Social Security is a federal government program designed to provide financial support to workers when they retire and are unable to earn an income. Although benefits vary from person to person, they are often only enough to cover basic living expenses. Social Security is an important part of retirement planning for most people.
Social Security Is Funded With Your Payroll Taxes
Under the Social Security system, a tax is deducted from your paycheck by your employer, and your employer provides a matching contribution. The tax that is deducted from your paycheck (part of the FICA tax) amounts to 6.2% of your income. This tax is only taken out of individuals' first $168,600 in income (in 2024).
To qualify for Social Security retirement benefits, you must work at least 10 years, but your benefits are calculated using your average annual income for your highest-earning 35 years. As of 2024, the average Social Security retirement benefit was $1,907 per month, while the maximum benefit (at full retirement age) was $3,822. These amounts usually increase annually to offset inflation. You're entitled to receive benefits from the time you retire until the time you die.
Delaying Retirement Can Increase Your Benefits
As of 2024, age 62 is the minimum age to receive Social Security retirement benefits. But collecting before you reach full retirement age (see below) is considered taking "early retirement," and you won't receive the full amount you are entitled to. Benefits are reduced 6%-7% for each you collect benefits before full retirement age.
The longer you wait to retire, up until age 70, the higher your benefits will be. Benefits increase 8% each year you wait after full retirement age to collect benefits.
For workers who were born in 1943 to 1954, full retirement age is 66. But full retirement age is set to gradually climb to age 67 for those born in 1960 or later.
Working and Collecting Early Retirement Benefits
If you continue working while you collect early retirement, or if you go back to work, your benefits will be reduced based on how much money you earn. Once you reach full retirement age, working won't affect your benefits. For more information, see our article on reduced early retirement benefits for workers.
Special Social Security Rules for the Self-Employed
If you're self-employed, you must pay self-employment tax (SECA) equal to both employee and employer Social Security contributions. In 2024, this amounts to 12.4% of your first $168,600 in income. Social Security tax applies only to wages, not to dividends.
Some folks try to lower their self-employment taxes by incorporating and taking some of their compensation in dividends rather than salary, but this alternative will reduce their retirement benefits. In addition, the IRS can impose tax penalties for those who pay themselves an unreasonably low salary to avoid self-employment taxes.
If you were self-employed before retirement, the Social Security Administration (SSA) may make a special determination of your benefits if you choose to retire before full retirement age.
Can You Count on Social Security?
Before 2021, the Social Security system was essentially self-funding. The system didn't pay out more money in Social Security benefits than it collected with FICA and SECA taxes, income tax on Social Security benefits, and interest earnings on the "trust fund" for Social Security. But due to the retirement of the "baby boom" generation, as well as slower wage growth, in 2021, the SSA had to reach into the trust fund to pay the full amount of benefits due. (The trust fund was created in 1939 to protect against periods of greater disbursements and short-term fluctuations.)
Although the trust fund stood at $2.8 trillion at the end of 2023, the trust fund is expected to run dry in 2035. At that point, if nothing is done to shore up the trust fund, the Social Security Administration will go back to paying out benefits only from the money it collects via FICA and SECA taxes and the income tax on Social Security benefits. If that happens, it's expected that the SSA will be able to pay only 83% of the benefits it currently pays to recipients.
The federal government may make changes to prevent this from happening, however, such as increasing Social Security taxes, raising the $168,600 cap on the income subject to Social Security taxes, and/or increasing the retirement age. To learn more, read Nolo's article on the future of Social Security.