What is Social Security and how does it work?
What is Social Security and how does it work?

Social Security is a federally-run program that provides income to a broad range of Americans, including retirees, people with disabilities and families with deceased spouses or parents. According to the Social Security Administration, as of mid-2021, 65 million Americans are receiving monthly Social Security benefit checks, of which 46.7 million are retirees. Additionally, as of December 31, 2020, nearly 9 in 10 people 65 and older received a retirement check, whether retired or not.

Here’s how Social Security works, where it’s funded, and how it fits into your retirement plan.

What is Social Security?

Social Security was a program championed by President Franklin Roosevelt as part of his New Deal program and signed into law in August 1935. While the primary focus of the program today is monthly benefit checks for retirees, Social Security also provides important financial support for others who may struggle to support themselves, including:

  • Those with disabilities.
  • Spouse or child of a deceased employee.
  • Divorced spouse of a deceased employee.
  • Dependent parents of deceased employees.
  • Spouse or child of eligible recipient.
  • Divorced spouse of an eligible person.

Simply put, Social Security helps those who may not be able to help themselves financially. Depending on your circumstances, you can receive Social Security benefits at any age.

In fact, Social Security pays more to children than any other government program.


To be eligible for benefits, most workers must receive some form of credit in the Social Security system. You earn these credits by working and paying Social Security taxes, which are deducted from each paycheck. In 2022, you’ll earn points for every $1,510 earned, up to four points per year. Usually, the amount needed to get a loan increases every year.

Most workers need 40 credits, or 10 years of work, to be eligible for benefits. Younger workers must work shorter hours to qualify for disability or survivor benefits.

How to raise social security funds?

Social Security is funded by payroll taxes levied on employees and their employers. You pay taxes on your income up to $147,700 (2022), at rates that vary by employment status:

  • If you work for someone else, you pay 6.2% and your employer pays 6.2%.
  • If you are self-employed, you pay the full tax, which is 12.4% of your income.

These taxes go into a trust fund that pays benefits to those who receive them today. About 85 percent of that money goes to benefits for retirees and their families, as well as the surviving spouses and children of deceased workers, the Social Security Administration said. The remaining 15% goes to people with disabilities and their families.

Administrative fees for the scheme are paid through the trust fund, but these fees are a relatively small percentage of less than 1% of the total funds paid to the fund. This low overhead makes Social Security one of the most effective government programs.


It’s also important to understand that the funds you deposit into the plan are not held in your dedicated account from which you will receive benefits later. These funds will be disbursed to current recipients, and the rest will be placed in a trust fund for future payments.

How does Social Security fit into your retirement plan?

Although Social Security is a key income level for many Americans, it was never intended as a complete retirement plan, according to the Social Security Administration.

The plan replaces a portion of a worker’s pre-retirement income based on the worker’s gross lifetime income. The actual benefits you receive depend on how much you contributed to the plan while you were working, and at what age you started claiming benefits (this leads to endless planning and discussions about the best time to start).

You can start receiving benefits at age 62, but your payments will be lower than if you started at full retirement age or later. If you retire early, your monthly pension will be reduced by about 0.5 percentage points each month until you reach full retirement age. So once you’re eligible, collecting your Social Security benefits can be expensive, especially if you’re long past retirement.


Your full retirement age depends on your year of birth, and is 67 for those born in 1960 or later. At this age, you will receive your full pension each month.

  • Low-income earners are expected to receive 75% of labor income.
  • Middle-income earners see about 40 percent of labor income.
  • High earners get about 27% of their income.

This bank rate calculator can help you quickly estimate the benefits you may be entitled to.

Financial advisors estimate that workers need at least 70% or 80% of their pre-retirement income to enjoy a comfortable retirement. Therefore, if you want to earn a higher income and maintain a standard of living, you must turn to other sources of income, including employer-sponsored retirement plans such as 401(k)s, IRAs, and other taxable savings and investment accounts.

Bottom line

Social Security can help you bridge the gap between your own retirement savings and the financial stability of your golden years. But it’s important to remember that you need to save money yourself, as this program alone may not be enough for most workers.

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Jake Smith

Escrito por

Jake Smith

He is the editor of Eragoncred. Previously, he was editor-in-chief of Eragoncred and a financial industry reporter. Jake has spent most of his career as a Digital Media journalist and has over 10 years of experience as a writer and editor.