What Is Social Security?

Definition and Example of Social Security

Social Security is a federal benefits program that pays benefits to retirees and workers who are disabled, as well as their family members and survivors.

• Alternate name: Old-Age, Survivors, and Disability Insurance Program
• Acronym: OASDI

For example, workers who have paid into Social Security for at least 10 years are generally eligible to receive Social Security reduced retirement benefits when they turn 62 years old and full benefits if they elect to wait until the reach full retirement age (which depends on when they were born).

How Social Security Works

Social Security is financed through a 12.4% tax split among employers and employees; self-employed individuals pay the entire 12.4%. This tax money is deposited into the two Social Security trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund.

The Social Security Administration pays current benefits and administrative costs out of these trust funds. Unused money is left in the trust funds and invested in Treasury bonds.

Types of Social Security Benefits

Although Social Security is perhaps best-known as a retirement program for older Americans, it also pays benefits to individuals outside that demographic.

Social Security Retirement Benefits

As a worker earns income during their working years, they earn up to four Social Security credits per year. Forty credits are typically required to receive retirement benefits. So, in general, if someone has worked and paid into Social Security for at least 10 years, they will be eligible for Social Security retirement benefits.

The amount of retirement benefits a retiree receives depends on their inflation-adjusted lifetime earnings as well as how old they are when they choose to begin receiving benefits.

Although individuals may be able to begin receiving Social Security retirement benefits at age 62, they will receive lower payments than if they wait until their full retirement age. A worker’s full retirement age depends on when they were born.

On the other hand, if a worker chooses to delay receiving retirement benefits until after they reach full retirement age, their future retirement benefits will increase with each month of delay until they turn 70 years old.

Social Security Disability Benefits

Social Security also issues benefits to workers of all ages who can no longer work due to a chronic or fatal condition, either mental or physical.

Similar to retirement benefits, Social Security has employment requirements for disability benefits, as well. These include the individual’s age at the time they became disabled, how long they worked in the three to 10 years prior to becoming disabled, and how long they worked in total before becoming disabled.

To receive disability benefits, you must have worked for a minimum amount of time in the three to 10 years before becoming disabled, including the quarter in which you became disabled. This is known as the recent work requirement.

In addition to the recent work requirement, an individual must have worked a certain number of years in their entire lifetime to be eligible for Social Security disability benefits. This requirement is called the duration of work requirement.

To meet the duration of work requirement, an individual would subtract the year they turned 22 from the year in which they became disabled to derive the number of quarters of work required.

For example, let’s say you were born in 1980 and turned 22 in 2002. If you became disabled in 2020, you would subtract 2002 from 2020 to arrive at 18. In this case, you generally would need to have worked at least 18 quarters (4.5 years) to satisfy the duration-of-work requirement.

Social Security Benefits for Families

When a Social Security beneficiary starts receiving retirement or disability benefits, members of their family may be eligible to receive benefits, as well. Family members can receive up to 50% of the beneficiary’s benefits with total family limits ranging from 150% to 180%.

A relative’s eligibility for benefits depends on their relationship to the beneficiary and possibly other factors, such as their age, disability status, marital status, student status, and childcare responsibilities.

Social Security Benefits for Survivors

Upon a Social Security beneficiary’s death, their surviving family may be eligible for benefits. These are called survivors benefits.

Generally, survivors receive 75% to 100% of the beneficiary’s basic Social Security benefit with total family limits ranging from 150% to 180%.

A survivor’s eligibility for benefits depends on their relationship to the deceased beneficiary and possibly other factors such as their age, disability status, marital status, dependency status, student status, benefits status, and childcare responsibilities.

Social Security vs. Supplemental Security Income

Sometimes people confuse Social Security and Supplemental Security Income (SSI). While both programs are administered by the Social Security Administration, they are intended for different groups of people and are financed in different ways.

Social Security, for example, pays out benefits to individuals, their families, and their survivors based on how long that individual worked without respect to need.

SSI, on the other hand, is needs-based and not based on an individual’s work history.

Criticism of Social Security

A primary criticism of Social Security is that at some point in the future—perhaps as early as the year 2034—the Social Security trust funds will no longer be able to pay full benefits scheduled under current law.

Although the trust funds’ projected shortfalls are typically attributed to lower birth rates and increased life expectancies for workers, some groups criticize the management of the trust funds themselves.

The Social Security Advisory Board, for example, has pointed out that the trust funds are invested solely in Treasury bonds, which have historically underperformed compared to the stock market. The board noted that if the trust funds were invested in stocks, the heightened returns could significantly mitigate their projected funding shortfalls.