Understanding Social Security Benefits: Types, Eligibility, and History

What Are Social Security Benefits?

Social Security benefits provide income to retired workers, people with disabilities, and their eligible spouses, children, and survivors. Established under the Social Security Act of 1935, the program, formally known as the Old-Age, Survivors, and Disability Insurance (OASDI), offers partial income replacement to promote financial stability.

Administered by the Social Security Administration, benefits are determined by factors like work history, earnings, and eligibility criteria, making it vital for recipients to understand how the system supports them throughout life's stages.

Understanding the Mechanics of Social Security Benefits

President Franklin Roosevelt signed the original Social Security Act into law in 1935. The current law, after a number of amendments, encompasses several social insurance and social welfare programs, including the issuance of Social Security benefits. Benefits are determined by a specific set of criteria issued by the Social Security Administration (SSA).

Payroll taxes under the Federal Insurance Contributions Act (FICA) or the Self Employed Contributions Act (SECA) (for self-employed individuals) fund Social Security and all of its benefits.

The Internal Revenue Service (IRS) collects tax deposits and formally entrusts them to the Social Security Trust Fund, which is actually made up of two separate funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance Trust Fund.

Eligibility Criteria for Social Security Benefits

You qualify for Social Security old age (or retirement) benefits by paying into the program during your working years. Full insurance is based on accumulating 40 quarters or "credits" from covered wages, and a worker can earn up to four credits a year. One credit is awarded for every $1,730 in earnings for 2024 (and $1,810 in 2025), an amount that is adjusted annually to keep up with inflation.

A payroll tax cap sets the maximum amount of earned income that is subject to the Social Security payroll tax. The payroll tax cap in 2024 is $168,600 (and rises to $176,100 in 2025).

The SSA keeps track of your earnings throughout your career, indexes each year's total earnings, and uses the 35 highest-earning years to determine your average indexed monthly earnings (AIME). Next, your AIME is used to arrive at your primary insurance amount (PIA), the monthly amount you can begin to collect when you reach full retirement age.

For individuals born in 1938 or later, the full retirement age gradually increases from 65 until it hits 67 for those born after 1959. You can collect Social Security retirement benefits at age 62, but the amount of the benefit will be reduced to compensate for receiving it earlier and, presumably, for a longer period of time.

In 2024, the maximum monthly Social Security payment for retired workers is $3,822, rising to $4,018 in 2025. The SSA’s retirement calculators can help you determine your full retirement age, the SSA’s estimate of your life expectancy for benefit calculations, rough estimates of your retirement benefits, actual projections of your retirement benefits based on your work record, and more. Retired adults with non-FICA or SECA-taxed wages will require additional help because rules for those individuals are more complex.

Exploring Different Types of Social Security Benefits

Spousal Benefits

Spouses who didn’t work or who didn’t earn enough credits to qualify for Social Security on their own can receive benefits starting at age 62 based on their spouse’s work record. Similar to claiming benefits on one's own record, a spouse's benefit will be reduced if they claim benefits before reaching full retirement age. The highest spousal benefit someone can receive is half the benefit their spouse is entitled to at their full retirement age.

Survivor Benefits

A surviving spouse can file for a survivor's benefit at age 60, but the benefit is reduced if claimed before full retirement age. They are permitted to switch to their own benefit at any point they wish starting at age 62 and through age 70 if that benefit is higher than the survivor's benefit.

People who were married for 10 years or longer—and are divorced and have not remarried—are entitled to collect the spousal benefit and the spousal survivor benefit. The rules are complicated so review them carefully.

Important Considerations for Maximizing Social Security Benefits

If an individual taxpayer's income exceeds $25,000, or a married couple filing jointly has income that's more than $32,000, they will be required to pay taxes on their Social Security benefits.

The portion of benefits that is subject to taxation depends upon income level, but no one pays taxes on more than 85% of their Social Security benefits, regardless of income. Benefits received due to disability are, in most cases, tax-free. If your child receives dependent or survivor benefits, this money does not count towards your taxable income.

The Bottom Line

Social security provides essential income for retirees, people with disabilities, and families of eligible workers. Benefits depend on credits, income, and claiming age, with higher payouts for those who wait until 70.

The program also offers spousal and survivor benefits, annual cost-of-living adjustments, and potential tax implications, making it essential to plan carefully to maximize lifetime benefits.