Social Security

What Is Social Security?

Social Security is a U.S. federal program that pays monthly benefits to retired workers, to people with qualifying disabilities, and to certain family members of deceased workers. It was created by the Social Security Act, which President Franklin D. Roosevelt signed in 1935 during the Great Depression. The Social Security Administration runs the program. Its core retirement, survivor, and disability components are often called Old-Age, Survivors, and Disability Insurance. It is separate from Medicare, the federal health insurance program.

How It Is Funded

Most of the program is financed through payroll taxes under the Federal Insurance Contributions Act (FICA). Employees and employers each pay a share of wages, and self-employed people pay both shares through the self-employment tax. Contributions are not held in individual accounts for each worker. Instead, they flow into trust funds that pay current beneficiaries, a structure known as a pay-as-you-go system. Taxes apply only to earnings up to an annual wage cap that is adjusted over time.

How Benefits Are Determined

Benefits depend on a worker's lifetime earnings. Workers earn credits as they work and pay in, and most need 40 credits, roughly ten years of covered work, to qualify for retirement benefits. The Social Security Administration averages a worker's indexed earnings over their career and applies a formula that replaces a larger share of earnings for lower-paid workers. Retirement benefits can begin as early as age 62, but claiming early results in a permanently smaller monthly check. Delaying benefits past full retirement age increases the monthly amount, up to age 70.

Why It Matters to Investors

For many retirees, Social Security is a major source of income, and it is generally regarded as a lifetime income stream that is adjusted for inflation through cost-of-living adjustments. Because the expected benefit reduces how much savings a person may need, it is often one input in retirement planning. Social Security benefits are set by law rather than market prices, and they cannot be bought, sold, or invested like other assets. Its long-term financing and benefit rules are debated in Congress, and any future changes could affect the benefits people receive.