Social Security: How Does It Work and What Are My Retirement Benefits?

Shawn Plummer

CEO, The Annuity Expert

Social Security is one of the most important benefits that Americans receive. It is a vital source of income for retirees, and it is important to understand how it works to get the most out of it. This guide will discuss Social Security basics – including how it works and what benefits are available. We will also provide tips on maximizing your retirement income from Social Security.

What do most retirees love about Social Security?

A few popular answers include:

  • “Reliable income that pays until I die,”
  • “It might go up, but it won’t go down,”
  • “The federal government backs it.”

And while Social Security continues to be one of the most popular government programs, it is not without its limitations. For example, the lack of a death benefit, a complicated set of filing options, and, in some cases, an irrevocable decision process means that clients need to take extra care in electing when and how to take Social Security benefits.

What Is Social Security And How Does It Work?

Social security is a government-sponsored program that provides financial assistance to older Americans. The program is funded through payroll taxes, and eligible individuals receive benefits based on their work history and earnings. Benefits can be used to cover basic living expenses, such as housing and food, and help pay for medical care. In addition, social security provides survivor benefits to deceased workers’ family members and disability benefits for workers who cannot return to work due to an injury or illness. While the program is not perfect, it has helped improve millions of Americans’ lives and continues to be an important safety net for those in retirement.

How is Social Security Calculated?

To receive a Social Security retirement benefit, a worker must have accumulated enough credits to be entitled to a benefit. Qualification for Social Security was based on coverage quarters, now known as credits.


A credit is earned every quarter in which earned income exceeds the applicable requirement, and the worker contributes to Social Security. A maximum of four credits can be earned in a year. Once 40 credits have been earned, the worker qualifies for a Social Security benefit. It did not matter when the qualification occurred.

Qualifications for other benefits are based on different criteria and are a topic for a different day.

Primary Insurance Amount

A worker’s retirement benefit is based on the primary insurance amount (PIA). The worker’s monthly benefit is payable at full retirement age (FRA). Full retirement age changes depending on the worker’s birth year.

  • The full retirement age is 66 for those born between 1943 and 1954.
  • For those born between 1955 and 1959, the full retirement age increases by two months yearly.
  • For those born after 1964 full retirement age is 67.

Payments that begin either before or after full retirement age will decrease or increase, respectively.

The PIA is determined by multiplying each year’s earnings up to the maximum Social Security wage base by an inflation factor, aggregating the 35 highest years divided by 420. This gives the average indexed monthly earnings.

Different percentages at different bend points are then applied to this number to give the PIA. The calculation is complex, but Social Security Administration has personnel and tools to assist you in the calculation.

Because of the complexities involved in determining Social Security eligibility, it is essential to consider those rules in light of your circumstances. For additional information, please go to

Social Security Full Retirement Age

Year of BirthFull Retirement Age
1937 or earlier65
193865 and two months
1939 65 and four months
1940 65 and six months
1941 65 and eight months
1942 65 and ten months
1943-1954 66
1955 66 and two months
1956 66 and four months
1957 66 and six months
1958 66 and eight months
1959 66 and ten months
1960 or later 67

How To Apply for Social Security

Generally speaking, you can claim your social security retirement benefit between the ages of 62 and 70. The earlier you take your benefit, the lower it will be. The longer you wait to claim your benefit, the higher it will be.

The decision is important because, with limited exceptions, it cannot be changed once the benefit begins. Workers’ social security retirement benefit is based on their full retirement age or FRA. Claiming early will allow your benefit to begin earlier but will result in reduced benefits.


For example, if you claimed your social security as soon as possible, at age 62, you would see a 25% reduction in your benefit and receive $750 a month. On the other hand, if you delay claiming your benefit, it will grow by 8% simple interest each year until you reach age 70. Based on our example, if you claim at age 70, you would receive 132% of your benefit, or $1,320 a month.

Because there is no one-size fits approach to claiming your benefits, it is crucial to consider these rules in light of your circumstances.

Is Social Security An Annuity?

Technically, Social Security is not an annuity, but the income payments work similarly to an annuity.


The similarities between Social Security and annuities are:

  • Pay an income for the rest of a retiree’s life.
  • Support a surviving spouse at the time of a retiree’s death
  • The income can increase with inflation.
  • It provides a higher income payout the longer you wait before starting the income.


The differences between Social Security and annuities are:

  • Annuity income can be paid over a fixed period of time. Social Security can not.
  • Annuity owners have more control over how much income they can generate. There is no control over Social Security.
  • The death benefit from an annuity can be in a lump sum, a series of payments, or a spousal continuance. Social Security provides a series of payments only.
  • Annuities can help pay for long-term care expenses. Social Security can not.

Social Security Benefits For A Spouse

Married couples are faced with more Social Security options than a single person. In addition to being entitled to their benefit, a spouse can also take a spousal benefit based on their spouse’s work record. With limited exceptions, the general rule is that the spouse is entitled to either their benefit or their spousal benefit, whichever is greater.

Let’s look at how the spousal benefit is calculated.

The baseline spousal benefit is 50% of your spouse’s Social Security benefit that they would receive at full retirement age or FRA. You must be 62 years old to claim a spousal benefit, and your spouse must have claimed their benefit.

It’s important to note that your spousal benefit can be reduced if you take it before your FRA but cannot be increased due to delaying your claim past your FRA.


The husband is 66 and receives a monthly Social Security benefit of $1,000. His wife is 62. If she waits until she is 66 to claim a spousal benefit, she will receive 50% of her husband’s benefit at his FRA, or $500 a month. However, if she takes her spousal benefit at age 62, she will reduce her benefit to $350 a month. As stated earlier, there is no additional benefit to the wife for deferring past her own FRA to claim a spousal benefit under her husband’s record.

Social Security Survivor Benefits

In addition to claiming your or your spouse’s record while living, a widow can also claim the deceased spouse’s record. A survivor’s benefit can be claimed by the widow or widower as early as age 60 but on a reduced basis. Much like a spousal benefit, the survivor benefit can be reduced if claimed early but cannot be increased by the survivor deferring past their full retirement age or FRA.

Example: Let’s assume that your FRA is age 66. The survivor benefit available to you at your FRA would be 100% of what your deceased spouse received if they claimed their benefit. In other words, when one spouse delays claiming their benefit until after their FRA, they not only receive a higher benefit for themselves but that higher benefit will be available to their surviving spouse if it’s higher than what the surviving spouse is then receiving.

How to Offset Lower Social Security Benefits When Spouse Dies

What happens to a retired couple’s Social Security benefits when a spouse dies?

The surviving spouse can either get the survivor or their retirement benefit, but not both. Social Security will pay whichever is higher.

One way to offset a decline in future Social Security benefits is with a lifetime income annuity. An income annuity can cover one person or both spouses.

Joint Annuity Payments

If you get a joint annuity, it pays the same amount even after your spouse dies. The significant advantage is that it will help with money if Social Security is not as much.

You can either have an annuity that will give you money right now or one that will give you money in the future. For example, with deferred income annuities, you choose when the payments start.

A lifetime income annuity could also provide a raise in future income to keep up with inflation and offset lower Social Security benefits if one of them has passed in the interim.

Social Security Taxes

One of the most common misconceptions regarding social security benefits is that they are not subject to federal income tax. This is true in some cases. However, for many of us, our social security benefits will be subject to some amount of tax.

The amount of your social security benefit that is taxed depends upon the amount of your combined income. To calculate this value, you combine your adjusted gross income, non-taxable interest, plus 50% of your social security benefits.

Filing Taxes as an Individual

  • If you are filing your taxes as an individual and your combined income is less than $25,000, you will not have to pay taxes on any of your social security benefits.
  • If you are filing your taxes as an individual and your combined income is in-between $25,000 and 34,000, you will have to pay taxes on 50% of your benefits.
  • If you file your taxes as an individual and your combined income is more than $34,000, 85% of your benefits will be subject to tax.

Filing Taxes Jointly

  • Married couples filing jointly with a combined income of less than $32,000 will not have to pay income taxes on their benefits.
  • Married couples filing jointly with a combined income between $32,000 and $44,000 will have to pay taxes on 50% of their social security benefits.
  • Married couples filing jointly with a combined income over $44,000 will have 85% of their social security benefits subject to tax.

Note*– This is the amount of social security subject to taxation, not the actual tax rate itself.

The number of benefits included in taxation will be subject to ordinary income at your marginal rate. However, it’s worth noting that non-taxable withdrawals and loans from a life insurance policy do not count towards one’s combined income for social security taxation purposes.

Social Security Tax Calculator

This SS calculator can help you determine how much of your Social Security benefit is taxable. For those with modest or low incomes, none of their Social Security benefits is taxable.

Social Security and Divorce

If you’re divorced, you may claim on your ex-spouse’s record as long as you meet the following criteria.

  • You’re 62 years old or older.
  • You were married to that person for ten years or more.
  • You’re currently unmarried.

You can claim even if your ex-spouse has remarried, regardless of whether the ex-spouse is claiming their own benefit, assuming you’ve been divorced for two years or more.

As a reminder, the benefit we are discussing here is the same as the spousal benefit. 50% of what your ex-spouse would have received at their full retirement age (FRA), reduced if you claim on their record before your own FRA.

Similarly, you can claim a survivor benefit on a former spouse so long as you are

  • married for at least 10 years,
  • you are 60 years old or older,
  • or you are disabled and 50 years old or older.

The government also allows you to remarry and still claim your ex-spouse’s survivor benefit so long as you remarry after age 60.

Generally, your survivor benefit will be 100% of your deceased former spouse’s social security benefit at death.

Maximum Social Security Benefit

Many social security recipients receive reduced retirement benefits simply because they started their benefits before their normal retirement age. However, every month you delay up to age 70 will increase your monthly benefit. In fact, every year that you delay after your normal retirement age, up to age 70, will increase your annual benefit by 8% simple interest each year for your lifetime and the lifetime of your surviving spouse.

Taking Benefits Too Early

Unfortunately, a lack of other financial resources or an unexpected financial hardship may force you to start your benefits early. However, suppose your circumstances improve, and you no longer need to continue to receive your social security benefits. In that case, there are two methods in which you can stop your benefits and let them continue to grow.

Application Withdrawal

A withdrawal of application allows canceling your application for up to 12 months after your benefits begin. This is not a decision to make lightly.

You will have to repay all the benefits you and your family received, including any Medicare premiums deducted, and you will need the consent of any other family members who have been receiving benefits on your record, other than a divorced spouse, since their benefits will be stopped, as well.

Please note that this is a withdrawal of your application for social security only. Withdrawal from Medicare is not recommended.


You may suspend your benefit payments once you reach your normal retirement age up until age 70. If you suspend your payments, any benefits being paid to other family members on your record will also be suspended, other than a divorced spouse’s.

If you’re on Medicare, your Medicare part B premiums will no longer be deducted, and you will be billed separately for those premiums.

Both a withdrawal and a suspension will ultimately result in a higher benefit payment to you over your lifetime and the lifetime of your surviving spouse.

Social Security Fake News

You stop paying taxes at age 90.

This is false. The amount known as combined income is the sole element in determining to what extent social security benefits are taxed. Age is not a factor.

You cannot claim Social Security Benefits if you’ve never worked.

This is also not true. While you may not have qualified as insured under your own work record or lack thereof, you may still claim under your spouse’s work record if:

When a spouse dies, the widow will receive BOTH your and your spouse’s benefits.

This one is also false. The survivor benefit you were entitled to receive is the greater of the two, but not the combination of the two. While this preserves the greater of the two Social Security benefits, survivors may lose an important part of their income stream when their spouse dies. As a result, it may make sense to plan and create an additional pool of money to protect the surviving spouse from that loss of income.

Frequently Asked Questions

Social Security Questions

Below are answers to questions commonly asked.

Will I get Social Security when I retire?

  • According to the Social Security Administration website, social security benefits are projected to be fully payable until 2035 (as of April 22, 2019,
  • Social Security is politically sensitive. Older voters – those receiving Social Security benefits – have very high voter turnout rates. Politicians are unlikely to reduce benefits for those receiving or about to receive. Changes are more likely to affect future recipients.
  • At some point, inaction will be too risky. In 1983, Social Security was thought to be months from running a deficit. Democrats and Republicans came together to make changes that could sustain the system for several more decades. In 2015 the Bipartisan Budget Act included a section to “close Social Security loopholes.” Demographic trends continue to work against the system’s finances, and further changes will be necessary.

If you are retiring in the next decade, many experts think you can plan to receive your full Social Security benefit payments. Although tax and benefit changes are most likely to affect younger workers, you still may wish to use conservative assumptions in planning how to use future Social Security benefits.

A solution that creates a financially sustainable system is likely because of the potentially catastrophic impact of doing nothing. The program’s scope, the number of people who rely on it as their main source of income, and the range of options for addressing financial shortfalls should eventually spur action to make improvements.

When should I take my Social Security?

  • Qualifying workers born before 1938 are eligible for full benefits (their “full retirement age” in Social Security jargon) at age 65. For anyone born between 1943 and 1954, full benefits begin at age 66. As the chart on the next page shows, the eligibility age goes up gradually with the year of birth, topping out at age 67 for anyone born after 1960.
  • Those who wait until after full retirement age to start receiving payments receive annual benefit increases. Benefits go up 7-8% each year a worker waits (up to age 70) after qualifying for full benefits.
  • Benefits can be received as early as age 62. Payments are reduced by about 6% annually for each year benefits are received before the worker’s full retirement age. For example, someone receiving Social Security at age 62 with a full retirement age of 66 would find their benefits about 25% lower than their full retirement age benefit.
  • If you receive Social Security payments before your full retirement age and continue to work, your benefits will be reduced. Benefits are reduced by $1 for every $2 you receive above a preset limit, which adjusts annually. Once you reach the full retirement age, you can receive benefits with no limits on earnings.

Maximize Social Security Retirement Calculator

The key to a comfortable retirement is having a steady income that you can rely on. For many people, that income comes from Social Security. However, maximize your benefits by timing your retirement around annuities. Annuities provide a guaranteed retirement income for the rest of your life, so you can time your retirement at the perfect age. Use our calculator to determine when both Social Security Income and annuity lifetime withdrawals provide the perfect retirement income. That way, you can relax and enjoy your golden years without worrying about money.

Next Steps

An annuity may be a great option if you’re like many people and are looking for ways to supplement your Social Security income. Contact us today for a free quote, and we can help you get started on the path to a more secure financial future.

What Is Social Security And How Does It Work? How To Retirement Income With Social Security Benefits. Is Social Security Taxed?

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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