How Does Social Security Work & Where Should You Start?

Posted by Elliot Marks

if you have ever taken a look at your paycheck you likely noticed that Social Security taxes were deducted. Maybe you even know someone who receives Social Security benefits on a monthly basis. Maybe you're wondering, "What does Social Security do?" It can sound complicated at first, but the basics of the system are fairly simple. If you would like to learn more about how the system works and what you should be doing to make sure you get your benefits, then you came to the right place. Just keep reading for a full explanation.

So How Does It Work?

Sample Social Security Card

So, what is Social Security? To understand how Social Security works, it is helpful to have a basic understanding of the history of Social Security. Knowing why it even came into existence helps provide a background for the way that functions today and even into the future. Social Security was founded in 1935 as a way for the Federal government to assist retirees with income after they had stopped working. The next logical question is how is Social Security funded?

In a nutshell, Social Security taxes are collected through FICA deductions from each paycheck that you earn. These taxes are collected at a rate of 12.4%, split equally between you and your employer. These funds are then used by the Social Security Administration so that they can be paid to people who are receiving benefits. There are several types of people who may be receiving benefits. Those include retirees, disabled Americans, survivors of deceased workers, and dependents of beneficiaries.

Of the money that is collected by Social Security, approximately 85 cents from every dollar is placed into the Social Security Trust Fund and ultimately paid to retired workers, qualified spouses, and dependents of deceased workers. The other 15 cents is paid to people unable to work due to disabilities and their families. Keep in mind that the Social Security system was never intended to be a total replacement for your income after retirement. It was meant to be supplemental income in addition to what a person had saved for their own retirement during their lifetime through a 401K, IRA, or other retirement savings plan.

The Social Security tax is mandatory, and it is collected automatically from your paycheck. If you are self-employed, then you are required to pay the full 12.4% tax as well. These funds are not placed into your own personal retirement account, rather they go into a larger fund of money and are disbursed as described in the previous paragraph. Upon reaching retirement age, you then apply for your benefits and begin receiving monthly payments from the Social Security fund. To learn how to receive your retirement benefits, then keep reading.

How to Find Out if You're Eligible For Social Security Benefits

Not every American receives Social Security benefits. You must be eligible for the benefits in order to receive them. There are a few different ways that you can qualify for benefits. The first is by reaching full retirement age. In addition to meeting the age requirement, you must also have accumulated enough work credits throughout your lifetime to qualify. That basically means that you must have worked enough and paid into the system in order to receive any benefits from the system.

In 2021, you receive one work credit for every $1,470 you earn. You can earn a maximum of four work credits per year, and 40 credits are required to be eligible for retirement benefits. So, you basically need to work at least 10 years to qualify for benefits when you reach retirement age.

You can also qualify for payments if you become disabled and unable to work. The SSA has strict requirements for what constitutes a disability, and you must meet those requirements to be deemed disabled. In addition, you must also have a qualifying work history, although the requirements are lower than they are for full retirement benefits.

You may also qualify for benefits if you are the spouse or dependent of a deceased benefit recipient. You should note that survivor benefits are not usually paid at the full amount of the original benefits. The amount of these benefits usually falls somewhere in the 75% range of the original amount.

One way to check your eligibility is to register for a My Social Security account on the SSA.gov website. This allows you to see your work history, estimate your benefit amount, and even apply for benefits. In addition, it can show you activity on your account such as Social Security name changes or other actions taken. It also has some very helpful tools when determining whether to receive your benefits while still working or waiting until full retirement age.

When To Claim Your Social Security Benefits

Retirement Planning

Many people reading about Social Security are really wondering, "How does retirement work?" Originally, you could claim your full retirement benefits at age 65. However, legislation was passed in 1983 that gradually raised the retirement age. Now, a person does not reach full retirement age until 67 if they were born in 1960 or after. This does not mean, however, that this is the only time you can apply for benefits.

You can still apply for retirement benefits upon reaching age 62, but you should know that your benefit amount will be reduced. Since you receive benefits for the remainder of your life, your benefits must be reduced if you begin receiving them early because it is expected that you will receive them longer than normal.

Similarly, you can choose to delay starting your benefits. In the same manner, your benefits will be increased because it is expected that you will receive them for a shorter period of time than normal. The decision on when to apply for your benefits should not be taken lightly. It should be based on your personal financial situation and whether you are still currently working. Consider consulting a financial professional to help you in making that decision.

Another factor to consider when taking your benefits is your health insurance coverage. In some cases, you will be automatically enrolled in Medicare upon receiving your Social Security retirement. There are ways to keep those costs low, but you should at least be aware of the situation.

How Does The Government Calculate Social Security Benefits?

This question is almost impossible to answer as no one really seems to know the math behind the actual calculations. We can tell you, however, that your benefits are calculated based on your average earnings throughout your lifetime. Most seem to agree that benefits are based on your 35 years of highest earnings, which can negatively impact you if you did not work for several years such as staying home to take care of children or caring for a sick family member.

The age at which you decide to begin your benefits also plays a role in the calculation. If you elect to start receiving benefits at the full retirement age of 67, then you will receive your full benefits - also known as your primary benefit level. If, however, you choose to take an early retirement and begin receiving benefits at age 62, then your Social Security retirement benefits will be reduced by about 25%.

On the flip side, if you delay the start of your benefits past age 67, you can add about 8% per year to your retirement income. These are called delayed retirement credits. Once you reach the maximum age of 70, your benefit amount will no longer increase. So, there is really no reason to delay the start of your benefits past age 70.

While no one really knows the exact calculation used to determine the amount you will receive, you can get an estimate of your benefits through your My Social Security account. This will show you the expected amount that you would receive based on the retirement age that you select. If you are already receiving benefits, the SSA makes adjustments from time to time for cost-of-living adjustments. You will usually see an increase in your monthly payments when this happens.

How Much Does Social Security Pay?

The amount that Social Security pays varies based on your average lifetime earnings. However, do not expect it to fully replace your pre-retirement income. Most experts state that Social Security will replace approximately 40% of your income. So, if you were a mid-income earner and made $50,000 while you were working, then Social Security will likely pay you somewhere around $20,000 per year after retirement.

You can quickly see why you should not fully rely on Social Security payments for your income during retirement. As we stated before, Social Security checks were only intended to be supplemental to your own retirement savings. Many older Americans have gotten into financial trouble because they did not have enough of their own money saved for retirement, and Social Security payments were not enough for them to live on.

If you become disabled before retirement age, expect your payments to be even less. In 2021, the average Social Security disability payment was $1,277 per month. Supplemental Security Income, or SSI, payments were even lower. You can see now why living on these disability benefits alone is nearly impossible!

How Do Social Security Payouts Work?

US Treasury Check

Receiving your benefits upon reaching retirement age is pretty straightforward. You simply need to use your Social Security number to apply for benefits. You can do this online or by completing and mailing the Form SSA-1. You will need to provide documentation such as your birth certificate, past W-2 statements, and other information. If you have lost your Social Security card, then you should immediately request a replacement.

Upon being approved, you will begin to receive your monthly payments through direct deposit or loaded onto a debit card. Physical checks are no longer mailed due to the manpower that it requires to distribute them. Direct deposit is a much easier and quicker process, and your money is available immediately in your account on the date it is disbursed.

Social Security payments may also be considered taxable income for income tax purposes depending on your total income. You could be taxed on anywhere from 0% - 85% of your payments based on your income level shown on your tax returns.

FAQ

Will Social Security Be Around in 30 Years?

The short answer is no one knows for sure, but it is likely that Social Security will be around in some form 30 years from now. Social Security has enough money to fully fund its current obligations through the year 2034. After that, payments may need to be reduced to keep up with the amounts that must be paid out of the fund. With more baby boomers retiring, this puts an even bigger strain on the system.

The key takeaway should be that you need to save for your retirement on your own. If you do get a payment from Social Security, then it can be used for hobbies or extra spending money, but do not rely on a Social Security check for your living expenses during your old age.

How Many Years Do You Have to Work To Get Maximum Social Security?

To qualify for full benefits, you need to work full time for 10 years of your life. The more you work, and the more you earn, the higher your benefits will be. If you only work 10 years and no more, then your benefits calculation will include several years of zero earnings, which will greatly reduce your monthly benefit amount.

Can a Person Collect Social Security Who Has Never Worked?

Many people ask, "Does everyone get Social Security?" A person who has never worked may qualify for Supplemental Security Income, but they cannot qualify for retirement benefits on their own. In addition, they are not covered by disability insurance, so they would not be eligible for SSDI benefits. A surviving spouse or dependent of a benefit recipient may be able to qualify for benefits even though they have never worked.

Can I Collect Social Security and Still Work?

In short, yes, you can collect Social Security while you are still working. If you have reached full retirement age, then you can earn as much as you like without incurring a reduction in your benefits. If you are below full retirement age, then your benefits may be reduced based on your current income. Don't worry though - the reduction will be credited back to your account, and your payments will increase once you hit full retirement age.

What Are The Social Security Benefits For Spouses?

Even if you have never worked, you may be entitled to benefits based on your spouse's work history. The U.S. Government tightened some of the spousal rules in 2015, so it is a little more difficult to obtain these benefits. To qualify, one spouse must already be receiving benefits, and the applying spouse must be at least age 62.

Divorced spouses may even be entitled to receive benefits based on the work history of their ex-spouse. To qualify, one spouse must already be receiving benefits or at least entitled to them. The marriage must have lasted at least 10 years, and the spouse trying to claim benefits cannot be re-married.

Conclusion

You should now have a good understanding of the purpose of Social Security and how it works. If you have any questions about your specific situation, you should attempt to contact your local Social Security office. Note that you should call first as many are closed due to the COVID-19 pandemic. You can check your annual Social Security statement to get an estimate of your expected payout, but you should never solely rely on that income for living. Save for retirement on your own so that anything you receive from Social Security is just extra money!

Elliot Marks

Elliot Marks

Author & Social Security Advisor

Elliot Marks has spent over 10 years providing clear and concise information to help Americans navigate the complex nuances of social security and many other government services in the United States. Elliot has a passion for helping those in need of these services to be able to find timely access to news and information that is relevant and helpful to their daily lives.