Chances are we’ve all felt a bit like Rachel on the hit show “Friends” when she looked at her first paycheck in bewilderment and said, “Who’s FICA? And why’s he taking all my money?”
FICA stands for the Federal Insurance Contributions Act. A portion of your paycheck is deducted as a payroll tax to fund Social Security benefits and Medicare.
There is a common misconception about what happens to that money. Unlike a 401(k), the amount withdrawn from your paycheck isn’t directly allotted to a retirement account with your name on it. Today’s workers are funding today’s retirees, with the expectation that when they become future retirees, they in turn will be funded by those future workers.
That’s just one of the components of Social Security that is frequently misinterpreted. It’s important to understand the program and how it affects you and your financial future. To help you, I’m sharing seven questions I often get about Social Security retirement benefits—along with my detailed answers.
At what age should I start taking Social Security retirement benefits?
Although most are eligible to receive Social Security benefits as early as age 62, there are a variety of factors that influence what may be the most optimal claiming strategy for your situation.
For many, age 65 is the magic number for when retirement “officially” begins, and that was the minimum age to receive full retirement benefits when the program began. This is commonly referred to as full retirement age or FRA. As human life expectancy has increased, so has FRA. This chart shows how the FRA has slowly gone up. For those born in 1960 or later, FRA is age 67.
The longer you delay Social Security, the bigger your benefit will be. In fact, every month you wait to file from your full retirement age until age 70, your benefit should increase. These are called delayed retirement credits. There is an 8% additional benefit for every year you delay. This chart breaks it down for you, demonstrating the increased benefit you could reap if you wait.
Do keep in mind, however, that there are scenarios where it may make sense to take benefits early rather than later. Get more details on why you might claim Social Security benefits sooner rather than later and how it impacts you.
What is my monthly Social Security benefit based on?
The formula is a bit complicated, but here are the main parts. First, the Social Security Administration takes your 35 highest earning years as their basis. Then they apply an inflation factor based on the first year they use. We all know $10,000 today doesn’t have the same purchasing power as $10,000 in 1990. They will add up those 35 highest years (or fewer if you don’t have at least 35 years in the workforce) and divide it by the number of months to determine the average indexed monthly earnings (AIME).
Note that you need at least 40 work credits to receive Social Security. Work credit equate to a taxpayer having earned the minimum amount in a quarter. In 2025, you would need to make $1,810 a quarter to receive 1 work credit.
Then, they will apply what’s called a “bend” point, designed to even out the system so those who had the least income get the most benefits. It’s very complex, but an important formula that changes with the national average wage index to protect lower income taxpayers. This chart shows the bend points used to determine this formula for the past few years.
According to the Social Security administration, the maximum benefit at FRA is $4,108 a month—$5,108 if the taxpayer waits until age 70.1 These numbers index for the cost-of-living adjustment each year as well which ties to yearly inflation.
As a high-income earner, why am I paying so much in tax when I won’t get it all back?
The FICA taxes you pay from wages and or self-employment income over your working life determine your Social Security benefits in retirement. Social Security tax is currently set at 12.4% of the income categories mentioned above.
W-2 employees are responsible for 6.2% of the Social Security tax while the employer covers the other 6.2%. Self-employed individuals are responsible for paying the full 12.4%. The maximum amount of earnings subject to Social Security taxes in 2025 is $176,100.
Therefore, someone who earns $176,100 and someone who earns $5 million currently pay the same into the Social Security coffers. (The 2.9% Medicare tax will apply to all earned income, however, and there is even an additional Medicare tax for high income taxpayers.)
So, even though you may not get every dollar back when you collect your benefit, there is a limit on the amount of wages that are subject to the Social Security tax if you earn above the cap.
Any unearned income—such as interest, dividends and capital gains, and income from pensions, annuities and deferred retirement accounts—are not subject to FICA taxes, although they may be subject to net investment income tax. These income buckets may impact how Social Security benefits are taxed. More on that later.
If I want to keep working, will it affect my Social Security benefit?
Many workers can keep working past their retirement age, whether that be full-time or part-time. Maybe even as self-employed now to dictate their own schedule. It’s not uncommon for people to view retirement as a time when they have more flexibility yet want to do something that gives them purpose, fulfillment, connection, and routine. The caveat being, any sort of earned income, whether a salary, self-employment, bonus, etc., could reduce your Social Security benefit.
If you are younger than full retirement age, the Social Security Administration will deduct $1 from your benefit payment for every $2 you earn over $23,400. In the calendar year you reach full retirement age, that earnings ceiling bumps up to $62,160 for the months leading up to the month you turn 67, and the amount deducted goes down to $1 for every $3 you earn over the ceiling amount. Once you reach full retirement age and into subsequent years, earnings of any amount no longer reduce your social security benefit payment.
For individuals who work past the date of claiming Social Security, if any year is part of their 35 highest years of earnings, Social Security will recompute the benefit, and they will receive an increased amount based on that recalculation.
Do I have to pay taxes on Social Security?
Your benefit may be taxed. If taxable, Social Security is considered ordinary income and will be taxed at your marginal tax rate. How much other income you receive shapes how this plays out.
Provisional income is all of your taxable income PLUS tax-exempt interest and dividends PLUS 50% of your gross Social Security benefit. The end result of this calculation and your filing status will determine how much of your Social Security is subject to federal income tax.
For Single, Head of Household, and Qualifying Widower filers with less than $25,000 of provisional income, 0% of Social Security is subject to federal income tax. For Married Filing Joint filers with less than $34,000, 0% of Social Security is subject to federal income tax.
For Single, Head of Household, and Qualifying Widower filers between $25,000 and $32,000 of provisional income, 50% of Social Security is subject to Federal income tax. For Married Filing Joint filers between $34,000 and $44,000, 50% of Social Security is subject to Federal income tax.2
Any provisional income for these filers over the $32,000 and $44,000 respectively means 85% of their Social Security benefits are subject to federal income tax. In short, 0% to 85% of your Social Security benefits could be subject to federal income tax.
The new One Big Beautiful Bill has sparked some conversation about no tax on Social Security. Contrary to popular belief, the bill does not change how Social Security is taxed. It added a $6,000 enhanced senior deduction for taxpayers aged 65 and older. This is limited to certain AGI limits and is tied to age, not social security. While this may provide tax relief for some people, it has no direct tie to Social Security taxation.
Also, be conscious of your residence. Each state is unique on how they tax income. There are currently nine states who tax Social Security.3
Will the Social Security fund run out before I receive my benefits?
This is a valid concern many people have. While increasing numbers of retirees are often living longer, there are dwindling numbers of workers contributing to the system that pays out to them. Based on what we know today, as long as people keep paying into the system and the government keeps collecting, Social Security benefits are expected to be fully funded until 2033, when they will drop to 77% of scheduled benefits, absent any changes.4
However, no one knows what changes could affect this, and it’s important to plan conservatively for retirement. It’s a best practice to stress test portfolios against various events. By stress testing the effect of a Social Security benefit reduction in the context of a holistic financial plan, you can see how well your finances could withstand that shock—either alone or in conjunction with another event.
Should I depend on Social Security to fund my retirement?
This all depends on the quality of life you want. Above, we’ve covered issues such as the potential size of your benefit and the solvency of the Social Security fund. For some people, Social Security benefits are a crucial part of their cash flow in retirement. They depend on these payments to support their life expenses. They have no choice but to depend on it.
Many others find that the benefits do not adequately fund the lifestyle they anticipate or the legacy they hope to leave. That’s why it’s wise to start planning for those golden years today. Whether you need the benefit or you are using it as a supplement source of income, maximizing the benefit based on your circumstances is the ultimate goal.
Consulting with a financial advisor can help you clarify your financial goals and the steps it will take to achieve them. While Social Security will likely be one core piece of your retirement, for most people, it shouldn’t be their only one.
Have More Questions About Social Security?
Your financial advisor can help answer any questions you might have about retirement and Social Security.
Don’t have a financial advisor? Give us a call today to get paired with a qualified financial advisor in your area.
Ryan Egolf is a non-registered associate of Cetera Wealth Services LLC.
1 “What is the maximum Social Security retirement benefit payable?” Social Security Administration, https://www.ssa.gov/faqs/en/questions/KA-01897.html
2 “IRS reminds taxpayers their Social Security benefits may be taxable.” Social Security Administration, https://www.irs.gov/newsroom/irs-reminds-taxpayers-their-social-security-benefits-may-be-taxable
3 “41 States That Won’t Tax Social Security Benefits in 2025.” Yahoo Finance, 30 March 2025, https://finance.yahoo.com/news/41-states-won-t-tax-120052096.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAEnsCIaos2ePBSYmnK6HLQgOmrJajhAbOlLb6jqP4l4xZX3mooJVOEOkZdjH8nnaFAXLrjqxjW8W6cShgbdaQM1ac-4eoFoSoi_MgSB28uWHMMaP86GjJTRkZlWPbgIpmugUQeZ85S2-WP8ADK8hUKk9FkV7CiWPUS1cEEQdP96U
4 “Status of the Social Security and Medicare Programs: A Summary of the 2025 Annual Reports.” Social Security Administration,https://www.ssa.gov/OACT/TRSUM/index.html
This information may not be relied on for the purpose of determining your social security benefits or eligibility, or avoiding any federal tax penalties. You are encouraged to seek advice from your own tax or legal professional.
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