How Does Social Security Work

Exactly how does Social Security work? Social Security is one of those federal government programs that have existed for several generations, yet few people truly understand the intricate workings of it. Started in 1935, Social Security is a form of social insurance. It is primarily considered an insurance fund for retired workers, but it also pays for the disabled and the widowed. In recent years, Social Security has come under severe scrutiny. Critics believe it cannot withstand the heavy burden of the retiring Baby Boomer generation. Social Security, however, remains the largest government program and is said to prevent over 40% of America's senior citizens from entering poverty.

How Does Social Security Work?
Social Security is broken down into three distinct programs. The first program is a retirement program and is available to qualified workers who have reached the federal age of retirement. Retirees may start collecting monthly benefits at age 62, but full retirement does not begin until sometime between ages 65 and 67, depending on the year of birth. 

The second program is a survivor's program. This program pays monthly benefits to the survivor of an eligible worker, once she reaches retirement age. The survivor can be either a spouse of the deceased's, or a child under the age of 18. In the event it is a child, the child will no longer be able to collect benefits upon turning 18.

The third program is a disability program. The disability program pays benefits to the worker who is no longer able to work due to illness or disability. It can also pay benefits to the spouse or child of the disabled, in the event of death.

Because Social Security is a social insurance fund, all workers must contribute a certain amount of credits before they are allowed to draw benefits from it. Workers must have at least 40 credits. Each credit translates into roughly 3 months and $900 paid in Social Security tax. 

Determining Payment
Many people think of Social Security as a private account that one cashes in on after retirement. Unfortunately, this is incorrect. The amount that you pay in Social Security taxes is not stored for your retirement but is directly paid out to those who are currently drawing benefits. Any money not going to the retirees is used as a surplus to fund other government projects. The money for your benefits will be drawn on the taxes of those who will work during your retirement.

The amount you will receive in benefits is tallied by a complicated equation. It calculates your highest earned salary on a 35-year basis and is adjusted further for inflation.

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Understanding how Social Security benefits are calculated and when you can receive them will help you make the most of this program.

There are three ways you can go about applying for Social Security benefits: in person at a Social Security office, over the phone or using an online form at the Social Security website.

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