Social Security: What It Is, How It Works

Social Security is an American federal insurance program that provides monthly income to qualifying recipients. Most Social Security benefits go to retired workers and their dependents, but Social Security also pays disability and survivors’ benefits. Social Security is funded primarily by payroll taxes from employees and employers.

The Social Security program, also known as the Old-Age, Survivors and Disability Insurance (OASDI) program, was established during the Great Depression. Its purpose is to provide financial security for aging workers, the disabled and children. In 2023, almost 67 million Americans received a monthly Social Security benefit, according to the Social Security Administration^[0]

• Average monthly worker benefit in March 2023: $1,833 ^[0]

  SSA.gov. Monthly Statistical Snapshot, March 2023. Accessed May 5, 2023.

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• Number of people who pay Social Security taxes (2021): 179 million.

• Cost of Social Security in 2021: $1.145 trillion. 

• Income from taxes and interest in 2021: $1.088 trillion.

• Trust fund reserves at the end of 2021: $2.852 trillion.

• Year when reserves are projected to be depleted: 2035 ^[0]

  SSA.gov. The 2022 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Accessed May 5, 2023.

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The Social Security program is run by the Social Security Administration (SSA). The benefits that retirees and other beneficiaries receive are largely funded by payroll tax contributions from people currently in the workforce, so it’s important that the ratio of workers to beneficiaries stays high enough to provide full benefits.

» Learn more: Will Social Security run out?

Most employees and employers each pay a 6.2% payroll tax on employee earnings up to a certain limit. This limit, called the wage base, usually changes each year. In 2023, the Social Security wage base is $160,200^[0]

This means that, for example, an employee making $161,000 per year in pre-tax income in 2023 pays the 6.2% Social Security tax on all but $800 of earnings; the employee’s employer also pays a 6.2% tax on those wages. Self-employed workers pay the fully combined 12.4% Social Security payroll tax themselves^[0]

When workers retire or become disabled, they may become eligible to receive monthly income from Social Security. In some cases, a worker’s children or spouse may also become eligible for benefits.

On average, Social Security retirement benefits replace roughly 40% of a worker’s pre-retirement salary^[0]

» Learn more: Social Security payment schedule: When do I get my check?

In general, two factors determine the size of your Social Security retirement benefit:

1. How old you are when you begin receiving Social Security benefits.

2. How much you earned and contributed to Social Security during your 35 highest-earning years.

Because the calculations rely on a person's highest 35 years of earnings, workers with higher salaries will likely receive higher Social Security retirement benefits than workers with low earnings or years spent out of the workforce. However, additional benefits such as spousal benefits may help compensate.

You can claim Social Security as early as age 62 (Medicare, on the other hand, is available at age 65). But the longer you remain in the workforce, the larger your monthly Social Security retirement benefit may be.

• If you retire before reaching full retirement age, the Social Security Administration permanently reduces your benefit.

• If you wait until your full retirement age to start collecting Social Security retirement benefits, you can receive 100% of your monthly retirement benefit.

• If you wait until after full retirement age to start collecting benefits, the Social Security Administration increases your benefit by up to 8% for every year you wait (up to age 70).

Here’s a breakdown of how your benefits are reduced if you retire before your full retirement age:

Your Social Security benefits continue increasing until you turn 70. After you turn 70, the increase in Social Security benefits ceases, even if you wish to delay retirement further.

» Learn more about the benefits of waiting to claim Social Security

People receiving survivors' benefits on behalf of a deceased spouse can qualify for retirement benefits as early as age 60, or 50 if they have a disability^[0]

Here are the highest monthly Social Security benefits an individual retiring in 2022 can receive, based on when they retire and start collecting benefits ^[0]

To qualify for the maximum Social Security retirement benefit, you'd have to earn the maximum taxable wage per year ($160,200 in 2023) for at least 35 years.

Yes, Social Security retirement and disability benefits are taxable. Income taxes on Social Security benefits are based on your “combined income,” which includes:

• Adjusted gross income (includes earnings, investment income and retirement plan withdrawals).

• Tax-exempt interest, such as interest on municipal bonds.

• Half of your Social Security benefit^[0]

  SSA.gov. Income Taxes And Your Social Security Benefit. Accessed May 5, 2023.

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Most Social Security recipients earn more than the minimum threshold and wind up paying taxes on their benefits. In fact, roughly 56% of beneficiary families are expected to pay income taxes on their benefits over the 35-year period between 2015 and 2050, according to a Social Security projection ^[0]

Here’s how it breaks down if you file your federal income taxes as an individual:

And here's how it breaks down if you jointly file your federal income taxes:

» Find out how to increase your social security benefits

Each year, benefit recipients receive a cost-of-living adjustment, or COLA. The amount of any increase is driven by the Consumer Price Index, which means that the original benefit amount will generally grow in step with inflation over time. The increase goes into effect with the benefit paid at the end of every December.

The COLA in 2022 was 8.7%, the biggest increase since 1981.

• Retirement benefits: Social Security retirement benefits are paid to workers who paid Social Security taxes. Benefits don't expire; once you start receiving Social Security payments, you can receive them for the rest of your life. 

• Survivors benefits: When a worker dies, eligible survivors can receive a Social Security survivor benefit. Survivors include spouses over 60 (50 if disabled or any age if caring for the deceased’s children under 16) or children under 18 (19 if students). In general, survivors’ benefits will be paid out monthly for the rest of the surviving spouse’s life, though there are some restrictions for divorced spouses.

• Disability benefits: Workers with a qualifying medical condition can be eligible for Social Security Disability Insurance. There isn't an expiration date on disability benefits. Payments will continue as long as the qualifying health condition remains, and Social Security will check in regularly to ensure your health condition is still affecting your ability to work.

• Dependent benefits: Children receiving Social Security benefits on behalf of a retired, disabled or deceased parent continue to receive payments until they turn 18. If the child is a student, they'll typically continue receiving benefits until they graduate high school or two months after turning 19.

» Learn more: How to apply for Social Security