How Does Social Security Work: Everything You Need to Know

Would it be possible for you to survive on $1,471 a month? According to the most recent data from SSA or Social Security Administration, this is the average amount a social security benefactor gets each month. 

Like most people, you are worried about your retirement. This is something you’d like to start preparing for as soon as possible to ensure a comfortable life later on. But is social security assurance enough? Will it be around by the time you retire? How do you make the most out of it? How does social security work anyway?

What is Social Security?

In the United States, social security is a government system that was initially designed for three categories of people. Those with disabilities, retirees, and families of deceased or disabled workers. Every time you get paid, a small percentage of your salary goes into something known as FICA.

The Federal Insurance Contributions Act or FICA funds social security. Every working American contributes 6.2 percent of their earnings of up to $128,700 to Social Security through payroll taxes. Employers are obligated to match that percentage, and self-employed people pay the full 12.4 percent. 

In 2019 alone, about 64 million people will benefit from Social Security, 45 million of whom are retirees. You need to be above the age of 62 and to have worked a minimum of 10 years to be eligible for Social Security Benefits. The years worked don’t need to be consecutive, though, and you can qualify with seasonal employment. 

The money collected ends up in two different trust funds. The first is the Old Age and Survivors Insurance, or OASI fund, while the second is the Disability Insurance or DI fund. When the collected amount exceeds the amount needed to give out benefits, the SSA has a surplus. This money earns interest similar to what happens when you save money into a bank.

What Will Happen Once You’re Eligible?

How do Social Security benefits work? What does Social Security do when people retire? Once you reach well into your 60s, you’ll probably think about retiring and applying for Social Security as a source of income. 

The average income, as stated above, is $1,471, while the maximum stands at $2,663. The amount depends on several factors, and most people are eligible for much less. Let’s delve deeper into these factors.

Your Age While Applying

The actual “full retirement age” stands at 65 years, but you may start receiving your benefits as early as 62 years. If you retire before 65, Social Security will reduce your benefits by 25% for the remainder of your life. 

This simply means that you’ll be getting the same amount, but it’ll seem less since it’ll be spread over more years. If you retire at your full retirement age, you may get an 8 percent increase up to the age of 70.

Your Income Through Your Working Years

Your eligibility will also depend on your credits. As of 2019, you earn one credit for every $1,360 you earn up to a maximum of four years. You’ll need 40 credits, which sum up to 10 years of work to qualify for benefits. 

As long as you have these credits, the SSA considers the 35 years of your life you earned the highest income your AIME or Average Indexed Monthly Earnings. They use this to calculate your benefits. 

If you held a public service job like a teacher or police officer, and are eligible for government-sponsored pensions, your Social Security benefits may be reduced or cut off entirely. To know how much you would qualify for, use the Retirement Estimator at 

Can You Receive Social Security Benefits While Still Working?

Yes, this is possible. Once you reach your full retirement age, you can easily work and make as much as you want while still receiving full benefits. If, however, you retire early at 62, the benefits will be reduced, as discussed earlier. 

The reduction will stand at $1 for every $2 you earn over $17,640. During the year you hit your retirement age, it’ll be reduced to $! For every $3 you earn over $46,920, which will stop the month you become fully retired. 

How Do You Get Spousal Benefits?

How does Social Security work when it comes to spousal benefits? Regardless of whether you’ve held any paid job in your life or not, you can claim your spouse’s benefits. Your spouse must be receiving their retirement benefits, and you must be past the age of 62. 

If you wait until your full retirement age, you can receive up to 50 percent of your spouse’s Social Security benefits. 

If you are widowed, you may be eligible for 100 percent of their benefits. This is unless you have a job of your own, and your benefits are higher than theirs. In some cases, you may even be eligible for your ex-spouse’s benefits after a divorce, depending on their records. 

Will Social Security Be Around When You Retire?

Is Social Security running dry? This is a burning question a lot of people want answered. You see, Social Security tends to be a pay-as-you-go system. The money you are paying now is not being saved for you. Rather it’s going to the current beneficiaries. 

The problem is after 83 years, Social Security’s total cost exceeded its income in 2018. To keep paying the benefits, Social Security must dip into its savings, which will eventually run out. This is estimated to happen by 2034, and even though it doesn’t mean there’ll be nothing left for the next generation, it may not run to its full potential. 

The thing is, a lot of Baby Boomers are retiring now, and a lot of Social Security money is going into their benefits. At the same time, fewer workers are paying the FICA taxes and funding the Social Security account. This means there is more money going out than currently coming in, which is known as the declining “workers-to-beneficiary” ratio.  

Millennials may have to receive only 75 percent of benefits by the time they retire unless the government either changes the benefits formula, raises the FICA taxes, or raises earnings.

How Do You Make Sure You Have Enough to Retire

It’s quite clear that you can’t typically depend on Social Security benefits for your retirement. You’ll still get some money from it, but unless you safeguard your retirement on your own, you potentially may not live the kind of retirement life you dream of. The earlier you start saving, and the more you save, the typically the better off you’ll be come retirement. 

How Does Social Security Work? The Bottom Line

Now that you know have a better understanding of how social security works, you are in a better position to make informed decisions about your retirement plans. Feel free to peruse through our website for answers on “how does Social Security work” and more informed posts about wealth management. 

This educational third-party material is being provided by Luke Will Director of Investments as a courtesy.

The Social Security Administration has not approved, endorsed, or authorized this presentation.  Contact the Social Security Administration for complete details regarding eligibility for benefits.  Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.  Links to external sites are provided for your convenience in locating related information and services. Guardian, its subsidiaries, agents, and employees expressly disclaim any responsibility for and do not maintain, control, recommend, or endorse third-party sites, organizations, products, or services, and make no representation as to the completeness, suitability, or quality thereof.

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Navigation Wealth Management is not an affiliate or subsidiary of PAS or Guardian. Navigation Wealth Management is not registered in any state or with the U.S. Securities and Exchange Commission as a Registered Investment Advisor. 2019-88626 Exp. 10/21

Scroll to Top