Understanding Social Security Benefits

Social Security is the largest social insurance program in the United States, and most people will fall within this safety net at some point in their lifetimes.

When you think of Social Security beneficiaries, you probably imagine retirees enjoying their golden years. In reality, Social Security pays out benefits to one in five Americans, 5.8 million of whom are under 65.

This key government program offers a range of Social Security benefits. Let’s review the basics.

How Does Social Security Work?

Social Security is a federal government-operated social insurance program. If you are currently working, you pay “premiums” into the system in the form of OASDI deductions, which stands for Old Age, Survivor, and Disability Insurance.

In 2023, the first $160,200 you earn yearly will have OASDI deductions.

People who work for an employer and receive a W-2 at the end of every year will pay 6.2% of their earnings into OASDI while their employer contributes an additional 6.2% on their behalf.

Self-employed individuals—including gig workers—pay in the entire 12.4% themselves based on their net earnings.

Why Was Social Security Created?

Social Security was originally created to address the epidemic of poverty among elderly Americans during the great depression. Over the years, the program has been expanded to include people with disabilities, widows and widowers, and their dependents.

Social Security is not a retirement system but rather a social insurance program. It is intended to prevent absolute poverty among our most vulnerable populations when they can no longer support themselves.

The Center on Budget and Policy Priorities estimates that without Social Security, over 22 million more Americans would be living in poverty, almost one million of them children under the age of 18.

Who Gets Social Security Benefits?

To qualify for Social Security benefits, you must be a U.S. citizen, permanent resident, or legally eligible for a Social Security number through your immigration status.

Undocumented workers have never been eligible for Social Security benefits despite contributing at least $13 billion annually to the Social Security trust fund, according to SSA’s estimates.

In addition to this basic qualification, you must have paid enough into the system or be the qualified dependent of someone who did. To qualify for retirement benefits, you must have worked for at least 10 years, earning a minimum of $6,560 a year. This would give you the 40 quarters of coverage you need to qualify for Social Security benefits.

In 2023, the amount to earn a quarter is $1,640. So, technically, you could earn $1,640 a year for 40 years to have the 40-quarters coverage you need to qualify for benefits. However, you can only earn a maximum of 4 quarters per year, so if you’ve never worked before in your lifetime, earning $65,600 in one year ($1,640 x 40) won’t qualify you for benefits.

Once you’ve met the working requirements, you must meet additional requirements outlined below depending on the type of Social Security benefit you seek.

Types of Social Security Benefits

Retirement Benefits

The most well-known Social Security benefit is the retirement benefit. Under current rules, you can claim Social Security retirement benefits between the ages of 62 and 70.

To calculate your benefits, Social Security uses a complex formula that considers your top 35 years of work history. You can see your personal benefit estimate online in under 10 minutes by setting up a My Social Security account at ssa.gov.

The amount you receive depends on how much you’ve paid into the system and your age when you start benefits. You get full benefits at your retirement age—between 66 and 67, depending on your birthday. Your benefits are reduced by 30% if you take them early at 62 and increase by 24% if you take them at age 70.

Disability Benefits

Social Security Disability benefits are only for individuals with a permanent disability. Social Security’s standard for a permanent disability is stricter than many state disability programs and private disability insurance plans, which can pay benefits if you cannot work your current job or have short-term problems.

To qualify for Social Security disability benefits, you must have a condition that is expected to last at least one year and prevent you from doing any job for the rest of your life.

To qualify for benefits, you must also have a work history with earned income for 20 out of the last 40 quarters, which equates to earning at least $6,560 per year for five out of the last 10 years or at least $3,280 per year for the last 10 years.

Auxiliary Benefits

Auxiliary benefits are available for dependents of individuals receiving retirement or disability benefits.

Eligible dependents include minor biological and adopted children, adult children who became disabled before the age of 22, current spouses caring for children under 18, current spouses over the age of 62 and some former spouses.

The benefit referred to as a spouse’s benefit or spousal benefit is, in reality, an auxiliary benefit. Auxiliaries of living beneficiaries are entitled to up to 50% of what the primary is eligible for if that 50% is more than they can get under their own earnings history and benefit eligibility.

Survivors Benefits

Survivor benefits are available for dependents of someone who has paid into the Social Security system and passed away.

Eligible dependents include minor children, adult children who became disabled before the age of 22, surviving spouses with children under the age of 16, surviving spouses over the age of 60, and surviving spouses over the age of 50 who became disabled within seven years of their spouse’s passing.

In addition to monthly survivor’s benefits, eligible dependents qualify for a one-time lump-sum death benefit. Unfortunately, this “lump-sum” is a misnomer, as the payment amount hasn’t changed since 1954 and is only $255.

Supplemental Security Income (SSI)

SSI is managed by the Social Security Administration, but it is actually a needs-based federal welfare program with very different rules and funding than Social Security programs. SSI is funded by the general tax base, not the Social Security Trust fund, which is funded by OASDI payroll deductions.

SSI is available to extremely low-income individuals with disabilities or over the age of 65 who do not have the work history to qualify for Social Security benefits. In 2023, the maximum federal SSI payment is $914 per eligible beneficiary with other income of $20 or less. In addition to household income limits, beneficiaries must also have resources totaling less than $2,000 to qualify for SSI.

SSI benefits are also available for disabled children in very low-income families or children residing in hospitals. Many states require families to apply for SSI to qualify for Medicaid for their children in the NICU. The maximum monthly SSI benefit amount for children and adults residing in institutions is $30.