Social Security is a U.S. government program established in 1935. It is best known as the source of retirement benefits for some 66 million older Americans. Another 8.2 million Americans receive benefits through its disability income insurance program.
The Social Security system is funded primarily through a payroll tax that is shared by employees and their employers. The Federal Insurance Contributions Act (FICA) mandates a 12.4% levy on employee earnings up to an earned income cap that is adjusted yearly.
For 2023, the cap is set at $160,200. The employer and the employee split this down the middle, each paying 6.2%. Self-employed people pay both shares, for a total of 12.4%.
Key Takeaways
- Payroll taxes fund the Social Security system, with employers and employees paying 6.2% each on earned income up to an annual cap set at $160,200 in 2023.
- Eligibility for Social Security is determined by quarters of coverage or credits, with one credit awarded up to a maximum of four a year for covered earnings set at $1,640 in 2023.
- To receive Social Security benefits a worker must accrue a total of 40 credits or one credit for each year after turning 21.
- The benefits formula considers the average earnings, indexed for inflation, for the 35 years in which the worker earned the most employment income.
- Those born between 1943 and 1954 may collect full benefits from age 66, with the age of eligibility gradually increasing to 67 for those born in 1960 or later.
- Reduced Social Security benefits are available from age 62 while waiting to collect the benefits past age 67 and up to age 70 increases the monthly payouts.
Is the Social Security Fund Running Dry?
The trust fund that is used to pay Social Security retiree benefits will be unable to pay its obligations in full as of 2033, according to a 2023 projection from the fund’s trustees. The same report estimates that the trust fund used to pay for Medicare Part A coverage will be inadequate by 2031.
How Social Security Works
It would be reasonable to think that the money you pay in payroll taxes as an employee is set aside in a fund awaiting your retirement. But that’s not how it works.
Current payroll tax receipts, in addition to investment income and other cash reserves, are combined in order to pay monthly benefits to retirees who are now receiving benefits.
The two Social Security trust funds (one for retirement benefits, the other for disability claims) invest their reserves in special issue U.S. government debt securities available only to the funds. At times, the reserves also have invested in publicly-traded U.S. Treasury bonds.
How Eligibility for Social Security Is Determined
People accrue eligibility for Social Security benefits by paying into the system over time through the payroll tax deduction. To qualify for full benefits, they must accumulate what the government terms a “quarter” of coverage, also known as a credit, for each calendar year after they turn 21 and the earliest of the following:
- The year before they turn 62
- The year before they die
- The year before they become disabled.
The quarter of coverage is a level of earnings that is subject to Social Security payroll taxes. This number is indexed for inflation, and is set at $1,640 for 2023.
Workers may accumulate up to four quarters of coverage (or credits) in a year and need a minimum of six quarters of coverage over their careers to qualify for Social Security benefits, provided they have also earned a quarter of coverage for each year after the age of 21 and before benefit eligibility, as noted above.
The maximum number of quarters of coverage needed to qualify is 40.
If you’re planning to delay applying for Social Security benefits, be sure to sign up separately for Medicare by age 65. Failing to do so may delay your Medicare coverage and increase its cost.
Calculating Benefits
The formula for calculating Social Security benefits uses your average earnings, indexed for inflation, from the 35 years in which you earned the most employment income that was subject to payroll taxes. The 2023 formula for the “primary insurance amount,” or the monthly Social Security benefit, is the sum of three numbers:
- 90% of the first $1,115 in average indexed monthly earnings from those highest-paid 35 years
- 32% of average indexed monthly earnings between $1,115 and $6,712
- 15% of average monthly earnings above $6,721
The dollar amounts of these benefit brackets, also known as “bend points,” change annually because they are indexed for inflation. The percentages for each bracket remain the same from year to year.
Social Security as Income Replacement
The formula means that people with lower lifetime earnings receive a larger proportion of their earnings in Social Security benefits. That makes the Social Security benefits system a progressive program, comparable in its effect to a progressive tax.
Benefits started at full retirement age can replace as much as 75% of covered income for the lowest-paid workers but only about 27% for the highest earners, according to the SSA. The maximum Social Security benefit for a worker retiring at full retirement age is $3,627 per month in 2023.
Calculators on the Social Security website can help you figure out what your benefit will be. You can apply up to four months before you wish to start receiving benefits.
Even if you never contributed to Social Security, you may be eligible to receive retirement benefits based on your spouse’s earning history. This is the case even if you are divorced (as long as your marriage lasted at least 10 years), or your spouse is deceased.
Social Security Eligibility
The age for receiving full Social Security benefits is now 67 for everyone born in 1960 and thereafter.
You can start getting Social Security checks as early as age 62, but the amount you receive will be permanently reduced.
You can get a bigger check by waiting to collect until age 70.
Following the extension of the full retirement age in 1983, workers qualify for full benefits according to the following schedule:
| Year of Birth | Full (normal) Retirement Age |
| 1937 or earlier | 65 |
| 1938 | 65 and 2 months |
| 1939 | 65 and 4 months |
| 1940 | 65 and 6 months |
| 1941 | 65 and 8 months |
| 1942 | 65 and 10 months |
| 1943-1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 and later | 67 |
Plan for Your Retirement
Social Security was never designed to serve as the sole source of a retiree’s income. The SSA notes that “on average, Social Security will replace 40% of your annual pre-retirement income.” You may need as much as 80% of your pre-retirement income to retire comfortably.
The best way to achieve a secure retirement is to take matters into your own hands. This means making sure to take advantage of a 401(k) or a similar tax-advantaged retirement plan, if your employer offers one, as well as investing in a regular or Roth IRA.
The Future of Social Security
For many years there have been concerns that the Social Security system is simply not financially sustainable.
The concerns are not unfounded. The 2023 annual report from the trustees of the Social Security and Medicare trust funds finds:
- The Old-Age and Survivors Insurance Trust Fund will be able to pay its scheduled benefits in full only until 2033. That’s one year earlier than was estimated in its report last year. This is the source of Social Security retirement checks.
- The Hospital Insurance Trust Fund will be able to pay its scheduled benefits in full only until 2031. That’s three years earlier than last year’s estimate. This is the source of Medicare Part A coverage.
- The Disability Insurance Trust Fund will be able to pay its scheduled benefits through at least 2097, which is as far into the future as the report projects. This is the source of Social Security payments to the disabled.
How Much Per Month Will I Get for Social Security?
The amount you get per month for Social Security depends on the age you start taking benefits, your earnings while you were paying into the system, and other factors.
You can get a rough estimate of your benefit in the Social Security Administration’s online benefit calculator.
The maximum benefit you can receive in 2023 if you start taking benefits at age 70 is $4,555. The average Social Security benefit in February 2023 was $1,693.88.
How Do I Find My Social Security Benefit Amount?
Your first stop should be the Social Security Administration’s website, You can set up a personal account that allows you to review your current information and even apply for benefits when you’re ready.
What Is the Maximum Social Security You Can Collect?
The maximum Social Security benefit that you can collect will depend on your retirement age. As of 2023, if you retire at 62, the maximum amount is $2,572. If you retire at full retirement age, the maximum amount is $3,808. And if you retire at 70, the maximum amount is $4,555. The numbers are revised annually for inflation.
The Bottom Line
While Social Security is an essential retirement income supplement for many, one thing is certain: Planning for additional sources of income to fund your retirement is important.
Following the government’s advice, you might count on Social Security to provide about half of what you need in order to retire in reasonable comfort. The other half needs to come from other sources. While you’re still working, consider taking full advantage of tax-advantaged retirement savings accounts like a 401(k) or an IRA.
Source: https://www.investopedia.com/articles/retirement/06/socialsecurity.asp?utm_campaign=quote-yahoo&utm_source=yahoo&utm_medium=referral&yptr=yahoo