How Does Social Security Work?

If you work in the US, you’re probably familiar with the line “Social Security Tax” at the bottom of your paycheck. That means you’re contributing a part of your income towards the Social Security program. 

Although it’s a big part of US workers’ lives, many are still confused and unsure what Social Security is and how it works.

Social Security is a program designed to provide economic support for retirees, disabled people, and surviving families of US workers. It’s funded by the contributions of the workers who are part of the program and it is the largest economic security program in the US.

According to the Social Security Administration (SSA), around 65 million Americans receive Social Security benefits each month in 2024. This article will discuss what Social Security is, how it works, and whether you’re eligible for Social Security benefits. 

What is Social Security?

Social Security is the United States’ Old-Age, Survivors, and Disability Insurance (OASDI) program. Run by the Social Security Administration (SSA), Social Security provides comprehensive financial benefits for retirees, disabled people, and their families. 

The main objective of the Social Security program is to provide financial protection for American families against the threats of unemployment, old age, and death. 

According to the SSA, the Social Security program fulfills these basic purposes:

• Provide for the material needs of individuals and families.
• Protect aged and disabled people against medical expenses that may use up their income or savings.
• Keep families together.
• Allow children to grow up in a healthy and secure environment.

President Roosevelt signed the Social Security Act in 1935. At the time, Social Security provided benefits only for retired workers age 65 or older. Since its creation, the program has undergone various changes. 

Let’s take a look at a brief timeline of events for this program. 

• In 1939, the program started providing insurance for surviving families of deceased workers. 
• It started covering for disabled workers and their families in 1956. 
• Medicare, health insurance for Social Security beneficiaries, was established in 1965. 
• In 1972, Social Security created the Supplemental Security Income (SSI) program for people with limited income and resources.

How Does Social Security Work?

Social Security works as a pay-as-you-go insurance program, which is funded by the contributions of the workers who are part of the program. Employers take out a portion of the employee’s wages to fund current Social Security benefits. In return, they receive benefits when they retire. 

Those contributions are typically paid through payroll withholding under the Federal Insurance Contributions Act (FICA). 

Or, if the individual is self-employed, then the contribution is made under the Self Employed Contributions Act (SECA). The IRS collects the funds, which then formally entrusts them to the Social Security Trust Fund to be managed.

Social Security Benefits Explained

Social Security benefits are payments given to qualified beneficiaries of the Social Security program. Though retirees make up the majority of the beneficiaries, others may also receive these benefits if they’re:

• Disabled
• A spouse or children of someone eligible for Social Security benefits.
• A spouse or children of a deceased worker.
• A divorced spouse of a deceased worker who has yet to remarry.
• A dependent parent of a deceased worker.

Types of Social Security Benefits

There are three main types of Social Security benefits:

1. Retirement benefits
2. Disability benefits
3. Survivors benefits

Retirement Benefits

Retirement benefits are given to workers who have been contributing to the Social Security program for at least 10 years. It’s also given to their spouse, dependent children, or divorced spouse who hasn’t remarried. 

The benefits are paid monthly, and the amount mainly depends on the worker’s pre-retirement salary.

Workers become eligible to receive retirement benefits at age 62. However, they can receive a higher monthly payment if they wait until their full retirement age, which is 67 for people born from 1960 onwards.

Here is the percentage of benefits one may receive depending on what age they begin collecting:

Disability Benefits

Disability benefits are given to people who cannot work due to their disabilities. The benefits may also be available for their spouse, children, or divorced spouse who hasn’t remarried. 

Unlike retirement benefits, the qualifications to receive the disability benefits are more complex. 

To qualify for the disability benefits, the worker must:

• Meeting the SSA’s definitions of disability. 
• Unable to work for at least a year due to disabilities.
• Have worked for a certain number of years, depending on the age they become disabled.

Survivors Benefits

Survivors benefits are granted to widows, widowers, and dependent parents or children of deceased workers who are part of the Social Security program. It also includes a “death benefit,” which is a one-time payment of $255 given to the surviving families of deceased workers.

The amount that survivors receive depends on various factors, including:

• The worker’s age at death.
• The survivors’ ages.
• The survivors’ relation to the deceased worker.
• Whether the survivors are disabled or not.
• The worker’s salary.

What Are Social Security Credits?

Not everyone in the Social Security program is eligible to receive benefits. Their eligibility is determined by the number of Social Security credits they earn.

Social Security credits are a number system used to determine whether a worker can receive Social Security benefits. An individual usually needs at least 40 credits to be eligible for benefits.

But extra credits over the minimum won’t affect the number of benefits they’ll receive.

How Can You Earn Social Security Credits?

You can earn Social Security credits by paying Social Security taxes. Contributing to the program is the only way to gain Social Security credits. These credits cannot be bought, borrowed, or transferred from another worker’s record.

Workers can earn up to four credits in a year. So, to amass the mandatory 40 credits needed to receive benefits in the future, an individual must work and pay Social Security taxes for ten years.

In 2021, $1,470 in covered earnings equals one credit. 

Thus, to get four credits in a year, an individual must earn at least $5,880 per year. Additionally, these credits will remain on an individual’s record permanently. Changing jobs or even ceasing to work for a while will not affect the number of credits.

Social Security Credit Requirements

Most people need 40 credits to receive Social Security benefits. However, this usually only applies to retirement benefits. There are exceptions and varying eligibility thresholds when it comes to Disability and Survivors Benefits.

Disability Benefits Credit Requirements

The number of credits necessary to qualify for disability benefits varies. The rules are:

• Before age 24: Earn at least six credits in a 3-year period, which ends when the disability occurs.
• Age 24 to 31: Earn at least two credits per year, between age 21 until the disability occurs.
• Age 31 onwards: At least 20 credits in the 10-year period before the disability occurs.

Survivors Benefits Credit Requirements

The number of credits needed for survivors’ benefits depends on the age when the employee dies. The younger the worker is, the fewer credits are required for their surviving family members to receive benefits. 

In some cases, however, survivors' benefits may even be granted if the worker has amassed six credits within three years before death.

Additionally, if the worker already receives retirement or disability benefits when they die, their survivors will receive proper entitlement without extra credits.

Wrapping Up

You can apply for Social Security benefits through the SSA website. Depending on which benefits you’re eligible for, you can complete applications for Retirement, Disability, and Survivors Benefits applications online.

If you cannot complete or submit the application online, you may also call the SSA at 1-800-772-1213 (TTY 1-800-325-0778).

You may also visit a local SSA office to apply for the program. However, due to the Covid-19 pandemic, you may only visit an SSA office after making an appointment. Check the SSA’s Coronavirus page for more details on this.