Social Security

What Is Social Security?

Social Security is the term used for the Old-Age, Survivors, and Disability Insurance (OASDI) program in the U.S., run by the Social Security Administration (SSA), which is a federal agency. Though it is best known for retirement benefits, it also provides survivor benefits and disability income.

How Social Security Works

Social Security is an insurance program. Workers pay into the program, typically through payroll withholding where they work. They can earn up to four credits each year.

For 2021, for every $1,470 earned, one credit is granted, until a sum of $5,880, or four credits, has been achieved. That money goes into two Social Security trust funds — the Old-Age and Survivors Insurance (OASI) Trust Fund for retirees and the Disability Insurance Trust Fund (DI) for disability beneficiaries — where it is used to pay benefits to people currently eligible for them. The money that is not spent remains in the trust funds.

A board of trustees oversees the financial operation of the two Social Security trust funds. Four of the six members are the secretaries of the departments of Treasury, Labor, and Health and Human Services, and the Commissioner of Social Security, while the remaining two members are public representatives appointed by the president and confirmed by the Senate.

Medicare, the federal health insurance program for Americans 65 and older and some people with disabilities, are also supported through payroll withholding, but that money goes into a third trust fund, managed by the Centers for Medicare & Medicaid Services.

Social Security benefits are computed based on their average indexed monthly earnings (AIME) during their 35 highest-earning years.

Types of Social Security Benefits

Social Security provides benefits to retirees, their survivors, and workers who become disabled.

Retirement Benefits

Workers who have paid into the Social Security system for at least 10 years become eligible for early retirement benefits at age 62. However, they will receive a higher monthly benefit if they wait until their “full retirement age” — 66 for people born in 1954, then add two months for each year until reaching 1960, at which point 67 becomes the new full retirement age for all. The monthly benefit is increased up to 70 years old.

Spouses can also claim benefits, based on either their own earnings record or their spouse’s. A divorced spouse who is not currently married can receive benefits based on an ex-spouse’s earnings record if the marriage lasted at least 10 years. Children of retirees can also receive benefits until they turn 18 (longer if the child is disabled or a student). The cutoff is 16 if you are caring for a child not your own.

Workers can get a projection of their benefits at different retirement ages by using the Retirement Benefits Estimator on the SSA website.

Disability Benefits

People who can’t work due to a physical or mental disability that is expected to last for a year or more — or result in death — may be eligible for Social Security disability benefits. To qualify, you generally have to meet certain earnings tests. Family members of disabled workers can also be eligible.

Survivors Benefits

The spouse and children of a deceased worker may be eligible for survivor benefits based on the worker’s earnings record. That includes surviving spouses who are 60 or older, or 50 or older and disabled, provided they have not remarried. A surviving spouse who is caring for a child who is younger than 16 or is disabled may be eligible for these benefits too.

For children to receive benefits, they must generally be younger than 18 or disabled. Under certain circumstances, a stepchild, grandchild, step-grandchild, or adopted child may also qualify for benefits.

Parents age 62 or older who were dependent upon a deceased worker for at least half of their income may also be able to collect benefits. In some circumstances, surviving spouses and minor children are also entitled to a one-time payment of $255 after an eligible worker’s death.

History of Social Security

The Social Security system in the U.S. was born on Aug. 14, 1935, when President Franklin D. Roosevelt signed the Social Security Act into law. The first monthly benefits checks became payable on Jan. 1, 1940, and the first person to collect one was Ida M. Fuller, a retired legal secretary in Vermont. Her check was for $22.54.

The system and its rules have evolved in the decades since. Today, Social Security is one of the largest government programs in the world, paying out hundreds of billions of dollars each year.

175 million

The number of people who paid Social Security taxes in 2020. About 65 million received monthly Social Security benefits.

The Future of Social Security

With the aging of the U.S. population, some observers have raised concerns about the viability of a system in which fewer active workers will be supporting greater numbers of retirees.

In their 2021 report, the Social Security Board of Trustees forecasts that the retirement fund (OASI Trust Fund) reserves would become depleted in 2033 (versus 2034 per the 2020 report), due in part to the COVID-19 pandemic that led to reduced employment and earnings. At that time, the continuing tax income will be enough to pay 76% of scheduled benefits going forward. The trustees forecast that the disability trust fund — DI Trust Fund — will dry up in 2057 (versus the 2065 estimate in the 2020 report).

If that prediction holds, Congress will need to find ways to plug the gap, which might mean higher taxes on workers, lower benefits, higher age requirements for retirees, or some combination of these elements.

It's worth noting that the 2021 report assumes that the pandemic "will have no net effect on the individual long-range ultimate assumptions." Although the Trustees noted that they will monitor the situation and may update projections in future reports to account for material changes.