How Does Social Security Work? 14 Common Questions

The future of Social Security is unpredictable to say the least.

In fact, most workers are concerned Social Security won’t be there for them when they’re ready to retire.¹ And yet, workers and retirees alike still expect Social Security to be a major source of income during their retirement years.² Something’s wrong with this picture, people!

Whether you’re just starting your career or you’re getting ready to clock out for the last time, it’s important to have a clear understanding of how Social Security works and how it fits into your retirement strategy.

To do that, let’s take a deep dive into some common questions you might have about Social Security:

1. What is Social Security?
2. How does Social Security work?
3. Will Social Security be around when I retire?
4. What is my full retirement age?
5. When can I claim my Social Security retirement benefits?
6. How do I qualify for Social Security benefits?
7. How much Social Security will I get?
8. Can I live off my Social Security benefits?
9. Should I claim my benefits before full retirement age?
10. Can I still get Social Security benefits if I continue to work?
11. What is the spousal benefit?
12. Do I owe taxes on my Social Security retirement benefits?
13. How do I apply for Social Security benefits?
14. How does Social Security fit into my retirement plan?

Social Security was created in 1935 to provide income for retired workers, disabled Americans, survivors of deceased workers, and dependents of beneficiaries. Today, about 176 million workers pay Social Security taxes, and 69 million Americans received Social Security benefits in 2021.^3, 4

But remember, Social Security benefits were never intended to be the only source of income for Americans in retirement. It was always meant to supplement your retirement income—like how a side of french fries is meant to “supplement” your cheeseburger. Like the old saying goes, “Man cannot live on french fries alone” . . . or something like that.

Unfortunately, a lot of folks never got the memo. The Social Security Administration reports that 1 out of 4 Americans who are 65 years old or older rely on Social Security for 90% of their income in retirement.⁵ Listen, if your plan is to depend on the government to help you retire with dignity, then you need a new plan!

Here’s how it works: American workers pay Social Security taxes on their income. It’s an automatic deduction based on what you earn. The more you earn, the more you owe Uncle Sam. However, there is a tax cap for high-income earners. In 2022, the cap stands at $147,000.⁶ This means, if you make $150,000, you’ll only be taxed for wages up to $147,000.

This year’s Social Security tax rate is 12.4%. If you work for someone else, you and your employer split the tax, paying 6.2% each. If you’re self-employed, you foot the entire 12.4%.⁷

Are the taxes you pay stashed away in your own personal Social Security savings account? Nope! Instead, the Social Security Administration pools the money and uses it to cover benefits for current beneficiaries.

Simply put: 85 cents of every Social Security tax dollar goes into a trust fund that pays benefits for current retirees, surviving spouses and dependents of deceased workers.⁸ The remaining 15 cents heads to a trust fund that pays disability benefits for qualified Americans.⁹

Don’t count on it. Or don’t count on all of it. 

Market chaos, inflation, your future—work with a pro to navigate this stuff.

Here’s the deal: Social Security is fully funded until 2034. After that, there will be enough money to fund about 78% of scheduled benefits.¹⁰ This means that, without reform, many Americans might not reap the full benefits of Social Security in retirement. . . that’s why Dave likes to call it Social Insecurity.

According to the Social Security Administration, 2.7 workers currently share the costs to cover one beneficiary. By 2035, that ratio will change to 2.3 workers per beneficiary.¹¹ That’s because millions of baby boomers will retire in the next decade, creating a strain on the system as it’s currently designed. (The number of Americans age 65 and older will increase from 57 million to 76 million by 2035.)¹²

What’s the bottom line? In its current state, the Social Security system is a mess—and you shouldn’t count on an inept government to fix it. If by some miracle Social Security is around when you retire, you’ll have some extra money to work with. But understand, it’s your job to take care of you and your family, not Uncle Sam’s.

According to the Social Security Administration, full retirement age is when a person is eligible for full (or unreduced) retirement benefits. The current full retirement age for people born in 1960 or later is 67.¹³

Do most people really work until age 67? Apparently, some Americans are okay with it. A recent survey showed that most workers expect to retire on average at age 66.¹⁴ While working longer might make sense for some folks, it might not be realistic for everyone. A report from the National Institute on Aging showed more people stop working due to poor health than because they have enough money to retire comfortably.¹⁵

A sudden medical condition or unexpected layoff could derail your good intentions to work longer, so prepare in advance for that real possibility.

Social Security Full Retirement Age

YEAR OF BIRTH	FULL RETIREMENT AGE
1942 and earlier	65
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

The good news is you don’t have to wait until full retirement age to start receiving your retirement benefits. You can actually claim retirement benefits as early as age 62.¹⁶ But if you do claim your benefits before you’ve reached full retirement age, you’ll get less money each month.

On the other hand, if you hold off until age 70 to start claiming your benefits, you’ll get a larger monthly check for more than your full retirement benefit.

Sample Social Security Benefit Scenario

^{If you’re scheduled to receive $1,000 at full retirement age of 67.*}

Claiming retirement benefit at age:	Your retirement benefit will be reduced by:	How much you’ll receive:
62	30%	$700
63	25%	$750
64	20%	$800
65	13.3%	$867
66	6.7%	$933
67	0%	$1,000
70	Increases 8% each year after full retirement age.17,18	$1,240

^{* You were born in 1960 or later.}

Before you can receive any benefits from Social Security, you have to earn enough credits to qualify for them in the first place. Credits? Yes, credits. You’ll need 40 of them over your wage-earning lifetime to receive Social Security benefits.

In 2022, workers receive one credit for every $1,510 they earn, and that amount changes each year.¹⁹ Workers are eligible for four credits a year. So, in most cases, you qualify for Social Security benefits after you’ve worked for at least 10 years earning at least $6,040 each year.

Your retirement benefit payment is based on how much you earned during your working career at jobs where you paid Social Security taxes.

Basically, the higher your lifetime earnings, the more money you’ll receive in retirement benefits. But the formula Social Security uses to calculate your full retirement benefit is designed to also help lower-income workers by replacing a higher percentage of their monthly salaries.

For example, let’s say that Sarah had a $100,000 average annual salary throughout her career while her friend Laura averaged $40,000 per year. Sarah probably gets a larger monthly payment from Social Security in retirement, but Laura’s monthly payment replaces a larger portion of her working income.  

And remember your age when you decide to claim your retirement benefits also affects your benefit. The earlier you start taking benefits, the less money you’ll get each month.

Keep in mind you will need other sources of income to enjoy a comfortable retirement. After all, the average post-retirement Social Security payout in 2022 is $1,657 per month—that’s barely enough to live above the national poverty level for a two-person household.^{20, 21}

That’s why it’s important to build your own retirement savings by investing 15% of your income in growth stock mutual funds through your company’s 401(k) plan or a Roth IRA.

That’s a good question. In most cases, it makes more sense to take your retirement savings sooner rather than later. Why? Because Social Security payments die when you die, so it’s best to take it early and often.

If you have enough money saved in your retirement accounts and don’t need your Social Security benefits for living expenses, even better! You can claim your Social Security early and work with your SmartVestor Pro to invest every penny.

If you invest $700 a month from age 62 to age 77, you could potentially have another $318,000 saved! That’s money your family could inherit—and it blows away the Social Security survivor benefit your spouse would receive.

You might be asking, “But wait, wouldn’t it be better to wait and get a larger monthly payment?” Just for kicks, let’s say your full retirement age is 67 and you’d receive a monthly benefit of $1,000. If you begin claiming your Social Security at 62, your benefit would be $700.²² But if you wait to claim your benefit until age 70, it would increase to $1,240 a month.²³

According to the CDC, the average life expectancy for Americans is 77 years old, so let’s say you’ll live to that age.²⁴ If you run the numbers, you might be surprised to find you actually end up receiving more money from Social Security over the course of your retirement if you start taking benefits on your 62nd birthday instead of waiting for the higher monthly benefit:

WHEN IS THE BEST AGE TO CLAIM SOCIAL SECURITY?
Age You Choose to Start Receiving Benefits	Monthly Retirement Benefit Amount*	Length of Retirement**	Total Social Security Retirement Benefits
62	$700	15 years	$126,000
67	$1,000	10 years	$120,000
70	$1,240	7 years	$104,160

^{*Based on full retirement age benefit of $1,000 at age 67.}

^{**Based on CDC’s average life expectancy of 77 years.}

Yes, you can start collecting Social Security before you reach full retirement age and continue to work at your job. . . but there’s a catch. There’s a Social Security income threshold that reduces your benefit by $1 for every $2 you earn above a certain amount. In 2022, that threshold is $19,560.²⁵

There is some good news, though. Once you reach full retirement age, you’ll receive a higher monthly benefit to make up for benefits withheld while you were still working.²⁶

We talked earlier about how you need to earn enough work credits to qualify for retirement benefits. But what if you decided to stay at home, raise your kids and didn’t work enough outside the home. How do you qualify for traditional retirement benefits? That’s where the “spousal benefit” comes in.

If you’re married with little or no earnings history to speak of, you can still receive the spousal benefit, which is half of your spouse’s full retirement age benefits.²⁷ But you should check to see if your own Social Security benefit is greater than half of your spouse’s—you should always claim the higher amount!

There are a couple things you need to keep in mind if you want to claim the spousal benefit. First, you must be at least 62 years old or have a child in your care to qualify. And second, just like with a worker’s retirement benefit, claiming the spousal benefit before full retirement age reduces your monthly benefit permanently. 

It depends. Some folks who receive Social Security benefits might have to pay federal income taxes on a portion of their benefits. The good news is you’ll never pay taxes on more than 85% of your Social Security benefits.

The amount of your Social Security benefits that gets taxed depends on how much you receive from other sources of income in addition to your Social Security benefits.

For individuals, you’ll need to pay taxes on your benefits if your “combined income”—which is basically your total income minus some specific tax deductions plus half of your Social Security benefits—is more than $25,000. If you’re married filing jointly, you’ll pay taxes if your combined income is greater than $32,000.²⁸

When you’re ready to start claiming your Social Security retirement or spousal benefits, you can apply in three different ways:

1. By phone at 800.772.1213
    
2. In person at your local Social Security office
    
3. Online with your My Social Security account²⁹

When you apply, be ready to provide the following information to Social Security:

• Date and place of birth
   
• Marital history
   
• Names and dates of birth of your children
   
• Job and employer details from the past two years
   
• Net income from self-employment in the past two years
   
• Military service
   
• The routing number of the bank account where you want Social Security to send your payment via direct deposit.

Don’t worry, Social Security has a checklist you can use to help you gather all the information you need to get started.³⁰

As it stands now, Social Security replaces only a portion of a person’s pre-retirement income. For example, medium income earners can probably expect Social Security to replace up to 40% of their income.³¹ Remember, benefits could be reduced about 20% after 2034.

But here’s the deal: Your goal is to invest and have enough money saved in your retirement accounts so Social Security simply doesn’t matter. Whatever you get from Social Security will just be the cherry on top of the sundae you made yourself!   

If your income is $55,000 and you invest 15% of that income from age 35 to 65, you could have almost $2 million in your 401(k)s and IRAs for retirement—and that’s if you never got a single raise in your entire career. You can do this!  

Don’t Focus on Social Security. Focus on Retirement Security.

It’s up to you to secure your retirement future, and you can take action today! Whether you want to know where to start or you’re looking for your next step, our SmartVestor program can connect you with a financial advisor who’ll help you get focused and confident about saving for your retirement goals.

You don’t have to depend on Social Security or the government for your retirement—you can do this! And a SmartVestor Pro can help.

Find a SmartVestor Pro today!

This article provides general guidelines about investing topics. Your situation may be unique. To discuss a plan for your situation, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.