Social Security is an insurance program that provides income for retirees and workers who become disabled

• Social Security is a federal program that provides retirement income and disability benefits.
• The Social Security program is funded by payroll taxes and is one of the largest areas of US federal spending.
• Starting to collect Social Security retirement benefits later rather than sooner can bring a significant financial bonus.
• Read more stories from Personal Finance Insider.

Social Security is federal program funded by payroll taxes that provides income to retirees and workers who become disabled. The benefits can also be passed on to their survivors.

"To better understand Social Security, it may be helpful to know that the official name is the Old, Age, Survivors, and Disability Insurance (OASDI) program," says Jay Zigmont, a certified financial planner and founder of Live, Learn, Plan, a Registered Investment Advisory firm based in Mississippi. "While OASDI may not be as catchy of a term as Social Security, it does explain the program."

The Social Security program was established during the Great Depression, with the first monthly benefit checks distributed in January 1940. The system has changed and evolved over the years and is now one of the largest categories of federal spending. 

How does Social Security work?

The Social Security program is funded through federal payroll taxes. If you collect a paycheck, your employer will withhold a portion of what you earn to go toward Social Security. If you're self employed, you'll pay these taxes yourself.

You'll might see the Social Security tax accounted for on your paycheck under a category called FICA, which stands for the Federal Insurance Contributions Act. It allows for tax withholdings to fund Social Security and Medicare. The Social Security portion for 2022 is 6.2% for the employee, with an equal match by the employer, for a total of 12.4% applied to the first $147,00 of earnings. If you're self employed, you'll have to pay both halves yourself.

If you do the math, you'll see that over the course of your career, you'll contribute a substantial portion of your income into the Social Security program. And so do hundreds of millions of other taxpayers. All of that money is pooled together to support what has become a vast program that retirees, the disabled, and their survivors rely on for economic security.

What benefits does Social Security provide?

While it's mostly associated with retirement, Social Security also provides disability and survivor's benefits. All of these programs are run by the Social Security Administration, a federal agency with about 60,000 employees that in fiscal year 2021 provided a combined total of approximately $1.2 trillion in payments to more than 70 million people.

Social Security retirement benefits

To qualify for retirement benefits, you need to have earned at least 40 Social Security "credits," which are earned by working and paying Social Security taxes. At the current rate, you earn one credit for every $1,510 in earnings and can only earn a maximum of four credits per year. But the number of credits you have doesn't actually determine how much you'll receive in benefits.

The amount of your Social Security benefits are calculated based on how much you earned in your lifetime. Your actual earnings are adjusted (or indexed) to account for changes in wages since time you received them. Your average indexed monthly earnings are then calculated for the 35 years in which you earned the most. A formula is applied to that figure to determine your basic benefit, known as the primary insurance amount (PIA). That's how much you would receive at your full retirement age.

The SSA provides statements with detailed information about how much you've paid into the program and estimates of how much you'll receive in benefits depending on the age at which you retire. You can get one by creating an online account with the agency, or you can request one by mail.

Choosing when to start receiving your retirement benefits is a very important decision.

"For most people, it is best to wait until 70 to receive Social Security benefits, but there are quite a few considerations," Zigmont says. "When to take your benefits is part of your financial plan that will change the course of your retirement for life."

While you can start receiving your Social Security retirement benefits as early as age 62, you aren't entitled to full benefits until you reach your full retirement age. Currently the full benefit age is 66 years and two months for people born in 1955. It will rise to 67 for those born in 1960 or later.

Starting to receive Social Security benefits later rather than sooner can bring a significant financial bonus. For instance, someone who starts at age 70 will get 132% of what they would have gotten as soon as they reached their full retirement age because they delayed getting them for 48 months, according to the SSA. Meanwhile, a worker who chooses to collect at age 62 may see a reduction of as much as 30 percent.

Regardless of how much you earned or when you retire, you should never rely on Social Security as your sole source of income in retirement. It almost certainly will not be enough. Be sure to include others, such as a 401(k) or IRA, in planning for your life after work. Many financial professionals recommend that you should aim to have between 70% and 80% of your pre-retirement income each year in retirement.

Social Security disability benefits

You can qualify for Social Security disability benefits if you're unable to work due to a physical or mental condition that is expected to last longer than a year or result in death. There are two different programs: 

• Social Security Disability Insurance (SSDI): This program pays benefits to you and certain family members if you are "insured," meaning you worked long enough, or recently enough, and paid Social Security taxes on your earnings. 
• Supplemental Security Income (SSI): This program pays benefits to adults and children with disabilities who have limited income and resources.

In order to receive benefits from Social Security for a disability, it has to be a total disability. This is not a short-term disability program like workers' compensation, insurance, or savings account. Two qualify, your disability must meet criteria including:

• You are unable to work in the future because of your medical condition.
• You cannot do the work you did previously or adjust to other work due to a recent diagnosis of a medical condition.
• Your condition has lasted at least a year or will result in your death.

Social Security survivors benefits

Under certain conditions, your family can receive Social Security benefits based on your years of work after you die. For widows or widowers, the criteria to receive payments is:

• Age 60 or older
• Age 50 or older with a qualifying disability 
• Any age if caring for a child who is younger than 16 or has a qualifying disability 

For your children to receive Social Security benefits the criteria includes:

• Being unmarried
• Younger than 18 years old
• Between 18 and 19 years old, but in secondary school as a full-time student
• Age 18 or older with a qualifying disability

The payments survivors receive will be based on a percentage of the deceased family member's basic Social Security benefit. This range is usually 75% to 100%. If you find yourself in a survivor's situation, you can use the Social Security program to help offset lost income due to your family member passing away.

What's a Social Security number and why is it important?

Virtually everyone who pays taxes in the US has a Social Security number. These unique nine-digit identifiers are often issued in infancy and follow us from cradle to grave.

The numbering system was created in the 1930s specifically for tracking income and determining retirement benefits. While Social Security numbers are still used for that purpose, they've evolved to become essentially a national identification number used not just by government but also banks, insurers, cell phone service providers, and all manner of other private businesses.

You need a Social Security number to get a job, open a bank account, insure your automobile, take out a loan, apply for a credit card, get a passport, buy a house, get a drivers license — and the list goes on. It's arguably the most important number in our lives.

Because they're so widely used for identification, Social Security numbers also have become prime targets for identity thieves. They can use them to do everything from opening up lines of credit to obtaining medical care in your name.

The SSA, which issues Social Security numbers and maintains the records, can issue you a new number as a last resort if someone has been misusing yours and you've done all you can to stop them. However, it warns that doing so might not solve your problems.

"For some victims of identity theft, a new number actually creates new problems," the agency says in a consumer advisory brochure. "If the old credit information isn't associated with your new number, the absence of any credit history under your new number may make it more difficult for you to get credit."