What Is Social Security (And How Does It Work)?

So, what is social security?

Social Security is a government program designed to provide financial assistance to eligible individuals through retirement, disability, and survivors’ benefits.

This safety net ensures that people who qualify receive the necessary support during various life situations.

Key Social Security Facts
Average monthly worker benefit in March 2023: $1,833 💰
Number of individuals paying Social Security taxes (2021): 179 million 👥
Total cost of Social Security in 2021: $1.145 trillion 💸
Income generated from taxes and interest in 2021: $1.088 trillion 💼
Trust fund reserves as of end of 2021: $2.852 trillion 🏦
Projected depletion year of reserves: 2035 📆

➡️ What is social security?

Social Security, an essential American federal insurance program, ensures regular monthly income for eligible recipients.

While a significant portion of these benefits caters to retired workers and their dependents, Social Security also extends its support to individuals with disabilities and survivors.

Funding for Social Security primarily originates from payroll taxes contributed by both employees and employers.

Commonly referred to as the Old-Age, Survivors and Disability Insurance (OASDI) program, Social Security was instituted during the challenging times of the Great Depression.

Its primary mission is to provide economic stability for elderly workers, those living with disabilities, and dependent children.

As of 2023, the Social Security Administration reported that nearly 67 million Americans were receiving monthly benefits through the program.

➡️ How does social security work?

The Social Security program is overseen by the Social Security Administration (SSA). The financial assistance provided to retirees and other beneficiaries is mainly supported through payroll tax contributions from individuals currently employed.

It’s crucial to maintain a sufficient ratio of workers to beneficiaries to ensure the provision of complete benefits.

On average, Social Security retirement benefits typically replace around 40% of a worker’s income before retiring.

For the majority of workers, both employees and employers contribute a 6.2% payroll tax on the employee’s earnings, up to a specified limit known as the wage base.

This wage base is usually adjusted annually. In 2023, the Social Security wage base has been set at $160,200.

For instance, consider an employee earning $161,000 annually before taxes in 2023. This individual pays the 6.2% Social Security tax on all earnings except the last $800.

Similarly, the employer also pays a 6.2% tax on these wages. Self-employed individuals cover the entire combined 12.4% Social Security payroll tax themselves.

When employees retire or face disability, they might qualify to receive monthly income through Social Security. In certain scenarios, a worker’s children, spouse, or former spouse may also become eligible for benefits.

➡️ How to calculate social security benefits

The computation of Social Security benefits hinges on two main factors:

  1. Your Age When Benefits Commence: The age at which you start receiving Social Security benefits significantly influences the calculation.
  2. Earnings and Contributions: The amount you earned and contributed to Social Security throughout your 35 most productive earning years plays a pivotal role.

Because the calculation is based on the highest-earning 35 years of an individual’s career, those with higher incomes are likely to receive greater Social Security retirement benefits compared to those who earned less or had gaps in their work history.

Nonetheless, supplementary benefits, such as spousal benefits, can help offset disparities.

➡️ How soon can I collect social security?

You have the option to start claiming Social Security as early as age 62 (Note: Medicare becomes available at age 65).

However, the longer you continue working, the larger your monthly Social Security retirement benefit could become.

Here’s a breakdown of how the timing of your claim affects your benefits:

Age at ClaimBenefit Impact
Before full retirement agePermanently reduced benefit
Full retirement age100% of monthly retirement benefit
After full retirement age, up to age 70Benefit increases by up to 8% per year

If you retire before your full retirement age, your Social Security benefit is subject to reduction. Here’s the breakdown for different birth years:

Full Retirement AgeYear of BirthBenefit Reduction
661943 – 195425%
66 and 2 months195525.83%
66 and 4 months195626.67%
66 and 6 months195727.5%
66 and 8 months195828.33%
66 and 10 months195929.17%
671960 and later30%

Your Social Security benefits continue to increase until you reach age 70. After turning 70, benefit increments stop, even if you choose to delay retirement further.

People receiving survivors’ benefits due to a deceased spouse can qualify for retirement benefits starting at age 60, or age 50 if they have a disability.

➡️ How much is my social security benefit?

The maximum monthly Social Security benefits that someone retiring in 2022 can receive vary based on when they retire and begin collecting benefits[9]:

Retirement AgeMaximum Monthly Benefit
62 years old$2,572 per month
65 years old$3,279 per month
67 years old$3,808 per month
70 years old$4,555 per month

To qualify for the utmost Social Security retirement benefit, one must have earned the highest taxable wage annually (which is $160,200 in 2023) for at least 35 years.

➡️ Do I pay tax on social security benefits?

Indeed, Social Security retirement and disability benefits are subject to taxation. The calculation of income taxes on these benefits is based on your “combined income,” which encompasses:

  1. Adjusted gross income (including earnings, investment returns, and retirement plan withdrawals).
  2. Tax-exempt interest, such as interest from municipal bonds.
  3. Half of your Social Security benefit.

A majority of Social Security recipients surpass the minimum threshold, leading to the payment of taxes on their benefits.

Approximately 56% of beneficiary families are projected to pay income taxes on their benefits during the 35-year span from 2015 to 2050, as per a Social Security projection.

However, no beneficiary is taxed on more than 85% of their benefits.

Here’s how the taxation tiers are structured for individual federal income tax filers:

Combined IncomeTax on Benefits
Up to $25,000None of your benefit
$25,000 to $34,000Up to 50% of your benefit
Over $34,000Up to 85% of your benefit

For those who file federal income taxes jointly:

Combined IncomeTax on Benefits
Up to $32,000None of your benefit
$32,000 to $44,000Up to 50% of your benefit
Over $44,000Up to 85% of your benefit

➡️ Social security & cost-of-living adjustment (COLA)

Benefit recipients experience an annual cost-of-living adjustment, referred to as COLA. This adjustment’s magnitude is determined by the Consumer Price Index, reflecting that the initial benefit sum generally rises in alignment with inflation over time.

This increase becomes effective for the benefit disbursed at the conclusion of each December.

Notably, the COLA for the year 2022 marked a significant 8.7% rise, representing the largest increase since 1981.

For reference, here are the COLAs recorded since 2013:

YearCOLA (for following year)

This information provides insight into the working of the cost-of-living adjustment and its implications over the years.

➡️ Types and duration of social security benefits

Retirement Benefits: Social Security retirement benefits are provided to individuals who have contributed to Social Security taxes.

These benefits have no expiration date; once you start receiving Social Security payments, they continue for your entire lifetime.

Survivors Benefits: Upon the death of a worker, eligible survivors can receive Social Security survivor benefits. Survivors encompass spouses over 60 (50 if disabled, or any age if caring for the deceased’s children under 16) and children under 18 (19 if students).

Generally, survivors’ benefits are disbursed monthly throughout the surviving spouse’s life. However, specific rules apply to divorced spouses.

Disability Benefits: Individuals with a qualifying medical condition can qualify for Social Security Disability Insurance. Disability benefits do not have a predetermined end date.

Payments persist as long as the qualifying health condition persists. Social Security conducts regular check-ins to ensure the health condition still impacts the individual’s ability to work.

Dependent Benefits: Children receiving Social Security benefits on behalf of a retired, disabled, or deceased parent receive payments until they reach the age of 18. If the child is a student, these benefits typically continue until high school graduation or two months after turning 19.

This overview provides clarity on the various types of Social Security benefits and their respective durations.

➡️ What is the purpose of social security?

Social Security emerged as a crucial component of FDR’s New Deal strategy, designed to alleviate the distressing poverty faced by elderly citizens during the depths of the Great Depression.

Its primary aim was never to amass wealth for retirement, but to provide essential support for the fundamental needs of older Americans, encompassing sustenance and housing.

From its inception with the Social Security Act of 1935, the program has undergone multiple expansions, strategically broadening its scope to counteract poverty within other vulnerable sectors of the population.

This includes individuals with disabilities, surviving spouses, widowers, and dependent children.

In the year 2023, a substantial average of approximately 67 million Americans each month will be recipients of Social Security benefits, constituting a collective payout exceeding a trillion dollars, as reported by the Social Security Administration (SSA).

Remarkably, nearly half of all Social Security beneficiaries rely on the program for more than fifty percent of their monthly income.

➡️ What is the future of social security?

Contrary to the circulating social media memes, Social Security isn’t heading towards bankruptcy.

According to current assessments, the Social Security retirement trust fund is anticipated to deplete by 2034.

After this point, incoming payroll deductions will be adequate to cover 77% of the scheduled benefits.

While it’s easy to point fingers at Congress for an instant fix, the real explanation behind our current predicament is more straightforward, albeit challenging to resolve.

Extended Lifespans of Retirees: Retirees are enjoying longer lives. Back in 1940, a 65-year-old had an average life expectancy of roughly 12.7 years for men and 14.7 years for women, with only 57% of the population reaching that age.

In contrast, today’s 65-year-olds are projected to live 18 years for men and 20.7 years for women, with 84% of people making it to 65.

Growing Retiree Population: The number of retirees has surged. In 1940, there were 8.3 million Americans aged over 65, constituting 6% of the nation’s populace. Fast forward to 2022, and the figure stood at 58 million, accounting for 17% of the population.

Projections from the Social Security Administration suggest that by 2035, the count will increase to 76 million, further intensifying their proportion within the total population.

Shrinking Worker-to-Retiree Ratio: Though data for 1940 isn’t as comprehensive, in 2022, there were roughly 2.8 covered workers contributing to Social Security for every beneficiary receiving payments from the SSA.

Predictions indicate that by 2035, this ratio is set to decline to 2.3.

In summary, the future dynamics of Social Security are shaped by increased lifespans, a larger retiree demographic, and a decreasing ratio of workers per retiree.

Addressing these challenges requires comprehensive solutions that account for these shifts in demographics and societal changes.

➡️ Possible solutions to social security challenges

In response to the ongoing Social Security challenges, numerous political figures have presented their own ideas for rectifying the situation.

Some potential solutions encompass:

  1. Raising the Retirement Age: This involves increasing the age at which individuals become eligible for Social Security benefits.
  2. Benefit Reductions: Adjusting the amount of benefits provided to beneficiaries.
  3. Means Testing: Evaluating income levels to determine eligibility for benefits.
  4. Raising the Income Cap: Raising the earnings threshold subjected to Social Security taxes.
  5. Elevating the OASDI Tax Rate: Enhancing the tax rate associated with Old-Age, Survivors, and Disability Insurance.
  6. Hybrid Approaches: Implementing combinations of the aforementioned measures.

In addition, more radical proposals such as privatization or even discontinuing the program altogether have been suggested.

Irrespective of the chosen course of action, it’s crucial to recognize that the most vulnerable members of our society rely heavily on Social Security.

While the program may not be flawless, it’s essential to bear in mind its original purpose when seeking a resolution.

Social Security was established to provide a safety net, and any solution should uphold its fundamental principles.

➡️ Is social security the same as social insurance?

While both “Social Security” and “social insurance” are related concepts, they are not exactly the same. “Social Security” specifically refers to the American federal program that provides retirement, disability, and survivors’ benefits to eligible individuals.

It is a specific program run by the Social Security Administration in the United States.

On the other hand, “social insurance” is a broader term that encompasses various government programs designed to provide financial protection to individuals or families against certain risks.

Social insurance programs can include unemployment benefits, healthcare coverage, disability benefits, and pension systems.

Social Security is a type of social insurance program, but not all social insurance programs are called Social Security.

➡️ Key information from the Social Security Administration (SSA)

The Social Security Administration (SSA) serves pivotal roles in the United States, primarily focused on providing essential services to citizens.

Functions of the SSA:

  1. Issuing Social Security Numbers: The SSA assigns Social Security numbers, which serve as unique identifiers for individuals.
  2. Administration of Programs: The SSA manages significant programs including Social Security retirement, survivors, and disability insurance.
  3. Supplemental Security Income (SSI): In addition, the SSA oversees the Supplemental Security Income program. This program is intended for individuals aged 65 and above, those with visual impairments, or those with disabilities.

Contact Information:

Locate an Office:

Main Address:

  • 6401 Security Blvd. Baltimore, MD 21235

Accessing the SSA’s Services:

The Social Security Administration plays an indispensable role in providing critical support to individuals across various life stages.

From assigning unique identifiers to managing retirement, survivors, and disability programs, as well as overseeing the Supplemental Security Income initiative, the SSA’s impact is far-reaching.

For further information or assistance, you can explore their official website or reach out via their provided contact details.

➡️ Social security FAQ

Frequently Asked Questions
Can I receive retirement benefits if I live outside the U.S.? 🌍
Most U.S. citizens can still receive Social Security benefits if they’re living or even visiting outside of the country, according to the SSA. Some countries even have transfer agreements that can give you U.S. benefits if you worked in a different country for part of your career.
How do I apply for Social Security benefits? 📄
You can apply for Social Security on SSA.gov. Separate applications exist for retirement, spousal, disability, and survivor benefits. Ensure that you time your application to receive the highest benefit possible.
Does Social Security include Medicare? 💼🏥
Medicare and Social Security are both government safety net programs. They aren’t the same, but they are linked. Many people become eligible for both programs at around the same time.

➡️ References

USA.gov. Getting Social Security benefits if you are living outside the U.S.
SSA.gov. Social Security Fact Sheet
SSA.gov. Monthly Statistical Snapshot, March 2023
SSA.gov. The 2022 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds
SSA.gov. Social Security in retirement
SSA.gov. Maximum Taxable Earnings
SSA.gov. If You Are Self-Employed
SSA.gov. Full Retirement Age for Survivors
SSA.gov. Workers with Maximum-Taxable Earnings
SSA.gov. Income Taxes And Your Social Security Benefit
SSA.gov. Income Taxes on Social Security Benefits

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Pavlos Written by:

Hey — It’s Pavlos. Just another human sharing my thoughts on all things money. Nothing more, nothing less.