Social Security

What is Social Security?

Social Security refers to a collection of federal programs that provide retirement income, social insurance, and medical benefits to older and needy citizens of the United States. The Social Security Administration manages the various programs grouped under Social Security, which are funded by FICA payroll taxes deposited in the Social Security Trust Fund.

Deeper definition

Social Security began as a New Deal program under President Franklin D. Roosevelt in 1935, and has been expanded and reformed several times over the decades. The disability program was added in 1956, while Medicaid and Medicare followed in 1965 under President Lyndon B. Johnson.

In recent years, there have been growing concerns about the long-term solvency and ever-rising costs of the programs making up Social Security, most prominently about the Social Security Trust Fund’s viability. Proposals for fixing the problems of Social Security have been offered repeatedly for decades, although little has been done to reform the system.

The largest component of Social Security is the Old-Age, Survivors, and Disability Insurance (OASDI) program, which pays out income to retired people. Payment of retirement benefits under this program is biased toward citizens who earned low to medium wages to ensure that they do not have to retire in relative poverty. The Social Security Administration and the Internal Revenue Service (IRS) tracks citizens’ earnings over the course of their careers and ensures that FICA taxes are paid on those earnings.

The other major programs administered by the Social Security Administration include:

  • Temporary Assistance for Needy Families (TANF)
  • Medicare, health insurance for those 65 or older
  • Medicaid, medical assistance programs for low-income citizens
  • State Children’s Health Insurance Program (SCHIP) for low-income citizens
  • Supplemental Security Income (SSI)
  • Social Security Disability Insurance (SSDI)

Estimate your future income from Social Security using Bankrate’s handy calculator.

Social Security example

Social Security retirement benefits aim to replace roughly 40 percent of the average U.S. citizen’s post-retirement income. If you paid FICA taxes for 10 years or more, you most likely qualify for benefits. To calculate your monthly payout, the Social Security Administration adjusts your highest 35 years of income into current dollars, then divides that figure by 420 (the number of months in 35 years) to arrive at your average indexed monthly earnings (AIME).

Depending on earnings thresholds, the Social Security Administration adjusts your AIME to determine your maximum monthly benefit at the full retirement age of 65. For instance, if you become eligible for Social Security in 2017, then you’d multiply the first $885 in AIME by 90 percent. Any amount earned between $885 and $5,336 would be multiplied by 32 percent, and any amount above $5,336 would be multiplied by 15 percent. The resulting amounts are added together and rounded down to determine your monthly benefit.

Other Retirement Terms

Original issue discount (OID)

Original issue discount (OID) is a bond market concept you need to understand.

Exchange fee

Exchange fee is a term every investor should understand. Bankrate explains it.

Empty nesters

You need to understand what empty nesters are. Here’s what to know.


A will describes what happens to your assets after you’re gone. Bankrate explains.

More From Bankrate