Learn About Earnings and Social Security Benefits

Understanding Social Security: What It Is and How It Works

Social Security is a federal insurance program that has been operating in the United States since 1935. The program collects money from workers' paychecks during their working years and uses that money to pay benefits to people who are retired, disabled, or whose family members have passed away. According to the Social Security Administration, about 67 million Americans receive Social Security benefits each month, making it one of the largest social programs in the country.

The way Social Security works is straightforward: employers and employees each contribute a portion of wages to the Social Security trust fund. Self-employed individuals contribute both portions. These contributions are known as payroll taxes, and they amount to 12.4% of earnings for employees and employers combined (6.2% each). The money collected goes into two trust funds: one for retirement and one for disability and survivor benefits.

When you work and pay Social Security taxes, you earn credits toward future benefits. In 2024, you earn one credit for every $1,705 in wages you make, up to a maximum of four credits per year. To be eligible for retirement benefits, you typically need 40 credits, which most people earn by working about 10 years. However, younger workers who become disabled or pass away may be able to receive benefits with fewer credits.

The program is designed as an earned benefit, not a handout. Your future benefit amount is based on your lifetime earnings record. The Social Security Administration keeps track of all your earnings, and your benefit is calculated using a formula that looks at your 35 highest-earning years. If you worked fewer than 35 years, zeros are used in the calculation, which lowers your benefit amount.

Practical Takeaway: Understanding that Social Security is an insurance program you pay into during your working years helps you see it as part of your overall retirement planning. Keep track of your earnings history by creating a my Social Security account at ssa.gov, where you can view your earnings record and verify it is correct.

Types of Social Security Benefits You May Receive

Social Security offers several different types of benefits, and understanding each one can help you plan for your future. The most common type is retirement benefits, which people can start receiving at different ages. You can begin receiving reduced retirement benefits as early as age 62, but the amount will be smaller than if you wait. If you wait until your full retirement age—which ranges from 66 to 67 depending on your birth year—you receive your full benefit amount. If you delay benefits until age 70, your monthly benefit increases by about 8% for each year you wait.

Disability benefits are available to workers of any age who have a serious medical condition that prevents them from working. Unlike retirement benefits, there is no minimum work history required for young workers to receive disability benefits, though some work credits are still needed. In 2024, the average disability benefit was about $1,550 per month. Family members of a disabled worker—including spouses and children—may also receive benefits based on that worker's record.

Survivor benefits are paid to family members when a worker dies. These benefits can go to a surviving spouse (including at any age if caring for a child under 16), children under 19 (or 19 if still in high school), and dependent parents over 62. The total amount a family can receive is limited—typically 75% to 180% of what the deceased worker was receiving or would have received. In 2024, the average survivor benefit for a family was approximately $3,800 per month total.

Supplemental Security Income (SSI) is a different program that provides monthly payments to people with low income who are 65 or older, blind, or disabled. SSI is not based on work history but rather on financial need. In 2024, the maximum SSI payment was $943 per month for an individual. Many people confuse SSI with Social Security disability benefits, but they are separate programs with different rules.

Practical Takeaway: Visit the Social Security Administration website to read about each benefit type and see examples of monthly payment amounts. Understanding which types of benefits might be relevant to your situation—whether you are planning for retirement, dealing with a disability, or have family members who depend on your income—helps you think about your long-term financial needs.

How Earnings Affect Your Social Security Benefits

Your lifetime earnings are the foundation for calculating your Social Security benefit amount. The Social Security Administration uses a complex formula, but the basic idea is simple: the more you earned during your working years, the higher your benefit will be. Your benefit is calculated based on your 35 highest-earning years of work. If you worked more than 35 years, the lowest-earning years are dropped from the calculation. If you worked fewer than 35 years, zeros are included in the calculation, which reduces your benefit amount.

For someone born in 1943 or later, the full retirement age ranges from 66 to 67. The average retirement benefit in 2024 was about $1,907 per month. However, benefits vary widely. A worker with high lifetime earnings might receive $3,822 per month (the maximum benefit in 2024), while someone with low lifetime earnings might receive around $886 per month. This variation shows how significantly your earnings history affects your benefit.

One important detail is that Social Security benefits are adjusted for inflation each year. In 2024, Social Security benefits increased by 3.2% from the previous year, a cost-of-living adjustment (COLA) designed to help benefits keep pace with rising prices. This means that even if you do not work anymore, your benefit amount grows each year to maintain its purchasing power.

If you worked for a government agency that did not withhold Social Security taxes—such as certain state or local employees—your retirement benefits may be reduced by two rules: the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP). The WEP can reduce your Social Security benefit by up to 50% of your government pension, and the GPO can reduce spousal or survivor benefits. These rules affect a much smaller portion of the population but are important to know if you have a government pension.

Practical Takeaway: Create a my Social Security account at ssa.gov to view your earnings history and benefit estimate. Review your record every few years to check for errors—mistakes in reported earnings directly reduce your calculated benefit. If you find an error, you can contact Social Security to request a correction, though you generally have a time limit to do so.

Earnings After You Start Receiving Benefits

Many people continue working after they begin receiving Social Security benefits, or they wonder whether working will affect their benefits. The rule is called the Earnings Test, and it only applies to people who have not yet reached their full retirement age. If you are younger than your full retirement age and you earn income from work, your benefits will be reduced by $1 for every $2 you earn above an annual limit. In 2024, that limit is $23,400. In the year you reach your full retirement age, the reduction is $1 for every $3 earned above $62,400, but this only applies to earnings before the month you reach full retirement age.

Once you reach your full retirement age, the Earnings Test no longer applies, and you can earn as much as you want without any reduction in your Social Security benefits. This is true whether you earn the money from employment, self-employment, or investments. The rule changes completely at full retirement age—there is no limit on earnings and no reduction in benefits.

Some people worry that working while receiving benefits means they are "taking" benefits they did not earn. This is a common misconception. If your benefits are reduced because of the Earnings Test before your full retirement age, Social Security does not forget those months. When you reach your full retirement age, Social Security recalculates your benefit to account for the months your benefit was reduced. In many cases, this results in a slightly higher monthly benefit later on—the system is designed to be roughly neutral over your lifetime.

Self-employment income is also subject to the Earnings Test. If you are self-employed and have not yet reached your full retirement age, you must count your net self-employment income (after deducting business expenses) against the annual earnings limit. However, there is a special rule: if you are self-employed and work less than 45 hours per month in your business, your income is not counted for the Earnings Test.

Practical Takeaway: If you plan to work while receiving