What Is Social Security?

The Social Security program was established in 1935 to provide retirement income for certain U.S. workers. It was later expanded to cover most of the workforce. Today it remains America’s pension plan and the financial lifeline many people use to stay afloat in their old age.

Social Security provides about half of elderly Americans with at least 50% of their income. For about one in five married couples and nearly half of single seniors, it's 90% of their income. There are specific rules for filing or updating your Social Security.

How does Social Security work? Regardless of your age, you really should know, and here are the answers to 10 questions that people most often ask.

Key Takeaways

  • Social Security income is a popular and important public pension system in the U.S.
  • Americans become eligible for full Social Security benefits at age 62, but benefit amounts depend on how early you elect to start.
  • The age at which full retirement benefits are paid is 67 for people born in 1960 or after, and 66 for those born between 1943 and 1954. For those born between 1955 and 1959, the age increases annually by two months.
  • Spouses are eligible for benefits even if they never worked for pay.

1. When Am I Eligible?

Depending on when you were born, you will be eligible for full retirement benefits as early as age 65 or as late as age 67.

  • If you were born before 1938, your full retirement age is 65.
  • If you were born between 1938 and 1942, the age ranges from 65 and two months to 65 and 10 months.
  • If you were born between 1943 and 1954, it’s 66.
  • If you were born between 1955 and 1960, it ranges from 66 and two months to 66 and 10 months.
  • If you were born in 1960 or later, it’s 67.

You can opt to receive Social Security as early as age 62, but if you do, your monthly benefits will be permanently reduced. For example, if you take benefits at 62 and your full retirement age is 66, your benefits will be reduced by 25%.

If you postpone taking benefits past your full retirement age, you will be rewarded with a higher benefit—8% for each year up to age 70, when benefits max out and there is no further incentive to delay signing up.

2. How Is Eligibility Determined?

Your eligibility for Social Security is based on the credits you earn during your working years. As of 2021, for every $1,470 you make, you earn one credit, up to a maximum of four per year. If you were born in 1929 or later, you need 40 credits—essentially 10 years of full-time work—to receive Social Security benefits at retirement.

“Once you have these minimum credits, your benefit is based on your highest 35 years of averaged earnings,” says Mike Windle, owner and financial advisor at Custom Wealth Solutions in Plymouth, Mich. “If you only worked 20, you would have 15 years of zero income.” For workers who spent a significant number of unpaid years at home, caring for children or elderly family members, this formula creates a significant disadvantage.

There are special provisions that can change the formula if you had certain public service jobs. “For citizens who have government-sponsored pensions, like teachers, firefighters, police officers, or other public employees, there is a high probability that your Social Security benefits are reduced or even eliminated,” says Mark Hebner, founder and president of Index Fund Advisors, Inc., in Irvine, Calif.

3. How Much Do I Pay In?

As of 2021 workers pay 6.2% of their wages into Social Security on up to $142,800 of their income. Employers contribute another 6.2%. People who are self-employed have to pay both portions, or 12.4%.

You can collect Social Security retirement benefits even if you’re still working.

4. How Much Will I Get?

Your Social Security benefits are based on your lifetime earnings. The formula is a little complicated, but it averages the income from your 35 highest-earning years. If you have already accumulated 40 Social Security credits, you can use the online Social Security Retirement Estimator to get a rough idea of what you will get.

5. Can I Get Social Security If I Work?

Yes, you can receive Social Security benefits while you are still working. If you’ve reached full retirement age, you can work and earn as much as you’d like and receive full benefits. If you’re under full retirement age, your benefits will be reduced temporarily. The money is not lost, however. Social Security will credit it to your record when you reach full retirement age, resulting in a higher benefit.

The reduction is $1 for every $2 of earned income over $18,960 in 2021. During the year in which you reach full retirement age, your benefits will be reduced by $1 for every $3 in income over $50,520 in 2021. That continues until the month you become fully eligible.

You can continue to contribute to a retirement account if you are still earning money, even if you're getting Social Security. This is relatively new.

6. How Does the Spousal Benefit Work?

The Bipartisan Budget Act of 2015 tightened some of the rules on spousal benefits, eliminating several strategies that couples once used to maximize how much they received. However, spouses can still claim benefits regardless of whether they ever held paid jobs, based on their partner’s record. To qualify, the spouse with a work record must already be receiving retirement or disability benefits, and the non-working spouse must be at least age 62.

As with other Social Security benefits, spousal benefits are permanently reduced if the nonworking spouse starts to collect before reaching full retirement age. If the non-working spouse waits until full retirement age, they will receive a spousal benefit of up to 50% of their partner’s full retirement benefit.

Spouses who are widowed become eligible for 100% of their partner’s full benefit unless they also had a job and the benefit they’ve earned through their own income is higher. Generally, the widowed spouse must be at least 60 years of age (with certain exceptions) to receive benefits from the deceased spouse's record, and the amount will be reduced if the surviving spouse elects to receive benefits prior to their own full retirement age. In addition, should the surviving spouse remarry prior to age 60, they will forfeit the deceased spouse's benefit. In some cases, divorced spouses are also eligible for spousal benefits based on their former partner’s record.

7. Do I Owe Taxes on Social Security?

You might, depending on your income. In 2020, couples who file a joint tax return and have a combined income between $32,000 and $44,000 will have to pay income tax on up to 50% of their benefits. If their combined income is more than $44,000, they’ll be taxed on up to 85% of their benefits. “Combined income” is defined as your adjusted gross income plus any nontaxable interest and one-half of your Social Security benefits.

For singles, those income thresholds are between $25,000 and $34,000 for 50%, and more than $34,000 for 85%.

Due to the COVID-19 pandemic, local Social Security offices are only open by appointment, and only in “dire need situations,” so most people will have to apply for benefits online or by phone.

8. How Do I Apply for Benefits?

You can apply at a local Social Security office, by phone (800-772-1213), or online. You’ll need to provide certain information and possibly some documents, such as a birth certificate. Social Security Form SSA-1 has a complete list.

The Social Security Administration says to apply “no more than four months before the date you want your benefits to start.”

9. How Does Social Security Work?

Social Security is a “pay-as-you-go” system. Money paid in by current workers is used to pay the benefits for current retirees. Any money that remains goes into the Social Security Trust Fund, to be used in future years when current contributions aren’t sufficient to cover all of the program’s obligations.

There are actually two trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement benefits, and the Disability Insurance (DI) Trust Fund. By law, the money in the trust funds is invested in U.S. government securities.

10. Is Social Security in Trouble?

It’s safe to say that the Social Security system faces some financial challenges. The ratio of current workers to retirees is declining, meaning there are fewer workers paying into the system for every retiree who is drawing money out of it. In addition, people are living longer than when the program was envisioned in the 1930s, so they’re collecting benefits for more years.

According to Social Security Administration trustees, starting in 2021 the retirement program’s costs will begin to exceed its income. At that point, it will have to begin dipping into its nearly $3 trillion trust fund to make up the difference. Under current projections, the program should be able to pay full benefits until 2035, when the trust fund will be depleted. After that, the program’s income alone is expected to be enough to pay about three-quarters of scheduled benefits until 2093.

As the trustees point out in their 2019 report, “Lawmakers have a broad continuum of policy options that would close or reduce Social Security’s long-term financing shortfall.” Those might include raising the tax rate, increasing or doing away with the cap on how much of an individual’s income can be taxed, further increasing the age at which retirees become eligible for benefits, and reducing the dollar amount of benefits to future retirees.

Given the program’s popularity and its importance to millions of Americans—and the millions of older Americans who have already paid into it for decades—it’s extremely unlikely that Congress would simply let it fail.