How Social Security Works

Retirement Benefits


To receive most Social Security retirement benefits, a person must be "fully insured," which simply means that he or she has worked for a long enough time and has put enough money into the system. This is tracked using credits: You receive one credit for each quarter-year you work. So if you work for an entire year, you earn a total of four credits. To be eligible for retirement benefits, you need 40 credits. Since you can't earn more than four credits per year, you have to work for at least 10 years to ensure full eligibility. You have to earn a certain amount of money each quarter to get a credit for that quarter. This amount increases each year to adjust for inflation. In 2003, it was $890.

Workers can start collecting Social Security retirement funds when they turn 62. However, this is the early retirement age -- the full retirement age depends on when you were born. For instance, if you were born between 1943 and 1954, you receive full benefits if you retire at age 66. If you were born in 1960 or later, your full retirement age is 67.

Drawing benefits at 62 results in an approximate 20 percent reduction in benefits received. The benefits are permanently reduced -- that is, they won't go back up once you reach your full retirement age. While you're working, your future benefit amount increases the closer you get to full retirement age. It is possible to increase your benefits by delaying retirement past full retirement age -- benefits will continue to increase until you turn 70. In addition to the increase you get simply from delaying retirement, the added years of earnings will also increase your benefits.

Once you reach full retirement age, you can receive your full retirement benefit amount. This amount is based on your earnings over your entire working lifetime. People who earned more will get more back. However, the system is skewed so that lower-income workers will receive a higher percentage of their former wages than higher-income workers.

Benefits are also subject to annual cost-of-living increases based on the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers). These adjustments are based on the price of goods purchased by approximately 32 percent of U.S. workers [ref] and average between 3 and 4 percent each year.

It is important to note that social security retirement benefits are not intended to be anyone's sole source of income (although this sometimes turns out to be the case -- see previous section). Social Security benefits will generally average out to about 42 percent of your former wages. Personal savings and other other retirement funds are expected to make up the rest.

Retirement benefits don't only go to the retired worker. Certain family members of the retired worker can also receive benefits, including:

  • a spouse over age 62
  • a spouse of any age who is caring for a child under age 16
  • a spouse of any age who is caring for a child who was disabled prior to age 22
  • a divorced spouse over age 62 if the marriage lasted 10 years or more
  • unmarried children under age 18 or still in high school
  • children who were disabled before age 22