Social Security explained
Social Security explained
Points to know
- Social Security retirement benefits are a safety net for retirees.
- Payroll taxes on employees and employers fund the Social Security program.
- Your Social Security benefits should be considered an important part of your retirement income.
What is Social Security?
Social Security is a federal government program that provides a guaranteed monthly income adjusted for inflation for eligible recipients, generally in retirement. Once you begin claiming benefits, they last for the rest of your life. Although it's not intended to be your entire retirement solution, Social Security plays an important role in helping you create a retirement income stream.
About 1 in 4 Americans over age 65 rely on Social Security benefits for at least 90% of their income, according to the Social Security Administration.1 However, on average, Social Security will replace about 40% of your annual pre-retirement earnings.2
Who pays for Social Security?
While working, you contribute a percentage of your earnings through payroll deductions and your employer matches the same amount. The current rate is 6.2% for employees and 6.2% for employers (up to a wage cap of $168,600 in 2024 and $176,100 in 2025).3 These contributions fund benefits for current recipients, just as future workers will fund your benefits when you retire.
This is different from retirement accounts such as IRAs and 401(k) plans, which enable you to invest on your own with an opportunity for growth and then draw from your savings in retirement. Typically, retirees rely on both Social Security and retirement savings accounts for their retirement income.
Need help with your Social Security strategy? Our advisors are here for you.
Our professional advisors can help you create a personalized strategy for maximizing your Social Security benefits as part of your overall retirement plan. We'll work with you to determine the optimal time to claim benefits based on your unique situation and goals.
How do you qualify for Social Security?
There are 4 ways you can qualify for Social Security.
1. Your earnings history
Social Security credits are the building blocks of your benefits. You need at least 40 credits to qualify—typically earned over 10 years of working. You can earn up to 4 credits each year based on your total wages and self-employment income. In 2024, you need $1,730 in earnings to get 1 Social Security credit ($6,920 for the maximum 4 credits). Credits permanently stay on your record, so you can add more at any time by continuing to work.
2. As a spouse
You can qualify for Social Security benefits based on your spouse's earning record, even if you've never worked in a job covered by Social Security. To receive Social Security spouse benefits, you must be at least 62 years old. If you plan to claim spousal benefits, keep these things in mind:
- Benefits are reduced if claimed before your full retirement age (FRA). This is the age at which you're eligible for your full monthly benefits, also known as the primary insurance amount (PIA).
- If you worked in a Social Security-covered job, it's advantageous to coordinate your benefits with your spouse's to help maximize the benefits. For example, when each spouse claims benefits on their own record, it usually makes sense for the higher earner to wait longer to collect because over time their increases will be worth more.
- If you never worked in a covered job, your FRA benefit equals 50% of your spouse's primary insurance amount (the basic benefit amount someone would get at their FRA before any adjustments for claiming early or late). However, a spouse can't collect spousal benefits until the higher-income spouse has claimed.
3. As a surviving spouse
If your spouse worked and paid Social Security taxes, you may be eligible for Social Security survivor benefits when they die. To receive survivor benefits, you must meet the following requirements:
- You must have been married for at least 9 months, in most cases.
- Your spouse must have worked the minimum required years (generally 10 years, depending on their age at death).
- You can receive full benefits at your FRA or reduced benefits as early as age 60.
- You may qualify based on other situations, like caring for minor children.
4. As an ex-spouse
You might qualify for benefits based on your ex-spouse's record if:
- Your marriage lasted at least 10 years.
- You're currently unmarried.
- Your ex-spouse is at least 62 and qualifies for Social Security.
Note: If your ex-spouse hasn't filed for benefits, you can still receive benefits if you've been divorced for at least 2 years.
What determines your benefits?
Several factors determine your Social Security benefits. Here's how Social Security is calculated.
Birth date: Your birth date determines your full retirement age (FRA). You'll be eligible for 100% of your benefits at your FRA.
Lifetime earnings: The Social Security Administration uses your 35 highest-earning years to calculate benefits. Years with no earnings count as zeros in the calculation. Past earnings are indexed to account for average wage growth.
Start date: Your benefits depend on when you start collecting, which can be anytime between ages 62 and 70. The longer you wait to start collecting, the bigger your benefit will be. For example, if you were born in 1960 or later, your benefits look like this:
Social Security benefits by age
To collect Social Security, you need to be 62 or older and have paid into Social Security through your payroll deductions for a minimum of 10 years. But just because you can collect payments immediately doesn't mean you should. Here's why.
The amount of your Social Security benefit is influenced by 2 age-related factors: the year you were born and how old you are when you start collecting benefits. Your birth year determines your full retirement age (FRA)—the age at which you become eligible for 100% of your benefits. The FRA has been gradually increasing and is now 67 for people born in 1960 and later. The age at which you start collecting benefits—whether it's before or after your FRA—will affect your monthly payment amount, either increasing or decreasing it.
| AGE YOU START COLLECTING | PERCENTAGE OF BENEFITS |
| 62 (earliest possible) | 70.8% |
| 63 | 75.8% |
| 64 | 81.1% |
| 65 | 87.8% |
| 66 | 94.4% |
| 66 and 10 months (full retirement age) | 100.0% |
| 67 | 101.3% |
| 68 | 109.3% |
| 69 | 117.3% |
| 70 (latest possible) | 125.3% |
| AGE YOU START COLLECTING | PERCENTAGE OF BENEFITS |
| 62 (earliest possible) | 71.7% |
| 63 | 76.7% |
| 64 | 82.2% |
| 65 | 88.9% |
| 66 | 95.6% |
66 and 8 months (full retirement age) |
100.0% |
| 67 | 102.7% |
| 68 | 110.7% |
| 69 | 118.7% |
| 70 (latest possible) | 126.7% |
| AGE YOU START COLLECTING | PERCENTAGE OF BENEFITS |
| 62 (earliest possible) | 72.5% |
| 63 | 77.5% |
| 64 | 83.3% |
| 65 | 90.0% |
| 66 | 96.7% |
66 and 6 months (full retirement age) |
100.0% |
| 67 | 104.0% |
| 68 | 112.0% |
| 69 | 120.0% |
| 70 (latest possible) | 128.0% |
| AGE YOU START COLLECTING | PERCENTAGE OF BENEFITS |
| 62 (earliest possible) | 73.3% |
| 63 | 78.3% |
| 64 | 84.4% |
| 65 | 91.1% |
| 66 | 97.8% |
66 and 4 months (full retirement age) |
100.0% |
| 67 | 105.3% |
| 68 | 113.3% |
| 69 | 121.3% |
| 70 (latest possible) | 129.3% |
| AGE YOU START COLLECTING | PERCENTAGE OF BENEFITS |
| 62 (earliest possible) | 74.2% |
| 63 | 79.2% |
| 64 | 85.6% |
| 65 | 92.2% |
| 66 | 98.9% |
| 66 and 2 months (full retirement age) | 100.0% |
| 67 | 106.7% |
| 68 | 114.7% |
| 69 | 122.7% |
| 70 (latest possible) | 130.7% |
| AGE YOU START COLLECTING | PERCENTAGE OF BENEFITS |
| 62 (earliest possible) | 75.0% |
| 63 | 80.0% |
| 64 | 86.7% |
| 65 | 93.3% |
| 66 (full retirement age) | 100.0% |
| 67 | 108.0% |
| 68 | 116.0% |
| 69 | 124.0% |
| 70 (latest possible) | 132.0% |
How to find out your Social Security benefits
The Social Security Administration (SSA) website provides estimates for how much you'll collect if you start receiving benefits at age 62, your full retirement age, and age 70.
Social Security retirement income
Social Security represents a significant source of retirement income for most Americans. According to government statistics, benefits replace about 40% of an average retiree's pre-retirement income. Yet about half of beneficiaries age 65 or older received at least half of their income from Social Security.4
Even for top earners, however, the benefits are relatively modest. The maximum Social Security benefit at full retirement age (FRA) in 2024 is $3,822 per month.
When you choose to claim your benefit will have a lasting impact on the amount you'll receive each month, and it can mean a difference of thousands of dollars over your lifetime. The easiest way to increase your monthly payments is to delay collecting. You won't get 100% of your benefits unless you wait until your FRA to claim. After your FRA, your benefits will keep increasing by ⅔ of 1% each month (or 8% a year) for each month you delay until you turn 70.
Should you consider a Social Security break-even analysis?
The question many people wrestle with in trying to decide when to take Social Security is: When will I come out ahead?
The decision as to the "right" time to claim Social Security has often been based on a break-even analysis of a retiree's expected benefits, if claimed at different ages, versus their life expectancy. The break-even point is the age at which the benefit amounts intersect.
In other words, will the money you'll get by claiming early and getting smaller checks for potentially a longer period be more than what you'll get by waiting and getting larger checks for potentially a shorter period?
A break-even analysis can help you determine when to start collecting Social Security benefits. It calculates the point at which the total value of higher benefits (from delaying collection) exceeds the value of lower benefits taken earlier.
Let's say John is 61 and his full retirement age (FRA) is 67. He would receive the following monthly payments depending on his age:
Here are his break-even points for claiming at various ages, assuming a 2% cost-of-living adjustment:
- Age 77 if John claims at age 62 versus FRA.
- Between ages 78 and 79 if John claims at age 62 versus age 70.
- Between ages 80 and 81 if John claims at FRA versus age 70.
In addition to a break-even analysis, consider your life expectancy, current health, family history, and your other assets in deciding when to collect Social Security.
Social Security factors to consider
What if you change your mind?
Say you claim Social Security and then change your mind. Perhaps you're still working, you take a part-time job, or you get an unexpected windfall.
If you think you no longer need the benefits, you have 2 options:
The "reset" rule
If you start collecting reduced benefits before your full retirement age (FRA), you can "reset" your benefits and erase the reduction.
- You must withdraw your benefits claim within 12 months of filing.
- You must repay all benefits your family received based on your earnings record.
- By deferring your benefits, you'll receive the increased benefit amount when you reapply for Social Security.
Pros and cons of the "reset" rule
The voluntary suspension rule
If you started collecting reduced benefits before your FRA and missed the reset deadline, you can suspend your benefits once you reach FRA and restart them later.
- You start claiming Social Security benefits before reaching your FRA.
- Upon reaching FRA, you decide you don't need the money and suspend your benefits.
- You can delay resuming benefits as late as age 70.
Pros and cons of the voluntary suspension rule
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1Irena Dushi, Howard M. Iams, and Brad Trenkamp. The Importance of Social Security Benefits to the Income of the Aged Population. 2017. Accessed November 6, 2024.
2Social Security Administration. Retirement Ready: Fact Sheet for Workers Ages 61-69. Accessed November 6, 2024.
3Social Security Administration. Accessed November 6, 2024, at https://www.ssa.gov/oact/cola/cbb.html.
4Irena Dushi, Howard M. Iams, and Brad Trenkamp. The Importance of Social Security Benefits to the Income of the Aged Population. 2017. Accessed November 6, 2024.
5Jim Borland. Why Social Security Retirement is Important to Women. 2019. Accessed November 6, 2024, at https://blog.ssa.gov/why-social-security-retirement-is-important-to-woman/.
6Social Security Administration. Accessed November 6, 2024.
7Pew Research Center. Accessed November 6, 2024.
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