Social Security

Social Security is probably the most popular fed­eral program, yet most people know almost nothing about it. In practice, Social Security’s complex bene­fit formulas and rules make it difficult for people to understand how their retirement benefits will work.

This paper explains what Social Security is and how it works. The first section explains what Social Security is and which programs are and are not part of Social Security. The second section explains the payroll taxes that mainly finance Social Security and how they are paid. The third section explains what Social Security’s trust funds are and are not. The fourth and longest section discusses how Social Security benefits are calculated and who is eligible to receive them. A companion paper will discuss the fiscal problems facing the current system and why changes are necessary. All of the information con­tained in this paper comes from Social Security Administration (SSA) sources.

What Is Social Security?

Social Security is the most popular government program and touches the life of every worker in America, but most people know little or nothing about how it operates. The following discussion explains what Social Security is and how it operates.

Social Security’s Major Programs. While most discussions focus only on Social Security’s retirement program, Social Security actually consists of three major programs, all of which are administered by the Social Security Administration. Specifically:

Retirement. Social Security’s retirement program provides a lifetime monthly income for qualified workers once they reach their full retirement age. Depending on when they were born, that age ranges from 65 to 67. The amount of retire­ment benefits that a worker receives depends on his or her income while working. Workers also have the option of receiving a lower monthly income starting at age 62.

Survivors. Social Security’s survivors program provides a monthly lifetime income to the sur­viving spouse of a deceased worker once he or she reaches retirement age. The amount of the monthly benefit depends on both spouses’ income while they were working. The survi­vors program also pays benefits to children under the age of 18 and the surviving spouse caring for them. Unless they are disabled, chil­dren’s benefits end when the last child either reaches age 18 or graduates from high school, whichever is later.

Disability. Social Security also pays lifetime monthly income to workers who are disabled and, in some cases, to their spouses and chil­dren under the age of 18. These benefits depend on the worker’s earning history.

Qualifying for Social Security. Workers do not automatically qualify for Social Security retire­ment benefits. Instead, they must work and pay a minimum level of Social Security taxes for at least 40 quarters during their working lives. These 40 quarters do not have to be consecutive. Cur­rently, workers earn a credit for each three-month period in which they earn at least $900. Once they have worked and paid Social Security taxes for the required 40 quarters, they are fully quali­fied to receive Social Security retirement benefits. If workers have paid Social Security taxes for a certain number of quarters in the recent past,[1] they are also qualified to receive disability bene­fits and to have survivors benefits paid to their spouses and to their children who are under the age of 18.

Disability benefits are paid to workers who have been disabled for at least one year. In order to qualify, a worker must have paid Social Security taxes within the recent past. “Disabled” in this case means unable to perform any substantial gainful work due to severe physical or mental impair­ment. Determination of eligibility is based on medical evidence and made by a government agency in the state in which the worker lives.

There is no requirement that an individual must be an American citizen to qualify for Social Security.