Social Security
Quick Definition
A federal program providing retirement income, disability benefits, and survivor benefits funded through payroll taxes.
Key Takeaways
- Delaying benefits past full retirement age increases payments by 8% per year up to age 70
- Benefits are based on your 35 highest-earning years — zero-income years reduce the average
- Up to 85% of Social Security benefits may be taxable depending on total income
- Social Security replaces about 40% of pre-retirement income — additional savings are essential
What Is Social Security?
Social Security is the United States' largest social insurance program, formally known as Old-Age, Survivors, and Disability Insurance (OASDI). Funded through the 12.4% payroll tax (split equally between employer and employee at 6.2% each) on wages up to $176,100 (2026), it provides retirement benefits, disability income, and survivor benefits. Retirement benefits are based on the 35 highest-earning years and are available as early as age 62 (with reduced benefits), at full retirement age (66-67 depending on birth year), or delayed until age 70 (with enhanced benefits of 8% per year of delay). Social Security replaces approximately 40% of average pre-retirement income, making it the foundation — but not the entirety — of most Americans' retirement plans.
Social Security Example
- 1Claiming Social Security at 62 instead of 67 (full retirement age) permanently reduces monthly benefits by approximately 30%.
- 2Delaying benefits from 67 to 70 increases monthly payments by 24% — from $2,500 to $3,100 per month.
- 3A married couple can optimize by having the higher earner delay to 70 while the lower earner claims at full retirement age.
Related Terms
Required Minimum Distribution (RMD)
The minimum amount that must be withdrawn annually from tax-deferred retirement accounts starting at age 73.
Traditional IRA
A tax-advantaged individual retirement account where contributions may be tax-deductible and earnings grow tax-deferred.
Marginal Tax Rate
The tax rate applied to the last dollar of income earned, determined by the taxpayer's tax bracket.
Disability Insurance
Insurance that replaces a portion of income if the policyholder becomes unable to work due to illness or injury.
FAFSA (Free Application for Federal Student Aid)
The federal form used to determine eligibility for financial aid including grants, loans, and work-study programs.
401(k)
An employer-sponsored retirement savings plan with tax advantages, often including employer matching contributions.
Expand Your Financial Vocabulary
Explore 130+ financial terms with definitions, examples, and formulas
Browse Personal Finance Terms