Free Guide to Understanding Social Security Today

How Social Security Works: The Basics

Social Security is a federal insurance program that has been operating since 1935. It works by collecting payroll taxes from workers and their employers, then distributing monthly payments to people who meet certain conditions. Understanding how this system operates helps explain why it matters to your financial future.

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When you work, your employer takes a portion of your paycheck—6.2% in 2024—and sends it to Social Security. Your employer also contributes an equal amount. Self-employed people pay both portions, totaling 12.4% of their income. These funds go into trust accounts managed by the Social Security Administration (SSA), a federal agency.

The Social Security system has three main trust funds. The Old-Age and Survivors Insurance (OASI) fund pays retirement benefits to workers aged 62 and older, as well as to their spouses, children, and survivors. The Disability Insurance (DI) fund provides monthly payments to workers who become unable to work due to medical conditions. Together, these programs—often called OASDI—serve as a foundation for many Americans' retirement and disability planning.

Your Social Security record is built through "credits" earned by working and paying taxes. In 2024, you earn one credit for each $1,730 of wages or self-employment income, up to a maximum of four credits per year. Most people need 40 credits (roughly 10 years of work) to receive retirement benefits. Younger workers may need fewer credits for disability or survivor benefits.

The amount you receive each month depends on your highest 35 years of earnings. Social Security calculates a benefit amount based on when you were born and when you start taking payments. For someone born in 1943 or later, the "full retirement age" ranges from 66 to 67, depending on birth year. You may take reduced payments as early as age 62, or wait until age 70 for a larger monthly amount.

Practical Takeaway: Social Security is an earned benefit based on work history and tax contributions. The more you understand how your earnings record affects your future payments, the better you can plan your financial decisions.

When You Can Receive Social Security Payments

Social Security offers payments at different life stages and under different circumstances. Knowing when you might receive payments helps you understand your options and plan accordingly. The program is not a one-size-fits-all system; instead, it provides several pathways depending on your situation.

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Retirement benefits are the most common type of Social Security payment. You may receive them starting at age 62, though your monthly amount will be smaller if you claim before your full retirement age. If you wait until your full retirement age—between 66 and 67 depending on when you were born—you receive your standard benefit amount. If you delay until age 70, your monthly payment increases by about 8% for each year you wait. According to the Social Security Administration, about 73% of new beneficiaries claimed retirement benefits in 2022.

Disability benefits are available to workers under full retirement age who have a severe medical condition expected to last at least 12 months or result in death. You do not need to be old to receive these payments; they are based on your work record and current health status. Family members may also receive payments based on your disability record, including a spouse caring for your child under age 16 and your children under age 19 (if still in high school).

Survivor benefits pay your family members if you pass away. Your spouse at any age caring for your child under 16, your unmarried children under 19 (or up to age 19 if in high school), and your dependent parents age 62 or older may each receive a portion of your Social Security. The total family benefit typically ranges from 75% to 180% of your basic benefit amount, depending on family size.

Supplemental Security Income (SSI) is a different program administered by Social Security that pays monthly benefits to people with low income and limited resources who are aged 65 or older, blind, or disabled. SSI is not based on work history but on financial need. As of December 2023, the average SSI payment was $621 per month for individuals.

Practical Takeaway: Social Security offers different payment types for retirement, disability, and survivor situations. Knowing which programs may apply to your circumstances helps you understand what information to gather and what options exist for your family's financial security.

How Your Earnings Affect Social Security

Your lifetime earnings directly shape the monthly Social Security payment you will eventually receive. The system uses a specific formula based on your work history, so understanding this connection helps explain why working longer or earning more can increase your benefits. The Social Security Administration calculates benefits using your highest 35 years of earnings, adjusted for wage growth over time.

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The calculation process begins with indexing your earnings. Social Security adjusts your past earnings to account for changes in average wages throughout the economy. This indexing ensures that benefits reflect the economic conditions of your working years. For example, earnings from 1990 are adjusted upward to reflect wage growth between then and now, so your benefit calculation treats all your working years fairly.

After indexing, Social Security identifies your 35 highest-earning years and adds them together. If you have fewer than 35 years of work, zeros are included for each missing year, which lowers your average. This is why people who take time out of the workforce—for caregiving, education, or other reasons—may see their benefits reduced. Working additional years can replace low-earning or zero-earning years, potentially increasing your benefit amount.

Your Primary Insurance Amount (PIA) is calculated using three "bend points" that apply different percentages to different portions of your average earnings. In 2024, the formula takes 90% of your first $1,174 in monthly average earnings, 32% of earnings between $1,174 and $7,078, and 15% of earnings above $7,078. This formula means lower earners receive a higher percentage of their earnings as benefits, while higher earners receive a lower percentage. The result is a progressive system designed to provide a poverty-prevention foundation for all workers.

If you were born January 2, 1943 or later, you receive a Cost-of-Living Adjustment (COLA) each year. In 2024, benefits increased by 3.2% to account for inflation. This adjustment helps your purchasing power keep up with rising prices, though the percentage varies year to year based on inflation rates measured by the Consumer Price Index.

Practical Takeaway: Your Social Security payment reflects your work history and lifetime earnings. Reviewing your earnings record and understanding how work years affect your calculation helps you make informed decisions about your work and retirement timing.

What Happens If You Work While Receiving Social Security

Many people continue working while receiving Social Security payments, either by choice or financial necessity. Understanding how work affects your benefits prevents unwanted surprises and helps you plan your finances. The rules differ depending on whether you have reached your full retirement age.

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Before you reach your full retirement age, Social Security reduces your benefits if you earn above a certain amount. In 2024, if you have not yet reached full retirement age for the entire year, your benefits are reduced by $1 for every $2 you earn above $23,400. During the year you reach full retirement age, benefits are reduced by $1 for every $3 earned above $62,160 (counting only earnings before the month you reach full retirement age). Once you reach full retirement age, earnings no longer affect your benefits, no matter how much you earn.

The earnings test applies only to work income, such as wages or self-employment earnings. It does not apply to investment income, rental income, pensions, or other types of income. This distinction is important for people with diverse income sources. A person receiving Social Security who has substantial investment returns or rental income will not see their benefits reduced, even though their total income is high.

Some people delay claiming Social Security specifically to continue working and earning. While they do not receive payments during this time, their benefit amount increases by 8% per year for each year they delay between full retirement age and age 70. This delayed retirement credit compensates for the years without payments and rewards those who continue working.

Work history also matters for future benefit increases. Earnings after you start receiving Social Security are included in the Social Security Administration's records. If you earn substantially more than one of your previous 35 highest-earning years, that