How Social Security Works in the U.S.

Social Security. It's a term that gets thrown around a lot in discussions about retirement, disability, and even politics. We’ve all heard of it, but do you know what it is or how it works? Let's break it down.

What is Social Security?

• In simple terms, Social Security is a federal social insurance program that provides financial support to people who are retired or unable to work due to a disability. The idea is that workers pay for their future economic security while they're still employed.
• In 1935, President Roosevelt signed the Social Security Act to assist retired workers who are 65 or older by providing them with a continued income after they retire.

How does it work?

• The Social Security system works like a mandatory savings program. When you are employed, you pay into the system by having Social Security taxes deducted from your salary. The current tax rate for Social Security is 6.2% for employees, and 12.4% for people who are self-employed. 
• The money paid into the Social Security system doesn't go into a personal account for you to draw on later. Instead, when you retire, you'll receive benefits paid for by future workers. Benefit payments are based on how much one earns during their working career, with higher lifetime earnings resulting in higher benefits.

Who is eligible?

• To qualify for Social Security benefits, you need to earn at least 40 Social Security credits, which you can earn by working and paying Social Security taxes. 
• Since 1978, you can earn up to 4 credits per year. In 2023, you can earn one Social Security and Medicare credit for every $1,640 in covered earnings per year. To receive the maximum 4 credits for the year, you need to earn $6,560.
• You can start receiving retirement benefits at age 62, but the full retirement age is currently between 66 and 67 depending on your birth year. If you claim benefits before your full retirement age, the benefit amount will be permanently reduced. Delaying your benefits to age 70 will result in an increased benefit amount.

What about Disability and Survivor Benefits?

• Social Security isn't just for retirement. The Social Security Disability Insurance (SSDI) program provides benefits to people who are unable to work due to a significant illness or impairment. To qualify for disability benefits, you must pass a recent work test and a duration work test.
• Survivor benefits are paid to the surviving spouse and children of a deceased worker, with the amount based on the deceased worker's earnings and the survivor's age and relationship to the worker.

The future of Social Security

• Since 2010, the program has paid more in benefits than it brings in revenue. This has led to conversations about the long-term sustainability of Social Security, and the impact of an aging population and longer life expectancies. 
• Unless Congress takes action, the Old-Age and Survivors Insurance and Disability Insurance trust funds are expected to run out by 2034, according to the Social Security Trustees Report.
• Calls for Social Security reform include raising the retirement age, increasing the payroll tax, or modifying the benefit formula.

Social Security is an important social safety net that supports millions of retired and disabled workers and their families. Understanding how it works can help you prepare for your future and make knowledgeable decisions about your retirement plan.

Are you worried about the future of Social Security?