The U.S. government provides social programs that create a financial safety net for vulnerable and retired Americans. Two of the most prominent programs are Social Security and Medicare.
Social Security provides financial assistance to nearly 70 million Americans (as of 2022). This government program supports:
Social Security is primarily funded through specialized taxation, a type of transfer payment. Employers and employees both pay Social Security taxes. The current rate is 6.2% for each party (12.4% for self-employed individuals). These taxes are collected and redistributed to program beneficiaries. A person must generally work for 40 quarters (10 years) to qualify for full Social Security retirement benefits.
Payments made to retirees are meant to provide a baseline income, but they often don’t cover every retirement expense. As stated by the Social Security Administration:
Social Security was never meant to be the only source of income for people when they retire. Social Security replaces a percentage of a worker’s pre-retirement income based on your lifetime earnings. The amount of your average wages that Social Security retirement benefits replaces depends on your earnings and when you choose to start benefits.
This is why many retirees also rely on savings and other retirement vehicles. Using qualified workplace plans, individual retirement accounts (IRAs), and annuities can help older Americans live more comfortably in retirement.
Social Security retirement benefits can first be claimed at age 62. However, the earlier benefits begin, the lower the monthly payment. For retirees born after 1960, the “full” retirement age is 67. At that age, a person receives 100% of their allocated Social Security benefit. Benefits can be delayed beyond full retirement age to receive a higher payment. For example, delaying benefits until age 70* results in 124% of the Social Security benefit. Once age 70 is reached, there is no incentive to delay benefits further.
*This example is true for Americans born in 1960 or later. Regardless, the specifics are not important test points.
The amount a retiree receives depends on:
In 2024, the estimated average monthly payment was $1,907 ($22,884 annually). This reinforces that Social Security is designed to be a baseline income in retirement. For reference, the federal government considers a person to live in poverty if their annual income is $15,060 or lower in 2024.
Social Security can also pay benefits to people connected to the worker. For example, a surviving spouse can sometimes claim benefits after their partner dies. This can be especially important when the surviving spouse had little or no earnings history (for example, a homemaker). In certain circumstances, children, parents, and ex-spouses may also be able to claim benefits based on a deceased person’s record.
Ex-spouses can sometimes claim Social Security benefits based on a former partner’s work record even if the former partner is still alive. For example, assume Partner 1 and Partner 2 were married for a long time. Partner 1 worked full-time, while Partner 2 remained unemployed. If they divorce, Partner 2 could potentially claim part of Partner 1’s Social Security benefits if all of the following apply:
Even if an ex-spouse claims benefits, it does not reduce the benefits received by the other ex-spouse. Continuing the example above, if Partner 2 claims benefits based on Partner 1’s record, Partner 1’s personal Social Security benefits are not affected.
Social Security benefits are taxable as ordinary income. Many Americans owe tax on their benefits, although only a portion* is taxable. People who report Social Security as their only retirement income generally aren’t subject to tax. In general, the lower a person’s income, the less likely they are to owe taxes on Social Security benefits.
*Americans who pay taxes on Social Security benefits are only taxed on 50% or 85% of their benefits. Those with lower incomes pay taxes on 50%, while those with higher incomes pay 85%.
Medicare is government-mandated healthcare coverage offered to disabled persons and senior citizens. Most Americans age 65 or older* use Medicare as their primary health insurance. Like private insurance, Medicare covers many healthcare costs, but the covered person is still responsible for deductibles, co-insurance, and other out-of-pocket expenses.
*Older Americans who remain employed at organizations with 20 or more employees that offer private health insurance may delay enrolling in Medicare.
Medicare is divided into multiple parts. The part that covers hospital services is free if the covered person worked for 40 quarters (10 years). Like Social Security, Medicare is funded* by payroll (employment) taxes. If a person does not meet the 10-year work qualification, they may pay monthly premiums to gain access. The other parts of the program, which cover non-hospital services (doctor’s visits, outpatient procedures) and prescription drugs, require monthly premiums.
*Besides payroll taxes, Medicare is funded by premiums paid by covered persons, taxation of Social Security benefits, and other federal revenues.
As with many government benefits, individuals with higher incomes are required to contribute more. Medicare recipients with annual incomes over certain thresholds are subject to the income-related monthly adjustment amount, better known as IRMAA. Under IRMAA, higher-income recipients pay higher insurance premiums.
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