So How Does Social Security Work Anyway?

Posted by Elliot Marks

All you may know for sure about Social Security is that the federal government reduces your take-home pay because of it and if you live long enough to retire, you may be able to apply for it. Most people don’t really understand how the program actually works or what they can reasonably expect from it.

Because every working American should have basic knowledge about Social Security, we have provided answers to some of the most commonly asked questions.

How Does It Work?

If you are an employee, a mandatory federal tax deduction will be taken out of your earnings. This deduction is currently 6.2% for Social Security and 1.45% for Medicare. Your employer is required to match these deductions for a total of 12.4% for social security and 2.9% for Medicare. If you are self-employed, you pay the whole 15.3% yourself. For 2020, $137,700 is the maximum taxable income limit.

This money is pooled with all your fellow working Americans and paid out to those who are eligible to receive benefits. 85% of the money is put in a trust fund for retirees and surviving family members. The other 15% benefits the disabled and their families.

How does Social Security Work?

Who Can Claim Social Security?

You must earn enough credits during your working life to qualify for it. In 2020, you get 1 credit for every $1410 you earn up to 4 credits annually. The amount it takes to earn 1 credit usually goes up every year. 40 credits (10 years for most Americans) are required before you are eligible for benefits. You build up your credit reserve over time. It doesn’t matter how many times you change jobs or if you are out of the workforce for periods of time.

Social Security Benefit Eligibility

It's important to make sure that you're eligible for Social Security retirement benefits. The following guide will help you determine whether you qualify.

Social Security Eligibility

When Can I Claim My Benefits?

You must reach a certain age to claim Social Security. If you were born before 1955, you can retire and get full benefits at 66. If you were born after 1959, you have to wait until you’re 67 to get full benefits.

You can retire at 62, but you won’t get full benefits. Example: If your full retirement benefits kick in when you reach 66 and 8 months, and you retire at 62, you will only get 71.7% of your full benefits. You should keep in mind that the retirement age is going up. This will increase the reduction rate of those who choose to retire early.

If you decide to delay receiving your benefits past the age of full retirement, your benefits will increase by a certain percentage monthly until you decide to retire or reach the age of 70, whichever comes first. The percentage of increase depends on when you were born and stops once you are 70.


Even if you retire early or decide to delay receiving benefits until after full retirement, you should still apply for Medicare 90 days before you turn 65.

How Much Will I Get?

The amount of money you receive from Social Security depends on how much money you make during your working life and how long you work. The Social Security Administration sends out benefit statements every year that will give you an idea of how much money you will be entitled to once you reach full retirement. The younger you are the less accurate the estimation will be because your future earnings are still unknown.

How much will I get from Social Security?

When and How Do I Get My Social Security Benefits Each Month?

The payment schedule depends on the day you were born. If you were born between the 1st and the 10th, you’ll receive payment on the 2nd Wednesday of the month. If your birthday falls between the 11th and the 20th, you’ll get your benefits on the 3rd Wednesday. Payment is made on the 4th Wednesday for those whose birthdays fall on the 21st through the last day of the month.

Payments are made electronically. You can have them deposited directly into your bank account. To do that you must have all the pertinent account information available when you apply. If you don’t have a bank account, you can sign up for the Direct Express card program or use an electronic transfer account.

Can I Live On Social Security?

Social Security was never intended to be a retiree’s sole source of income. It is intended to replace a certain percentage of the money you were making before you retired. The percentage varies according to your lifetime earnings and when you decide to retire. The Social Security Administration estimates that Social Security benefits account for 75% of annual income for very low-income earners. 40% for medium-income earners and 27% for high-income earners.

Social Security Benefit Eligibility

It's important to make sure that you're eligible for Social Security retirement benefits. The following guide will help you determine whether you qualify.

Social Security Eligibility

Do I Have to Pay Taxes on My Benefits?

According to the Social Security Administration, about 40% of Americans receiving benefits pay taxes on them. If you earn more than $25,000 in a year and file as an individual, you will be taxed. If you make more than $32,000 in a year and file jointly, you will be taxed.

Will Social Security Still Be Around When I’m Old Enough to Claim It?

The latest reports from the Social Security Administration state the funds used to pay benefits, for both retirement and disabilities, will run out in 2035. While politicians routinely promise to save Social Security for future generations, most economists agree that it won’t be done without raising taxes and cutting benefits. Nobel Prize-winning economist, Richard Thaler, floated the idea of blending private 401k plans with social security at an event last year hosted by Brookings Institute.

If retirement is in your distant future, your best bet is to invest and save aggressively. You should treat Social Security as an added bonus. Learn more about social security and medicare coverage here: Social Security Office

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.