Social Security is a U.S. government benefits program established in 1935. While Social Security makes disability income insurance payments, it is most commonly associated with monthly retirement benefits paid out until death.

The Social Security system is funded with payroll taxes. The Federal Insurance Contributions Act (FICA) mandates a 12.4% levy on employee earnings, subject to an annual earned income cap set at $147,000 in 2022. The employer pays 6.2%, and the employee pays 6.2%, while the self-employed pay 12.4%.

Key Takeaways

  • Payroll taxes fund the Social Security system, with employers and employees paying 6.2% each on earned income up to an annual cap set at $147,000 in 2022.
  • Eligibility for Social Security is determined by quarters of coverage or credits, with one credit awarded up to a maximum of four a year for covered earnings set at $1,510 for 2022.
  • To receive Social Security benefits a worker must accrue a total of 40 credits, or one credit for each year after turning 21.
  • The benefits formula considers the average earnings, indexed for inflation, for the 35 years in which the worker earned the most employment income.
  • Those born between 1943 and 1954 may collect full benefits from age 66, with age of eligibility gradually increasing to 67 for those born in 1960 or later.
  • Reduced Social Security benefits are available from age 62 while waiting to collect the benefits past age 67 and up to age 70 increases the monthly payouts.

The payroll tax receipts aren’t set aside against eventual benefits for the taxpayer contributing to the system; instead they are pooled with interest income and any reserves to pay benefits to those already receiving them. The two Social Security trust funds (one for retirement benefits, the other for disability claims) invest their reserves in special issue U.S. government debt securities available only to the funds, though in the past they have held publicly traded U.S. Treasury bonds.

Social Security Credits

Workers accrue eligibility for Social Security benefits by paying into the system over time. To qualify, they must accumulate a quarter of coverage, also known as a credit, for each calendar year after they turn 21 and the earliest of the following:

  • The year before they turn 62
  • The year before they die
  • The year before they become disabled.

The quarter of coverage is an amount of employee earnings or self-employment income subject to Social Security payroll taxes that’s indexed for inflation, set at $1,510 for 2022. Workers may accumulate up to four quarters of coverage (credits) in a year, and need a minimum of six quarters of coverage over their careers to qualify for Social Security benefits, provided they have also earned a quarter of coverage for each year after the age of 21 and before benefit eligibility, as noted above. The maximum number of quarters of coverage needed to qualify is 40.

If you’re planning to delay applying for Social Security benefits, be sure to sign-up separately for Medicare by age 65. Failing to do so may delay Medicare coverage and increase its cost in some instances.

Calculating Benefits

The formula for calculating Social Security benefits uses your average earnings, indexed for inflation, from the 35 years in which you earned the most employment income subject to payroll taxes. The 2022 formula for the “primary insurance amount,” or the monthly Social Security benefit, is the sum of:

  • 90% of the first $1,024 in average indexed monthly earnings from those best 35 years
  • 32% of the average indexed monthly earnings above $1,024 up to $6,172
  • 15% of the average monthly earnings above $6,172.

The dollar amounts of these benefit brackets, also known as “bend points,” change annually because they are indexed for inflation. The percentages for each bracket remain the same from year to year.

Because those with lower lifetime earnings receive a larger proportion of those earnings in benefits, the Social Security benefits formula is considered progressive, comparable in its effect to a progressive tax. Benefits started at full retirement age in 2022 would replace as much as 75% of covered income for the lowest-paid workers and about 27% for the highest earners, according to the SSA.

The maximum Social Security benefit for a worker retiring at full retirement age was $3,345 per month in 2022.

Calculators at the Social Security website can help you figure out what your benefit will be. You can apply up to four months before you wish to start receiving benefits.

Even if you never contributed to Social Security, you still may be eligible to receive retirement benefits based on your spouse’s earning history—even if you are divorced (if your marriage lasted at least 10 years), or your spouse is deceased.

Social Security Eligibility

Permanently reduced Social Security benefits are available from age 62. Following the extension of the full retirement age in 1983, workers qualify for full benefits according to the following schedule:

Year of Birth Full (normal) Retirement Age
1937 or earlier 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67

Plan for Your Retirement

According to the SSA, Social Security was never designed to serve as the sole source of a retiree’s income. The SSA notes that “on average, Social Security will replace 40% of your annual pre-retirement income.” Meanwhile, you may need as much as 80% of your pre-retirement income to retire comfortably.

The best way to achieve a secure retirement is to take matters into your own hands. This means making sure to take advantage of a 401(k) or a similarly tax-advantaged retirement plan, if your employer offers one, as well as investing in a regular or Roth IRA.

Another smart reason to save for your retirement: In their 2022 report, Social Security trustees project the program’s fund for retirement benefits, the Old-Age and Survivors Insurance (OASI) Trust Fund, will deplete reserves in 2034, leaving it reliant on tax receipts that will cover 77% of scheduled benefits beyond that point.

The Bottom Line

While Social Security is an essential retirement income supplement for many, one thing is certain: Planning for additional ways to fund your retirement is a good idea. If you reach retirement and other sources of income, such as Social Security and defined-contribution plans, prove to provide sufficient income, your personal savings will add to the mix, and you’ll have more money than you need.

If you reach retirement and those other sources of income are not enough, you’ll also be able to rely on the nest egg you’ve built.

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  2. U.S. Social Security Administration. “2022 Social Security Changes.”

  3. U.S. Social Security Administration “Insured Status Requirements.”

  4. U.S. Social Security Administration. “Your Retirement Benefit: How It Is Figured,” Page 1.

  5. Social Security Administration. “Normal Retirement Age.”

  6. U.S. Social Security Administration. “Starting Your Retirement Benefits Early.”

  7. U.S. Social Security Administration. “Delayed Retirement Credits.”

  8. U.S. Social Security Administration. “Special Issue Securities: Trust funds and Types of Investments.”

  9. U.S. Social Security Administration. “Quarter of Coverage.”

  10. U.S. Social Security Administration. “Primary Insurance Amount.”

  11. Congressional Budget Office. “Budget Options: Make Social Security’s Benefit Structure More Progressive.”

  12. U.S. Social Security Administration. “Understanding the Benefits,” Page 1.

  13. U.S. Social Security Administration. “Benefit Calculators.”

  14. U.S. Social Security Administration. “How Far in Advance Can I Apply for Social Security Retirement Benefits?

  15. U.S. Social Security Administration. “Benefits For Your Family.”

  16. U.S. Social Security Administration. “Your Social Security Statement,” Page 1.

  17. U.S. Social Security Administration. “A Summary of the 2022 Annual Reports.”

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