides disability benefits and support for family members who lose a spouse or parent. 

Statistics show about 180 million people worked and paid social security taxes and about 65 million people received monthly benefits as of June 2020. Most of the beneficiaries, about 49 million people, are current retirees, according to the Social Security Administration.

To better understand what social security benefits are, how the federal government calculates them, and what you can financially expect to get later on in life, this guide should provide answers to commonly asked questions. 

How does social security work?

When a person works, he or she pays into the social security system. Take a look at a pay stub. You’ll notice that your employer has taken out FICA taxes, that’s for social security retirement benefits. Most employees pay 6.2% of their income into social security and the employer matches that, paying another 6.2%, for a total of 14.4% of income delivered to the social security system. 

As a person works and pays into the system, credits are earned. Eligibility is based on earning credits. Usually, a person needs 40 credits, which are usually accumulated after about 10 years of work, to be eligible for social security benefits. 

Senior citizens choose when to start collecting retirement income. It can be collected at full retirement age, where a person receives full benefits or collected earlier, at age 62. If a person decides to collect early retirement at the age of 62, the income will be less than it would be if the person waited until full retirement age.

What age is considered full retirement age? It varies based on the year a person is born. The chart below explains when a person is considered full retirement age:

Year of birth

Full retirement age
1943-1954 66
1955 66 years and 2 months
1956 66 years and 4 months
1957 66 years and 6 months
1958 66 years and 8 months
1959 66 years and 10 months
1960 or later 67

When a person is ready to start collecting social security, he or she must apply for the benefits about four months before the payments are expected to start. Funds are deposited directly into a bank account or placed on a prepaid debit card.

How much money can you expect from social security?

The amount of money a person gets for monthly income depends on lifetime earnings and at what age the benefits are claimed. As of June 2020, the average monthly payout was $1514, which is about $18,170 a year. While that might not seem like a lot, keep in mind that social security isn’t meant to be a person’s sole source of retirement income. It’s meant to serve as a supplement. 

Of course, knowing how much money will likely come from social security can help with retirement plans. 

The federal government has a formula to calculate retirement benefits. To start, actual earnings are adjusted or indexed to account for changes in wages since a person began working. Then, an average monthly earning is reached by looking at the 35 best-paid years. From there, a primary insurance amount is computed, which is the amount a person would earn monthly if the person waited to claim benefits at full retirement age. 

Since the math behind social security benefits is a bit complicated to grasp, the Social Security Administration has a retirement estimator tool on its website (ssa.gov) that can provide this figure easily. A “My Social Security” account must be set up first.

Before using the estimator, there are certain factors that can change a retirement benefit that retired workers should be aware of, which include:

  • The age at which social security retirement benefits are claimed alters the monthly amount.
  • Cost of living adjustments are added to benefits when a person reaches 62 and continues up to the year a person starts receiving benefits.
  • A person can delay the start of their own retirement benefits past his or her full retirement age, which can increase monthly benefits. 
  • The payout formula is different for government workers with a pension that’s not tied to social security. Government employees should use this planning tool for additional information.  

What should you know about disability benefits?

Social security benefits are also available for those with disabilities from two different programs: Supplemental Security Income and Social Security Disability Insurance. 

Supplemental Security Income is for elderly, blind, or disabled adults or children with little to no income or assets. Social Security Disability Insurance provides benefits for people who have worked enough to qualify for social security benefits, which is usually about 10 working years.

To learn more, check out our guide to benefits for people with disabilities

What should you know about social security survivor benefits?

Social security funds are also used to pay survivor benefits. If an earner dies, qualifying spouses, or in some cases parents, can receive benefits. To start the process, the Social Security Administration must be notified of the death and a death certificate must be submitted. 

Spousal benefits are generally available to spouses once they reach the age of 60. The amount given depends on how much money the deceased person was getting from social security or would have earned, if the person wasn’t claiming benefits yet. The amount changes based on when a spouse claims the benefit as well. Waiting until full retirement age does result in more income. 

It’s possible for people to claim both their own social security benefits and survivor benefits. If that’s the case, a person will get the larger monthly sum, not both benefits combined. A person might decide to claim their own benefits early and delay survivor benefits. 

To understand more about social security survivor benefits and what the benefit amount could be, visit the survivor benefits page on the Social Security Administration website. 

How can you apply for social security benefits?

If a person is ready to collect social security benefits, there are three ways to get the process started. A person can apply online at ssa.gov, by calling the Social Security Administration office at 1-800-325-0778, or by visiting a local social security office.

Filing online takes about 15 minutes. A person must answer a series of questions to complete an application, but the process can be completed in multiple sessions, if necessary. It’s best to apply for the benefits about four months before you’d like to receive them.  

Where does social security tax money go?

Social security is a payroll tax that’s taken out of a person’s paycheck. In 2021, $0.85 of every dollar goes to a social security trust fund that pays out social security benefits. About $0.15 of every dollar goes to a trust fund used to support people with disabilities. Less than $0.01 goes to manage the fund, according to the Social Security Administration

When did social security income start?

President Franklin D. Roosevelt signed the Social Security Act into law in 1935. Its original purpose was to help older Americans retire more comfortably, but was amended to include disability and survivor benefits years later.

Are social security benefits taxed?

If a person earns too much money, social security income is taxed by the U.S. government. If a person files a federal tax return as an individual with a combined income between $25,000-$34,000, the person will pay income tax on up to 50% of his or her benefits. A person making more than $34,000 will pay income tax on up to 85% of his or her benefits. 

A joint return with a combined income between $25,000-$44,000 will also pay income tax on up to 50% of the benefit sum. Anything over $44,000, the earner can expect to pay tax on up to 85% of the monthly benefit. The social security website explains more about taxed benefits.

What is delayed retirement?

Delayed retirement is when a person chooses not to claim benefits until after their full retirement age. The person earns delayed retirement credits, which can increase the monthly amount the person will receive once he or she starts collecting.

What is early retirement?

A person can start collecting social security benefits at the age of 62, which is before anyone reaches their full retirement age. If the money is collected before full retirement age, it’s considered early retirement and benefits are reduced.

Can you still work and receive social security benefits?

Yes. A person can work and still get social security, but there is a limit to how much can be earned. The United States government has some strict, specific rules about earning while claiming benefits, which can be found on the social security website under receiving benefits while working.

Will social security run out?

Reports show social security funds could run out by 2028. There are many reasons behind the depleting funds. For starters, the pandemic has created a high unemployment rate, which means fewer people are paying into the system. Plus, wages are down, so even people who are paying into the system are paying less. The pandemic has shaved an estimated seven years off the social security fund’s lifespan. 

In addition, more people are claiming disability and more people taking social security before they reach full retirement age, which has also left the system strapped for cash. 

There are suggested solutions, which include increasing payroll taxes, reducing everyone’s benefit amount, and raising the minimum age to collect social security. 

Considering the future of social security is unstable, it’s best to speak with an investment advisor to review your earnings record, estimate social security benefits, and plan for shortfalls.   

What resources are available to learn more about social security? 

A person can visit the Social Security Administration website at ssa.gov, call the office at 1-800-325-0778, or visit a local social security office. Typically, offices are open Monday-Friday from 7am-7pm. 

This guide, Understanding The Benefits, may also provide additional information.

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