How Does Social Security Work?

How Does Social Security Work?

Social Security uses mandatory payroll taxes to grow trust funds that are used to pay income to retirees and other qualifying persons.

Any surplus that is collected in a given year and not paid out is used to purchase Treasury Bonds, which pay a guaranteed rate of interest to the trusts and allows the government to use this surplus money in the meantime.

When you receive your paycheck, you’ll see a deduction for FICA (Federal Insurance Contributions Act), which is a “combined payroll tax” for both Social Security and Medicare.

A total of 12.4% of your income is paid into the Social Security system each year; if you are employed by someone other than yourself, half of this contribution is paid by your employer. Income over $118,500 is not included in this calculation (as of 2016). Social security trust funds cover the needs of the Old-Age, Survivors, and Disability Insurance (OASDI) benefit provided to Americans.

The most common way social security benefits are paid is as retirement income, but millions of Americans also receive disability benefits, known as SSD or SSI in some cases. Spouses and minor children can receive a person’s social security check if they die.

Married couples sometimes use strategy to get the maximum social security payout in retirement, since each spouse may have their own benefit and a spousal benefit available to them, if they both were working and paying FICA taxes before retirement. Only one benefit can be paid to each living person, however.

There used to be a popular “file and suspend” strategy for married couples, but this was eliminated in 2016. Social security benefits can be taxed as income if a married couple has a high enough taxable income in retirement.

People can see what their benefit will be at normal retirement age (currently 67 for most working Americans), and use online calculators to see what their reduced benefit would be as early as age 62 (which would be 70% of your full benefit amount at normal retirement age).

A person can wait until age 70 to take their Social Security Benefit, and this will result in a benefit about 8% higher for each year it was deferred past normal retirement age. Benefits also increase for Cost of Living Adjustments (COLA).

There is, of course, more to know, and we’ll try to fill in the gaps in the following articles.

Am I Eligible for Social Security Benefits?
Can I Start Collecting My Social Security Benefits If I’m Still Working?
When Will Social Security Go Bankrupt?