Social Security

Also called OASDI, Old-Age, Survivors, and Disability Insurance

The federal program that pays retirement, disability and survivor benefits, funded by payroll taxes on workers’ earnings.

What it means

Social Security is a U.S. government insurance program. Workers and employers each pay a payroll tax of 6.2% on wages up to an annual cap, and self-employed people pay both halves. Workers generally need 40 credits, roughly ten years of work, to qualify for retirement benefits.

The monthly benefit is based on a person’s highest 35 years of earnings, adjusted for wage growth. Benefits can start as early as 62, but claiming before full retirement age, which depends on birth year, permanently reduces them, while delaying past full retirement age raises them until 70. Benefits receive annual cost-of-living adjustments, and some benefits may be taxable depending on income.

Example

Suppose a worker’s estimated benefit at full retirement age is $2,000 a month. Claiming early would lock in a smaller check for life, while waiting until 70 would produce a larger one; the exact percentages depend on birth year.

How it’s used

Deciding when to start retirement benefits
Planning spousal and survivor benefits
Estimating baseline retirement income

Strengths and weaknesses

Strengths

Lifetime income that rises with cost-of-living adjustments
Includes disability and survivor protection
Benefits are backed by the federal government

Weaknesses

Usually replaces only part of pre-retirement income
Claiming early permanently reduces the monthly benefit
Future benefit levels depend on how Congress addresses the program’s funding

Good to know

A personal earnings record and benefit estimate are available from the Social Security Administration; checking it for missing years can prevent errors.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.