Top Ten Facts About Social Security You Should Know

Social Security serves as a foundational element of the social safety net in the United States, established to deliver financial aid to retirees, individuals with disabilities, and their families. Supporting approximately 70 million people, or about one in every five U.S. residents, this system ensures economic security for those retired or unable to work due to disability.

With its inception in the 1930s, Social Security has evolved to become a key aspect of financial planning, affecting most American families in some way. Currently, Social Security benefits represent about 30% of the income of people over age 65, with 37% of men and 42% of women age 65 and older receiving 50% or more of their income from Social Security.

Understanding the benefits Social Security offers, along with its limitations and the requirements for eligibility, is important for maximizing its potential impact on individual and familial financial stability. As it operates on contributions from workers’ paychecks, it reflects a shared effort to protect those in society who need support during their retirement years or in the face of disabilities. Consider consulting with a seasoned financial advisor who can help guide you on how to incorporate Social Security into your retirement plan to maximize your benefits.

This article will discuss the Social Security system and how it works, so you can strategically use it in your retirement planning process.

Below are the top 10 Social Security facts you should know to better understand and integrate Social Security benefits into your retirement planning strategy:

Fact #1 Workers and employers both act as the source of funding

The Federal Insurance Contributions Act (FICA) mandates payroll taxes as the primary funding source for Social Security, with workers and employers each contributing 6.2% of earnings up to a taxable maximum, which has risen over the years in response to wage growth. In 2023, this cap was $160,200, reflecting an adjustment to account for inflation and wage trends. The contributions are split between the Old Age and Survivors Insurance (OASI) and the Disability Insurance (DI) Trust Funds, which pay out benefits to eligible recipients. The increasing cap over the years highlights efforts to maintain the program’s solvency amidst demographic shifts, such as an aging population. This funding strategy impacts workers and employers by tying Social Security contributions directly to wage levels, ensuring that as wages increase, so does the funding for future benefits, albeit imposing a higher payroll tax burden as the income cap rises.

Fact #2 Social Security beneficiaries are determined based on eligibility criteria

While most workers pay towards this important fund, does everyone get Social Security? It is noteworthy that Social Security benefits are not granted automatically.

Only some people are eligible to receive benefits automatically. Eligibility hinges on earning “credits” through work history. Typically, individuals need to accumulate 40 credits, equivalent to 10 years of work, to qualify for retirement benefits. However, the number of credits required for disability benefits varies based on the age at disability onset. Nearly all working Americans, about 96%, are covered under Social Security, contributing to its funds through payroll taxes. This widespread coverage ensures that a vast majority of the workforce has access to Social Security benefits.

While the requirement of 40 credits has remained stable, discussions on adjusting this in response to changing work patterns reflect the system’s need to adapt to modern economic realities. This ongoing evaluation ensures that Social Security remains relevant and effective in providing support to those in need throughout their lifetimes.

Fact #3 Average Social Security benefits per month vary for beneficiaries

The average monthly Social Security benefits provide a crucial financial foundation for millions. As of 2024, the typical monthly retirement benefit stands at approximately $1,907. This figure represents a broad average, encompassing the diverse amounts that retirees receive, which are influenced by their earnings history and the age at which they choose to start receiving benefits.

Furthermore, the Social Security program extends support to disabled workers and survivors, with benefit amounts customized to fit their individual circumstances. For disabled workers, the average monthly benefit in 2024 amounts to approximately $1,537, aiding in financial stability during times of incapacity. Similarly, survivors receive an average monthly benefit of around $1,501, providing vital assistance to families coping with the loss of a loved one.

Fact #4 Cost-of-Living Adjustments (COLAs) are applied to account for inflation

To maintain the purchasing power of Social Security benefits in the face of inflation, annual cost-of-living adjustments (COLAs) are applied. These adjustments are pegged to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), reflecting changes in the cost of living.

In 2024, beneficiaries saw a COLA of 3.2%, a necessary increase to help offset the effects of inflation on fixed incomes. This adjustment aligns with historical trends, as evidenced by the average annual COLA over the past decade, which has hovered around 2.5%.

COLAs serve as a vital mechanism for ensuring that Social Security benefits keep pace with broader economic trends. For instance, data from previous years indicates that COLAs have ranged from as low as 0.3% in 2016 to as high as 8.0% in 1975, reflecting the varying degrees of inflation experienced over time.

Fact #5 Maximum benefits are variable

The maximum Social Security benefits an individual can receive vary based on their retirement age and income history, reflecting the highest earners who retire at the full retirement age (FRA). The FRA varies depending on the year of birth, gradually increasing from 65 to 67 for those born in 1960 or later. For individuals retiring at their FRA in 2024, the maximum benefit amount is significantly higher than the average retirement benefit, showcasing the program’s design to replace a portion of pre-retirement income based on lifetime earnings.

The exact maximum benefit can change yearly, influenced by wage growth and COLA adjustments, emphasizing the system’s responsiveness to economic conditions.

The maximum benefit is a crucial aspect of financial planning for retirees, providing an essential source of income stability during retirement years. As of 2024, the maximum monthly benefit for an individual retiring at full retirement age is approximately $3,345. However, this figure may vary depending on factors such as earnings history, retirement age, and changes in economic conditions.

Fact #6 Payment schedule depends on the date of birth of the beneficiary

Social Security benefits are distributed monthly, with payments made in arrears. This means that beneficiaries receive their payment for a given month in the following month. The specific date payments are made depends on the beneficiary’s birth date and, in some cases, other factors like the date of entitlement or the type of benefit received. Generally, payments are scheduled for each month’s second, third, and fourth Wednesdays. For example, those born in the first part of the month may receive their benefits on the second Wednesday, while those born later might see their benefits arrive on the third or fourth Wednesday. This systematic approach helps ensure a smooth and predictable flow of payments to beneficiaries each month.

Fact #7 The Social Security system has a provision for survivor benefits for couples and families

Social Security extends its support beyond individual workers to include spouses, children, and survivors, offering a wider safety net for families. Spouses may be eligible for benefits based on the worker’s record, even if they have never worked or have low earnings. These benefits can be up to 50% of the worker’s benefit at full retirement age, providing essential financial assistance to spouses who may not have their own work history or have limited earnings.

Children of retired, disabled, or deceased workers can also receive benefits under the Social Security program. Typically, these benefits amount to up to half of the parent’s full benefit, helping to alleviate financial burdens and ensure the well-being of dependent children.

Survivors’ benefits also play a crucial role in supporting widows, widowers, and children of deceased workers. By providing vital financial assistance, survivors’ benefits help maintain living standards after the loss of a primary breadwinner, offering stability during challenging times.

In 2023, about 96% of persons aged 20-49 who worked in covered employment had survivors insurance protection for their children under age 18 (and surviving spouses caring for children under age 16).

This comprehensive approach underscores the importance of Social Security as a multi-generational safety net, ensuring that the impact of the program stretches across families and generations. Data from recent years indicates that over 6 million widows and widowers receive survivor’s benefits. Additionally, around 3 million children receive benefits as survivors of deceased workers, emphasizing the program’s role in providing stability and protection to families facing loss.

Fact #8 Supplemental Security Income (SSI) offers additional benefits

The Supplemental Security Income (SSI) program further adds to the strength of the U.S. safety net. It is designed to provide additional financial support to elderly, blind, and disabled individuals with minimal or no income. This program recognizes the need for basic monthly financial aid to cover essential living costs. For 2024, the SSI payment amounts have been set at $943 for an eligible individual and $1,415 for an eligible couple. These amounts reflect the program’s commitment to assisting those in the most need, helping to ensure that all individuals have access to the resources necessary for basic subsistence. In 2023, approximately 8.8 million individuals received Social Security Disability Insurance benefits, totaling $11.7 billion in payouts. This group comprised 7.5 million disabled workers, 89,000 spouses of disabled workers, and 1.1 million children of disabled workers. Moreover, during the same period, disability benefits were extended to over 8.9 million individuals, with disabled workers constituting 89 percent of the total recipients.

SSI, thus, serves as a testament to the societal pledge to support its most vulnerable members, working alongside Social Security to form a more comprehensive coverage net.

Fact #9 Taxation of Social Security benefits varies based on income level

The taxation of Social Security benefits depends on the beneficiary’s overall income level. If the total of one’s adjusted gross income, non-taxable interest, and half of their Social Security benefits exceeds certain thresholds, a portion of the benefits may be subject to federal income tax. For individuals and couples, these thresholds can vary. Up to 50% of Social Security benefits may be taxable for individuals with a total gross income including Social Security of at least $25,000 or couples filing jointly with a combined gross income of at least $32,000. This can increase to 85% of Social Security benefits becoming taxable for individuals with a combined gross income of at least $34,000 or a couple filing jointly with a combined gross income of at least $44,000. This tax structure aims to balance fairness and support, primarily affecting those with higher total incomes, and emphasizes the importance of planning and understanding one’s true financial picture in retirement.

Fact #10 Future of Social Security

The sustainability of Social Security is a topic of ongoing discussion and concern, with projections indicating potential funding shortfalls in the future. These concerns stem from demographic shifts, including an aging population and a declining worker-to-beneficiary ratio, which put pressure on the system’s financial resources. The number of Americans 65 and older is projected to increase from about 58 million in 2022 to about 75 million by 2035. In 2023, there were an estimated 2.7 covered workers per Social Security beneficiary, with projections indicating this ratio will decrease to 2.3 covered workers for each beneficiary by 2035.

Addressing these challenges may require reforms such as adjusting the retirement age, modifying the benefit formula, or changing the cap on taxable earnings. The goal of potential reforms would be to ensure the long-term viability of Social Security, so it can continue to serve as an important component of financial security for future generations.

To conclude

Social Security remains an integral pillar of financial stability for millions. Social Security payments in 2023 injected over $1 trillion into the economy, additionally underscoring its role as a key economic stabilizer. This significant contribution to economic activity further solidifies the program’s importance in supporting both individuals and broader economic well-being.

It bears testimony to the collective effort to support individuals and families during retirement or in times of disability. It’s, thus, crucial for everyone, from current beneficiaries to those in the early stages of their career, to understand the intricacies of Social Security as it can pave the way for a robust financial strategy for retirement. However, with the system facing potential changes and the need for adjustments based on individual circumstances, the guidance of a financial professional can be invaluable. Financial professionals bring a wealth of knowledge and resources to help you maximize your Social Security benefits, integrate them into a broader retirement plan, and adjust your strategy in response to legislative changes.

Use the free advisor match service to get matched with vetted financial advisors who can offer personalized advice on when to start taking Social Security benefits to optimize your income throughout retirement, taking into account your health, marital status, and financial goals. Simply answer a few questions about your financial needs, and our match tool can connect you with 2 to 3 advisors suited for meeting your financial goals.