How Does Social Security Work?

If you’ve ever looked closely at your paycheck (or your self-employment taxes, if you’re self-employed), you’ve probably noticed a portion of your earnings is taken out every month for Social Security. Those contributions are tied to a benefit you could be eligible for someday, one that many Americans take advantage of in retirement. According to the Social Security Administration, 66 million people received monthly Social Security benefits in 2022—and 51 million of those were retirees and their families.  

Though you may be aware of this benefit, you might have questions about how Social Security works, what benefits you’re entitled to and how much you’ll end up getting. We’ll unpack these questions for you and give you a sense of what you might expect in the future.  

What does Social Security do?  

Social Security is a source of income you can receive from the government when you retire or if you are no longer able to work due to a disability. Your family can also receive Social Security benefits, depending on the situation.  

There are three types of Social Security benefits:  

• Retirement benefits: This is the most common type of benefit people receive from Social Security. Once you decide to retire and begin accepting Social Security benefits, you’ll receive a monthly check from the government that will replace a portion of your income. It’s important to note, however, that this cost replaces some—not all—of your income. Most people also rely on personal retirement savings to help create retirement income above and beyond what they’ll get from Social Security.  

• Disability benefits: Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) are two programs available to people who can’t work because of a mental or physical condition that is expected to last more than a year. The main difference between these two programs is in their eligibility requirements. If you have worked and paid into Social Security and you have a disability that prevents you from working, you may be eligible for SSDI. To be eligible for SSI, you don’t necessarily need to have paid into Social Security, but you do need to meet certain age/disability requirements and show evidence of limited income and resources.  

• Survivors’ benefits: Widows, widowers, dependents and even parents may be eligible to receive Social Security benefits after someone who has paid into Social Security has passed. The benefit amount will depend on the age of the deceased at the time of passing, how much was paid in and the age of the recipient (and whether the recipient has a disability). There also may be a one-time $255 benefit payment made to a person’s family after their death, provided they’ve contributed enough to be eligible.  

How does Social Security work?  

If you work for an employer, 6.2 percent of your paycheck goes toward Social Security, and your employer contributes another 6.2 percent on your behalf. If you work for yourself, you’re responsible for contributing the full amount for employer and employee on your own. This money goes into different trust funds that are then used to pay out benefits for people who are retired, people with qualifying disabilities, dependents of beneficiaries and surviving spouses/dependents.  

As of 2023, about 85 cents of every dollar you pay into Social Security goes toward paying benefits to current eligible retirees, their families and surviving spouses/children of people who have died. Roughly 15 percent then goes toward paying benefits to people with disabilities and their families.  

Once you meet the criteria and decide to begin taking your Social Security benefit, you can apply to the Social Security Administration. Once processed, you’ll receive monthly electronic deposits into your bank account.  

How you become eligible for Social Security retirement benefits 

Once you have met the eligibility requirements, you can begin receiving your benefits from Social Security. Social Security eligibility is determined by your retirement age and how many credits you’ve earned while working.  

Age 

Depending on what year you were born, the Social Security Administration sets a full retirement age at which you can begin receiving your full benefit. Typically, people reach their full retirement age around age 66 or 67. However, you can start receiving benefits as early as age 62—but by taking them early, you’ll actually reduce the monthly amount you’ll receive. On the flipside, by delaying taking benefits, you can increase the total amount you’ll receive by 8 percent for each year that you delay up until age 70. The increase is applied to all your future benefit payments, so if you live a long life, waiting could make quite a significant difference in how much you’ll get in the end.  When to take Social Security will be a crucial decision as you develop your retirement plan. 

Credits 

By working and paying taxes, you earn up to four Social Security credits per year. In 2023, you earn one credit for every $1,640 in earnings (the amount you need to earn to qualify for a credit increases over time). Generally, most people will become eligible when they’ve earned about 40 credits (which happens after about 10 years of work).  

How the amount of Social Security you get is determined 

Once you have enough credits to qualify for Social Security retirement benefits, your benefit payment amount is based on how much you earned while you were working. If you made more throughout your career, your benefit payments will be higher. Likewise, if you took time off work or your income was lower, your benefit amount may be lower.  

When you choose to begin receiving your benefit will also impact how much your monthly benefit will be. This is why many people choose to delay getting benefits or continue working past the full retirement age. If you choose to delay receiving benefits, your monthly benefit will be increased by a percentage each month (up to 8 percent per year) beginning at the time you reach full retirement age. Your benefit will continue to increase by that percentage until you do start taking benefits or until you turn 70—whichever comes first.  

Similarly, if you choose to start taking benefits before the full retirement age, your benefit amount will be permanently reduced by about 0.5 percent for every month that you collect the benefit before your full retirement age. Though that may seem like a small percentage, over time, it can add up. Let’s say you sign up for Social Security at 62. With the reduced monthly percentage withdrawn, by the time you reach 67, you’ll get only about 70 percent of your full benefit.  

Once you begin receiving benefits, you may also be eligible to have your spouse receive them, too. If your spouse is at least 62 years old (or has a qualifying child in their care), they could receive as much as half of your benefit payment amount, provided you have been married for at least one year. If your spouse is eligible to receive their own benefit that is higher than the spousal benefit, they can still apply to receive their own benefit when they retire. However, if you have a spouse who did not work or earned a lower income, claiming a Social Security benefit on your record can be an income option for them once you retire. (This is even an option for ex-spouses who were married for more than 10 years.) 

Will Social Security run out? 

You may have heard that Social Security will not be around by the time you retire, but that’s not entirely true. The Social Security Administration projects that trust fund reserves will become exhausted by 2037, but taxes contributed by taxpayers are still expected to cover about 76 percent of scheduled benefits. And that’s assuming that lawmakers don’t take any action. It’s entirely possible that the government could make changes to the program so that it can continue to pay out full benefits. While it’s entirely possible that Social Security could look different in the future, it’s likely that it will continue to pay benefits at some level for many years to come. 

How much does the average person get from Social Security? 

Social Security is an important part of your retirement plan because it provides a steady check that will last as long as you live. But while it provides an important base of income in retirement, it’s just one part of a retirement plan.  

The Social Security Administration estimated that the average monthly benefits paid to all retired workers in 2023 was $1,829. If you compare that number to the Bureau of Labor Statistics’ average weekly income of $1,110 for U.S. full-time, salaried workers, you’d find that the average monthly Social Security benefit covers only about 40 percent of the average monthly income. This means most people won’t be able to rely on Social Security alone to cover their cost of living in retirement.  

It’s important to make sure you have other assets and means of income in place by the time you reach retirement age to support the lifestyle you want in retirement. A 401(k), IRA or other investments (or a combination of all three) are some of the most common additional ways people save for retirement. A Northwestern Mutual financial advisor can show you additional options like how permanent life insurance can help you maximize your retirement savings. Our advisors can also help you build a financial plan that shows you the best time to claim Social Security as well as additional strategies that can help you maximize your benefit. 

The primary purpose of permanent life insurance is to provide a death benefit. Using permanent life insurance accumulated value to supplement retirement income will reduce the death benefit and may affect other aspects of the policy.