How Does Social Security Work?

Published In Government Programs

Social Security, also known as the Old-Age, Survivors, and Disability Insurance (OASDI) is a federal program that includes several insurance and welfare programs. The original Social Security Act was signed into law by President Franklin Roosevelt in 1935 and the current version of the Act has been amended numerous times.

Social Security is funded through payroll taxes or a self-employed contributions tax. Tax deposits are collected by the Internal Revenue Service (IRS) and are formally entrusted to a federal trust fund that supports Social Security.

The Center on Budget and Policy Priorities estimated that Social Security retirement payments for 2023 will be 21% of federal expenditures, or $1.4 trillion.


The amount of the monthly Social Security benefit a worker is entitled to depends upon their earnings record, the amount of taxes they have paid, and the age at which the retiree chooses to begin receiving benefits. In 1937, the number of people receiving Social Security benefits numbered 53,236. The annual expenditure for benefits that year amounted to $1,278,000. In 2015, Social Security paid out $73,522,000 to more than 56 million people. The average monthly benefit is $1,227. In 2022, Social Security paid out $1.232 trillion to about 66 million people.  The average benefit was $1657.  In October 2023, the average benefit was $1709.70 .

And this benefit is critical to the financial health of millions of Americans. Social Security is a major source of income for 21.7 million people of all ages, without which they  would be below the poverty line, according to March 2022 data from the Center on Budget and Budget Priorities.

Cost of Living Adjustment (COLA)

Each year, the increase in benefits (called the cost of living adjustment or inflation adjustment) is calculated on the consumer price index. When that index does not increase in the prior year (in this case 2015), the benefit (for 2016) does not go up. Congress started requiring annual cost of living adjustments in 1975, and since that time an upward adjustment in the COLA has failed to happen only three times – in 2010, 2011, and 2016.

Proposed Changes to Shore-Up Social Security

Trustees in charge of the Social Security Trust Fund anticipate that the fund will run out of reserves in 2034. While this does not mean the system will go broke, the implication is that the Trust Fund will not be able to live up to 100% of its financial commitments to its beneficiaries. In fact, if the future projections are correct, Congress does not act, and funds do run out in 2034,  roughly 80% of benefits will be payable. In other words, there is an automatic 20% benefit cut for beneficiaries. A number of proposals have been made over the years to make changes in the factors that impact Social Security payouts in order to ensure its long-term financial solvency. Those proposals for a Social Security do-over include:

  • Put a hold on the amount of the monthly benefit either through eliminating the annual cost of living adjustment or reducing the monthly payment itself.
  •  Raise the Social Security Retirement age gradually so that beneficiaries have to wait to file and receive benefits. (Click here to view Social Security’s analysis of the Projected Effects of a Proposal to Increase the Full Retirement Age)
  • Reduce the number and amount of benefits that are available to dependents or-high income individuals.
  • Raise the payroll tax cap to increase the amount of money flowing in the Trust Fund (or make all earnings subject to the payroll tax)
  • Increase the tax on benefits.
  • Change the COLA calculation to a slower measure of inflation.
  • Apply the Social Security Tax to net investment income of high income earners.

Each of these options has its detractors and supporters and the debate around each is complicated by emotional, political, and economic factors. There are many alternative solutions being considered to ensure Social Security remains financially solvent and able to pay out beneficiaries; click here for a listing by the Social Security Administration of those proposals.  The wild card is whether any reform plan will have a chance to make it through Congress.

Maximizing Your Social Security

There are a number of ways to maximize your social security benefit and get the most money..

  • Work longer – the longer you work the greater your benefit. Social Security figures your benefit by calculating your average earnings during your most productive 35 years.
  • Don’t retire early—if you work beyond full retirement age (FRA), the more you will receive in monthly benefitsapproximately 8% per year, up to age 70.
  • Stay healthy – the longer you live, the more benefits you receive.
  • Live in a tax friendly state – some states tax your Social Security benefits and some do not.
  • Boost your income over timeto get a higher payout down the line, work up to higher paying positions.

Calculating Your Social Security Benefit

Several good resources exist for calculating your benefit under the Social Security Program.

This article has been updated since it originally published in February, 2016.

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