Social Security Basics: Retirement, Disability and Survivor Benefits

Social Security is one of the most important financial programs for American families. It provides income to retirees, people with disabilities and the families of workers who have died. For many retirees, Social Security is a major source of income, and its inflation-adjusted, lifetime payments make it especially valuable. Understanding how Social Security works can help you plan for retirement and make informed decisions about when to claim benefits.

How Social Security is funded

Social Security is funded primarily through payroll taxes. Most workers pay Social Security taxes on their wages up to an annual earnings limit, and employers pay a matching amount. Self-employed people pay both shares through self-employment tax. These taxes fund benefits for current beneficiaries, with surplus funds held in trust funds.

The program is administered by the Social Security Administration, or SSA.

Types of benefits

Social Security provides several types of benefits.

Retirement benefits are monthly payments for workers who qualify, which can start as early as age 62. Retirement benefits are the most widely known part of Social Security.

Disability benefits, known as Social Security Disability Insurance or SSDI, provide monthly payments to workers who can’t work because of a medical condition that’s expected to last at least one year or result in death, and who meet the work requirements. The definition of disability for Social Security is strict, and the application process can take time.

Survivor benefits are paid to eligible family members of workers who die, such as surviving spouses, minor children and in some cases dependent parents. Survivor benefits can provide crucial financial support to families after the loss of a wage earner.

Spousal benefits are available to eligible spouses and some former spouses, based on the worker’s earnings record. A spouse may be eligible for up to half of the worker’s full retirement benefit, depending on when they claim. Divorced spouses may qualify if the marriage lasted at least 10 years and other requirements are met.

Supplemental Security Income, or SSI, is a separate program administered by the SSA that provides payments to people with limited income and resources who are 65 or older, blind or disabled. SSI is funded by general tax revenue rather than Social Security taxes.

Qualifying for benefits

You earn credits by working and paying Social Security taxes. You can earn up to four credits per year, based on your earnings. According to the SSA, most people need 40 credits, about 10 years of work, to qualify for retirement benefits. Requirements for disability benefits vary based on your age when you become disabled, with younger workers needing fewer credits.

How benefits are calculated

Your retirement benefit is based on your highest 35 years of earnings, adjusted for historical wage growth. The SSA uses a formula that replaces a higher percentage of earnings for lower earners than for higher earners, making the program progressive.

If you have fewer than 35 years of earnings, zeros are included for the missing years, which lowers your benefit. Working additional years can replace lower-earning or zero years with higher earnings, potentially increasing your benefit.

Benefits receive annual cost-of-living adjustments, known as COLAs, based on inflation, which helps protect their purchasing power over time.

When to claim retirement benefits

Choosing when to claim Social Security is one of the most important retirement decisions you’ll make, since it affects your monthly benefit for life.

You can claim as early as age 62, but claiming before your full retirement age permanently reduces your monthly benefit. Full retirement age is 67 for people born in 1960 or later, and slightly earlier for people born before 1960.

Delaying past full retirement age increases your benefit through delayed retirement credits, up to age 70. Waiting until 70 results in the highest possible monthly benefit. There’s no additional increase for delaying beyond 70.

The right time to claim depends on your health and life expectancy, your financial needs, whether you’re still working, your marital status and your other sources of retirement income. For married couples, coordinating claiming decisions can maximize lifetime benefits, including survivor benefits.

Working while receiving benefits

If you claim before full retirement age and continue working, the earnings test may temporarily reduce your benefits if your earnings exceed an annual limit. Withheld benefits aren’t lost; your benefit is recalculated at full retirement age to account for them. After full retirement age, there’s no limit on earnings.

Taxes on Social Security benefits

Depending on your total income, a portion of your Social Security benefits may be subject to federal income tax. Some states also tax Social Security benefits. Check irs.gov for current rules.

Check your record

Create a free my Social Security account at ssa.gov to review your earnings history, which determines your benefits, and see estimates of your benefits at different claiming ages. Review your earnings record regularly for errors, since mistakes could reduce your benefits. If you find errors, contact the SSA with documentation, such as W-2s or tax returns.

Medicare is separate

Medicare, the federal health insurance program for people 65 and older and some younger people with disabilities, is separate from Social Security, though the two are related. Medicare enrollment generally starts around age 65, even if you delay claiming Social Security. If you’re not receiving Social Security benefits when you turn 65, you’ll typically need to sign up for Medicare yourself. Enrolling on time helps avoid late enrollment penalties.

Plan with Social Security in mind

Social Security is a foundation for retirement income, but it’s typically not designed to replace all of your pre-retirement income. Combining Social Security with personal savings, workplace retirement plans and other income sources helps create a secure retirement.