Social Security Explained
Since its creation in 1935, Social Security has become one of the most important supports older adults have. Originally intended to be a supplement for retired seniors, the program now manages an annual budget in excess of $800 billion.
Together with Medicare, the medical insurance plan for Americans aged 65 and over, senior pensions and benefits occupy 45% of the federal budget's expenditures.
The Social Security program's many benefits currently keep nearly 15 million older Americans above the poverty line.
The Social Security Administration
The Social Security Administration (SSA) was established in 1935 as part of FDR's New Deal package of benefits for needy U.S. citizens.
As conceived, the program's aim was to provide a comfortable supplement to older adults' existing retirement benefits, such as pensions and investment income, and to prevent the rise of poverty among American seniors.
Today, the program is administered by the Department of Health and Human Services, a vast federal department that oversees more than $1 trillion in federal spending each year.
This budget goes to fund several public support programs, but the largest outlay the department manages is for Social Security benefits. While the program was originally conceived as a limited supplement for some older adults who needed help in retirement, the Social Security program today reaches into the life of every citizen of the United States.
Shortly after birth, a typical American citizen is issued an identifying number from the SSA. This Social Security number (SSN) was originally just a pass for accessing benefits, but by the 1970s it had become a de facto national ID number. By the 1980s, it was difficult or impossible to find employment, banking services or social welfare programs without presenting an SSN.
The Social Security Administration has almost accidentally become one of the most influential institutions in American economic life.
Programs Offered by the SSA
Though the program has grown well beyond its initial parameters, the core services of the Social Security Administration remain unchanged. The SSA provides financial support for over 63 million Americans under at least one of its divisions, and at least 178 million Americans either pay into the system or receive benefits from it.
Social Security benefits are generally paid out under one of four main divisions:
- Social insurance
- Health insurance or health services
- Programs for specific groups
- Financial assistance programs
Social Insurance Programs
The SSA's social insurance programs work to provide support for citizens of all ages who need financial assistance to make ends meet. Older adults, unemployed workers and people who have trouble supporting themselves due to temporary disability can all appeal to the Social Security Administration's social insurance programs for help.
These programs are funded exactly like a private insurance plan, with a fraction of every worker's paycheck withheld to fund the risk pool of other American citizens, with benefits available as needed for those who qualify for them.
Old-Age, Survivors, and Disability Insurance (OASDI)
The OASDI program is what most people are talking about when they refer to "Social Security benefits." This is the largest income maintenance program in the United States, and its monthly payments are intended to replace income lost due to retirement, permanent disability or the passing of a family income earner.
The funds for this program appear on pay stubs as federal insurance and self-employment contributions (FICA and SECA). Over 96% of U.S. jobs are covered by these programs. Revenues go into two government trust funds, the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund.
From these contributions, qualified beneficiaries are paid monthly benefits based on their past contributions to the trust funds and their current eligibility criteria.
Unemployment Insurance (UI)
Federal unemployment insurance was established as part of the Social Security Act of 19351, and it has been one of the most utilized Social Security benefits since its inception. Operating as a joint federal-state program, unemployment insurance (UI) is administered in each state under local requirements within federal benefit guidelines.
UI benefits are intended to partially replace some of the income lost from involuntary loss of employment. When a covered worker is fired without cause, laid off or temporarily deprived of work, UI benefits can provide a valuable stopgap to prevent catastrophic loss of income during the downtime.
Eligible workers typically must register at a public employment office, have a specified benefit amount paid in advance from payroll withholding contributions and be both looking for and willing to work.
Benefit levels are set by individual states, though every state maintains a cap on the maximum benefits that may be claimed. Benefits are generally paid for anywhere between 1 and 39 weeks, with extensions of up to 13 weeks available if necessary.
Extra extensions are sometimes granted by the SSA during recessions and other economic downturns, as well as during exceptional events, such as the 2020 COVID-19 crisis. Since its inception, UI benefits have been extended through special programs for federal, military and civilian workers.
Workers' Compensation is one of the oldest public support programs in the United States. The first iteration of the program was launched for some federal workers as early as 1908, with later expansions and state-level programs gradually growing the scope of the benefit. In 1949, the SSA was assigned responsibility for coordinating the federal component of Workers' Compensation, which by then had been adopted by all (then) 48 states.
The laws that govern Workers' Compensation vary enormously between states. Depending on the geographic location of the claimant, claims vary in payment amounts, term of payments and eligibility requirements. Workers' Compensation benefits are funded largely by employers and by workers themselves. The amount each contributes typically varies by state.
Workers' Compensation benefits are generally open to qualified workers who become sick or are injured as a result of their work. Beneficiaries may claim assistance for a short-term disability, such as injuries from a slip-and-fall accident, or they can use Workers' Compensation benefits as a stopgap while waiting for long-term disability approval, as in the case of permanent respiratory conditions and other chronic health problems.
Temporary Disability Insurance
Temporary Disability Insurance provides many of the same benefits as Workers' Compensation, but for beneficiaries whose health conditions are not related to their work.
Adoption of Temporary Disability is not universal across the United States, though many state governments manage a program in parallel with Workers' Compensation. In addition to state government programs, some industries have their own compensation programs, such as the national railroad industry.
Covered workers may claim benefits through the Temporary Disability program if they meet their state-level eligibility requirements. Benefit amounts are set by state laws, but they stay relatively close to Workers' Compensation benefits.
Applicants generally must have documentation of their medical need, combined with a work history that includes payroll contributions during a look-back window that may range up to two years prior to the filing of an initial claim. Covered health issues include any medical condition or injury not related to the beneficiary's occupation that nevertheless prevents the covered worker from performing normal job duties and earning regular income.
Health Insurance and Health Services
Medicare is one of two major federal health insurance programs.2 Open to most U.S. citizens aged 65 and over, the Medicare program operates as the largest health insurance program in the United States.
Medicare was not part of the original Social Security legislation in 1935, but it was later added to the administration as Title XVIII of the Social Security Act in 1965.
Medicare is available to seniors and permanently disabled beneficiaries under age 65 in two basic forms, Original Medicare and Medicare Advantage.
Original Medicare is delivered in four parts:
- Part A is open to seniors aged 65 and over who have worked and contributed to the program for at least 40 quarters, or 10 years, during their working lives. Part A pays much of the cost of inpatient hospital and clinical care for beneficiaries.
- Part B coverage generally pays for outpatient services and medical supplies for enrollees.
- Medicare Part D benefits pay for much of the cost of prescription drugs.
- Another part of Medicare, Part C, is also known as Medicare Advantage.
Medicare Advantage plans take the place of Original Medicare coverage for seniors who opt into a plan. Part C benefits differ by state, but all authorized plans must provide 100% of the same benefits available under Original Medicare Parts A and B, and they have the option of adding extra benefits as needed.
Extra services can include Part D prescription coverage, dental and vision benefits and some extra care services, such as rehab and alternative therapy care. Premiums and co-payments vary with the type of plan and the state where coverage is provided.
Medicaid is the second major health insurance program offered by the SSA. Like UI, Medicaid is a joint federal-state program. Each state administers its own Medicaid program and sets benefits and eligibility standards.
Eligible applicants are generally the medically needy whose income and assets fall between 100% and 300% of the Federal Benefits Rate, a national guide to means-tested poverty relief programs.3
Medicaid programs provide a basic level of health insurance for preventive care, medical treatments and palliative care. Medicaid pays for many of the same services employer-provided health insurance covers, while charging as little as $0 in premiums and co-payments.
Services, supplies and prescription medications are paid for according to a set schedule that tends to rise every few years, as directed by Congress.
Programs for Specific Groups
In addition to the general support programs administered by the SSA, the administration also operates several programs aimed at groups with specific needs. To be eligible for these programs, applicants must meet criteria set by Congress and interpreted by the SSA department assigned to the specific program.
Honorably discharged veterans may be eligible for either of two cash benefit programs. The first pays a disability stipend for veterans whose incapacity is attributable to their service, while the other is a special disability program for non-service illnesses and injuries.
Service-connected disability benefits are open to most veterans who leave their service with a disability related to their time in uniform, regardless of their financial status. Approval for non-service disability payments is conditional on the applicant meeting income and asset limits set by the SSA.4
Award amounts are subject to review by program administrators and are usually defined by the degree to which the veteran is disabled. Benefits are paid monthly to recipients, and they are transferable to surviving spouses and children.
Government Employee Retirement Systems
The Federal Employees Retirement System (FERS) covers retired federal workers who began their employment after January 1, 1984.5 This program pays benefits in a triple-tiered system.
The basic benefit is open to beneficiaries who have met the required service obligation to take federal retirement. Beneficiaries are able to claim an annuity that is paid in addition to the regular Social Security retirement pension.
A special payment plan is available to retired federal workers who qualify for retirement, but who have not yet reached the age of 65. This tier of the program pays a benefit that approximates a Social Security benefit until the recipient becomes eligible for Social Security.
The third tier of the FERS program is the Thrift Savings Plan, which operates as a tax-deferred savings program. Thrift Savings allows federal workers to save up to 10% of their pre-tax income, with matching government contributions up to 5% of the employee's salary, and earn interest until retirement.
Contributions and earned interest are both generally not taxable until withdrawn at retirement age.
In an odd holdover of how retirement benefits developed in the United States, Railroad Retirement pensions developed prior to the original Social Security Act of 1935, and the benefits paid under the program remain separate today.
From 1927, American railroad workers have been able to draw on a federally managed pension plan that parallels the later Social Security benefit Congress later adopted. Railroad Retirement became a separate adjunct to the main Social Security program in 1935 and 1937.
The Railroad Retirement program pays monthly benefits to retired and disabled former rail workers. Benefits are also available to surviving spouses and qualified children of deceased beneficiaries.
To qualify for a railroad pension, applicants must have worked for a designated national railroad carrier for a minimum period of time. Benefit amounts are similar in size to the monthly payments older adults are entitled to under the main Social Security retirement program.6
Some of the programs administered by the SSA are intended not for older adults or Americans with disabilities, but for economically distressed people and areas. Some of these benefits are direct cash aid, while others have developed as voucher programs or discounts for vital services.
As a rule, strict income and asset limitations apply to applicants who sign up for one of these means-tested programs, and the issuing agencies may attach requirements for the beneficiary to seek work or other sources of income as a condition of receiving aid.
Supplemental Security Income
In 1972, an act of Congress grouped together the nation's many pension and benefit programs for seniors, Americans with disabilities and economically needy citizens into a single national program. That program, Supplemental Security Income (SSI), provides a limited monthly cash benefit for indigent and financially limited beneficiaries.7
SSI is a joint federal-state benefit that applies a minimum federal benefit amount to each recipient, along with an extra payment provided at the state's discretion. Thus, beneficiaries in some states receive nearly double the amount similarly qualified recipients do in states with lower contribution totals.
Applications for SSI typically require verification of limited income and assets, along with a demonstration of financial need, which may be an income and expense report or even a visit to the applicant's home by a program worker.
Enrollment in SSI is conditional on limited income, and as a result many other social support programs accept current participation in SSI as proof of eligibility for other benefits.
Temporary Assistance for Needy Families (TANF)
Temporary Assistance for Needy Families (TANF) replaced the older Aid to Families with Dependent Children (AFDC) program in 1996. Commonly known as cash aid, or simply "welfare," TANF pays a monthly stipend to economically needy families to help meet their cash needs. Eligibility for TANF is based on the applying families' size, income and perceived need for cash aid.8
The Personal Responsibility and Work Opportunity Reconciliation Act of 1996, which created the program, contains strong requirements for work and incentives for states to ease beneficiaries into paid employment.
TANF project workers are expected to monitor beneficiaries' work hours, child support payment compliance (if applicable) and child welfare as needed. Funding is available under the program for child care in support of parents' efforts at work. Medicaid coverage is automatically extended to minor children whose families receive TANF benefits.
Benefit awards are generally limited to a term of two years, and parents are required to work a limited number of hours each week. Almost any kind of work is accepted by the program; public and private sector, subsidized and unsubsidized, and on-the-job training all count toward a beneficiary's work obligation.
Parents with children under age 6 are excused from the work requirement if they cannot find child care, while parents with children aged 12 months and younger are entirely excused from working.9
Supplemental Nutrition Assistance Program (SNAP)
SNAP is the federal food aid program that has replaced the older Food and Nutrition Assistance ("Food Stamp") program. SNAP money is provided by the USDA and flows through the SSA to state governments' own social services departments, where the program is directly managed by state and county officials.
SNAP benefits are paid out as a voucher, typically loaded onto an electronic debit card, that can be used only for the purchase of food items. SNAP benefits may not be used for any other purpose.
Benefit amounts are determined by beneficiaries' income and family size, with renewals every 2 to 5 years.10
Eligibility Guidelines for Social Security
As ubiquitous as the Social Security program has become, eligibility is not automatic for beneficiaries. Applicants for Social Security programs generally must meet program-specific guidelines.
In addition to these, all applicants for SSA programs must be U.S. citizens or permanent legal residents with certain residency requirements in the United States. Age, income and physical disability requirements may also apply to specific programs.
OASDI enrollment is open to seniors aged 62 and over, who have met lifetime employment requirements set by federal law. Eligible workers must have been employed for a minimum of 40 lifetime work credits.
A maximum of four credits may be earned in each year of work, with one credit assigned for each $1,320 in income. Thus, in 2018, a worker who earned as little as $5,280 earned the maximum four credits for the year. After 10 years of work, or 40 credits, workers are fully eligible for OASDI retirement benefits.11
Benefit amounts are calculated from the applicant's 35 best-paying years of work. Annual income is adjusted for inflation, with all sources of income considered for determination of benefits. The 35 years considered do not need to be contiguous to be counted together.
The SSA operates a similar set of requirements for workers who become permanently disabled prior to their retirement age. Ideally, disabled workers should have all 40 of their lifetime work credits earned prior to their application, but the SSA does not disqualify younger adults who may not have been able to earn all 10 years' worth of credits at the time they became disabled. The SSA applies a staggered scale for younger applicants, with as little as six credits needed for disabled workers under age 24.
Spouses of eligible seniors can also qualify for benefits if they meet certain criteria. If an applicant stayed at home during marriage and did not work much outside of the home, it is possible that not enough credits have been earned to qualify for OASDI benefits. In that case, the SSA may apply the working spouse's credits and income qualification to the spouse's benefits.
To meet program requirements, eligible spouses must have been married for at least 10 years to the spouse whose credits they're applying under. This does not affect the working spouse's own eligibility for benefits. This eligibility is available even to divorced former spouses, if the marriage otherwise meets the SSA's requirements.
Disqualifications for Social Security Benefits
Losing Social Security benefits can be a stark prospect, and as a rule the SSA is not eager to cut off benefits for older adults who may not be able to get back to work to support themselves. Sometimes it can't be helped, however, and certain conditions can cause a reduction or elimination of benefits under the program.
One disqualification that many beneficiaries look forward to is higher income. Certain SSA benefits, such as SSI, TANF and non-service veterans' disability, are means-tested, which imposes a maximum income cap on all recipients. As a beneficiary's income rises, it is possible to earn out of eligibility for the program and lose benefits.
A similar disqualification exists for Temporary Disability Insurance. In the event a beneficiary recovers sufficiently to return to employment, benefits may be reduced or canceled.
Spousal benefits may be altered or discontinued if the surviving spouse remarries. In this case, it is typical that a new benefit amount will be calculated based on the new spouse's credits and lifetime earnings.
Fraud is another potential cause for disqualification by the SSA. Knowingly submitting false information in order to qualify for or to increase benefits is a crime, and the SSA may impose a term of disqualification on top of any criminal penalties such acts can incur. The term of disqualification can be for life in some cases.12
Checking Your SSA Benefits
Average monthly benefits
OASDI benefits are calculated using a measure called "average indexed monthly earnings." This calculation summarizes the best 35 years of earnings beneficiaries had during their working lives. These earnings are indexed according to the general change in wages during the years under consideration to keep a standard metric for assigning value to credits earned.
Benefit amounts are adjusted according to the age at which a beneficiary retires. Older adults who retire at age 62, the youngest allowed age for OASDI benefits, generally receive less per month than beneficiaries who retire at age 65. Seniors who delay retirement to age 69 have their monthly benefit award increased accordingly. Deferred benefit increases are only available to age 69, with no additional premium paid for workers who retire beyond that age.
In 2018, the average OASDI benefit was $1,324.14 a month. The average disability benefit was $1,233.70 a month.13
Given the importance Social Security benefits have taken on for older adults, knowing what a likely benefit amount is likely to be can be an important part of retirement planning. Only a benefit award letter from the Social Security Administration can provide a definitive answer to what benefits have been earned, but it is possible to estimate likely benefits as a loose guide.
The Social Security Administration offers an online benefits calculator working adults of any age can use to get a rough estimate of their likely benefits if they take retirement at ages 62 (the minimum), 67 (standard retirement age) and 70 (the maximum age).14
How to Apply for Benefits
Seniors can apply for retirement, survivor, disability and other benefits online, at the SSA web portal.15 Applications can also be submitted over the phone by calling (800) 772-1213.
Seniors can also apply for cash benefits or Medicare/Medicaid coverage at any local Social Security office in the country.16 New applicants are encouraged to make an appointment prior to arriving at the office.
Seniors can first apply for OASDI retirement benefits at age 62, though the amount paid is likely to be less than the full amount that becomes available from age 67, or the enhanced amount offered to seniors who defer retirement to age 70.17 Prior to that, it is possible for some adults to qualify for disability benefits that are nearly equal to their full retirement benefit.
To qualify for OASDI payments starting at age 62, a retiring senior must be a U.S. citizen or permanent legal resident who has established at least 10 years of residence in the United States and paid into the Social Security payroll withholding system during their working life.
Qualified beneficiaries must have worked a minimum of 10 years and earned a minimum of 40 work credits for wages earned during a career. Disability applicants must have medical evidence of their inability to work in addition to the other requirements for OASDI.
Retiring at 62
Seniors first become eligible for the standard Social Security retirement option during the year when they turn 62. Seniors who choose to retire at this age can expect a 25% reduction in their regular OASDI benefits to make up for the extra 48 months they get paid before the standard retirement age of 66.
Seniors who retire and apply for benefits at age 65 typically receive 93.3% of their total award amount to make up for the extra 12 months they receive benefits. Seniors who defer until age 70, the maximum deferment age, can expect to receive up to 132% of their monthly benefit amount, owing to their 48-month deferral.18
Continuing to Work While on Social Security
Older adults can continue to work while collecting Social Security benefits, though benefit amounts may be temporarily reduced until full retirement age is reached.
Seniors who have not reached the full retirement age of 66 by the end of 2020 will have $1 deducted from their retirement benefit for every $2 they earn above $18,240 for the year. Seniors who reach their 66th birthday sometime during 2020 may see a deduction of $1 for every $3 they earn during that year above $48,600.
Older adults aged 66 and over may continue to work without deductions from their full retirement benefit.19
Questions You Might Have About Social Security
How do I check my Social Security benefits?
The Social Security Administration provides an online tool for adults who would like to estimate their likely benefits. Site users must input their name, Social Security number and some personal information and submit an inquiry. Results display likely estimated benefit totals for different retirement ages.20
What are the three types of Social Security?
The SSA offers financial support under three major program areas. Social insurance covers OASDI and several unemployment and disability programs. Health insurance includes Medicare and Medicaid. The third major program area is group-specific benefits for members of certain groups and citizens with special circumstances.
Can you collect Social Security at 66 and still work full time?
Seniors who choose to work beyond the full retirement age can still collect their full OASDI benefit each month. Benefit amounts can even increase beyond the statutory limit for seniors who continue to work until age 69, and who first apply for retirement benefits at age 70. Working seniors ages 62 through 65 can also receive benefits while they work, but award amounts may be temporarily reduced depending on annual earnings.
What is the official Social Security website?
The United States Social Security Administration operates an online hub at SSA.gov. Visitors to this site can get information about programs and projects, alerts about upcoming developments and applications for many of the SSA's benefits. The site also offers a convenient retirement calculator, benefits planners, fraud reporting and the ability to check application status as it updates.