How does Social Security work?

What is Social Security?

Social Security is a federal program in the U.S. that provides retirement benefits in the form of supplemental income to qualified individuals. While most people think Social Security only provides benefits to retirees, it also provides survivor benefits to workers who have been injured or disabled and their relatives.

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The history of Social Security

Social Security was created as an anti-poverty program during The Great Depression in the 1930s. The Social Security Act was signed by President Roosevelt in 1935 as part of America’s New Deal—a series of financial reform programs aimed at alleviating suffering during the depression between 1933 and 1939. In 1935, Social Security was simply designed to pay workers over the age of 64 a post-retirement income. Here is a timeline of how Social Security has evolved since then:

• 1939: Survivors insurance was instituted for the families of deceased workers.
• 1956: Disability insurance was created for workers with a disability and their families.
• 1965: Medicare starts providing health insurance to Social Security recipients.
• 1972: Supplemental Security Income is designed as a needs-based program to provide supplemental income to people with limited income or resources, including individuals who are over 65, blind, or disabled. Children with disabilities are also eligible for Supplemental Security Income.

How is Social Security financed?

Social Security is financed through a dedicated payroll tax. Employers and their employees pay 6.2 percent of their wages up to the taxable maximum ($160,200 as of 2023), while self-employed workers pay 12.4 percent. This amount comes out of your paycheck as a tax, and you receive the benefits of paying into the system when you retire. It’s worth noting that the Social Security taxes you’re currently paying are being used to support today’s retirees, who paid their own Social Security taxes when they were younger.

Who is eligible for Social Security benefits?

To receive Social Security benefits when you retire, you must have worked and paid your Social Security tax for a certain length of time. The exact length depends on when you were born, but everyone needs to have worked for at least ten years to qualify. The monthly amount of Social Security income you can receive as a retiree is based on your lifetime earnings and when you choose to start receiving benefits.

When should you start retirement benefits?

Choosing when to start your retirement benefits is an important decision. You can opt to receive your retirement benefits as early as 62, but your monthly benefits won’t reach the maximum amount. If you decide to receive your Social Security benefits at your “full retirement age,” you’ll receive the maximum benefit amount, or the highest monthly payment you’re eligible for in your 60s. Currently, the full retirement age is around 67, but that number changes depending on when you were born.

If you delay collecting your retirement benefits until the age of 70, you’ll receive even more benefits than you would at your full retirement age. However, your benefits stop increasing after that.

The future of Social Security

There are some concerns among Americans about the future of Social Security. With the baby boomer generation currently coming of retirement age, there may not be enough workers to support all the future retirees. If that comes to fruition, the government will need to find a way to supplement the funding gap so that workers who paid into Social Security throughout their careers can still reap the benefits.

Understanding what Social Security is and how it works will help you plan for retirement. If you’re still curious about what else you need to retire, learn if you should have a 401k, IRA, or both.