Social Security Benefits

What Are Social Security Benefits?

Social Security benefits are payments made to qualified retirees and disabled people, and to their spouses, children, and survivors. Social Security — officially the Old-Age, Survivors, and Disability Insurance (OASDI) program in the U.S. — is a comprehensive federal benefits program designed to provide partial replacement income for retirees and their spouses, those whose spouse or qualifying ex-spouse has died, and the disabled. Under specified conditions, it also supports children of beneficiaries.

President Franklin Roosevelt signed the original Social Security Act into law in 1935. The current law, after a number of amendments, encompasses several social insurance and social welfare programs, including the issuance of Social Security benefits. Benefits are determined by a specific set of criteria issued by the Social Security Administration (SSA).

How Social Security Benefits Work

Payroll taxes under the Federal Insurance Contributions Act (FICA) or the Self Employed Contributions Act (SECA) (for self-employed individuals) fund Social Security and all of its benefits.

The Internal Revenue Service (IRS) collects tax deposits and formally entrusts them to the Social Security Trust Fund, which is made up of the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance Trust Fund.

You qualify for Social Security old age (or retirement) benefits by paying into the program during your working years. Full insurance is based on accumulating 40 quarters or "credits" from covered wages, and a worker can earn up to four credits a year. One credit is awarded for every $1,470 in earnings for 2021 (up from $1,410 in 2020), an amount that is adjusted annually to keep up with inflation. A payroll tax cap sets the maximum amount of earned income that is subject to the Social Security payroll tax. The payroll tax cap in 2021 is $142,800 (up from $137,700 in 2020).

The SSA keeps track of your earnings throughout your career, indexes each year's total earnings, and uses the 35 highest-earning years to determine your average indexed monthly earnings (AIME). Next, your AIME is used to arrive at your primary insurance amount (PIA), the monthly amount you can begin to collect when you reach full retirement age.

For individuals born in 1938 or later, full retirement age gradually increases from 65 until it hits 67 for those born after 1959. You can collect Social Security retirement benefits at age 62, but the amount of the benefit will be reduced to compensate for receiving it earlier and, presumably, for a longer period of time.

In 2021, the maximum monthly Social Security payment for retired workers is $3,148. The SSA’s retirement calculators can help you determine your full retirement age, the SSA’s estimate of your life expectancy for benefit calculations, rough estimates of your retirement benefits, actual projections of your retirement benefits based on your work record, and more. Retirees with non-FICA or SECA-taxed wages will require additional help because rules for those individuals are more complex.

If you wait until you're 70 instead of 62 to collect benefits, you'll get an extra 8% a year, which means you'll collect 132% of your PIA for the rest of your life. Once you reach 70 the increases stop.

Spousal and Survivor Benefits

Spouses who didn’t work or who didn’t earn enough credits to qualify for Social Security on their own can receive benefits starting at age 62 based on their spouse’s work record. Similar to claiming benefits on one's own record, a spouse's benefit will be reduced if they claim benefits before reaching full retirement age. The highest spousal benefit someone can receive is half the benefit their spouse is entitled to at their full retirement age.

When a spouse dies, the surviving spouse is entitled to file for a survivor's benefit as early as age 60. The benefit will be reduced if they file prior to reaching their full retirement age. They are permitted to switch to their own benefit at any point they wish starting at age 62 and through age 70 if that benefit is higher than the survivor's benefit.

People who were married for 10 years or longer — and are divorced and have not remarried — are entitled to collect the spousal benefit and the spousal survivor benefit. The rules are complicated so review them carefully.

Cost-of-living adjustments (COLAs) equal to the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) are made annually to Social Security benefits to counteract the effects of inflation, although there have been years with no increase due to negligible inflation rates.

Social Security Benefits and Taxes

If an individual taxpayer's income exceeds $25,000, or a married couple filing jointly has income that's more than $32,000, they will be required to pay taxes on their Social Security benefits. The portion of benefits that is subject to taxation depends upon income level, but no one pays taxes on more than 85% of their Social Security benefits, regardless of income. Benefits received due to disability are, in most cases, tax-free. If your child receives dependent or survivor benefits, this money does not count towards your taxable income.