Social Security
Social Security is a government-run, inflation-indexed annuity designed to transfer wealth from high earners to low earners. The program is funded through the Federal Insurance Contributions Act (FICA) tax: a 6.2% deduction from your wages under IRC §3101(a), “Rate of tax”, matched by 6.2% from your employer under IRC §3111(a), capped at $184,500 in 2026 (indexed annually with the national average wage; the cap has climbed roughly 4.5% annually over the past decade).
If you are self-employed you owe both sides of the ledger — the full 12.4% under IRC §1401(a), “Rate of tax”, capped at $22,878 for 2026. Two details change that number in practice. Because SE tax applies to 92.35% of net self-employment earnings (not gross revenue), you need about $199,800 of net earnings to hit the cap; and you deduct half the total SE tax above the line under IRC §164(f), which recovers roughly a fifth of it at a top bracket. Separately, the 2.9% Medicare component has no cap and the additional 0.9% Medicare surtax applies above $200,000 single / $250,000 joint, so the marginal SE burden never falls to zero — it steps down from 15.3% to 2.9% at the wage base and back up to 3.8% above the surtax threshold. If you have both W-2 and 1099 income, W-2 wages fill the Social Security cap first and 1099 earnings face the 12.4% only until the combined total reaches the limit.
The latest Trustees Report projects that the retirement (OASI) trust fund exhausts its reserves in 2033, after which incoming payroll taxes cover roughly 77% of scheduled benefits. Counting the disability fund alongside it — which Congress would have to authorize — pushes depletion to 2034 at 81%. Do not panic and claim early out of fear; Congress will inevitably patch the system, likely by raising the retirement age, increasing the FICA wage cap, or squeezing higher earners. For conservative planning, model your benefits at 77% of the statement amount and use that figure consistently throughout your projections.
Understanding Social Security matters because it is the only inflation-adjusted, government-backed annuity in your portfolio. You cannot outlive it, and its guaranteed payments reduce the cash flow demand on your investments, thereby lowering your required Safe Withdrawal Rate (SWR).
The full retirement age (FRA) is currently fixed at 67 for anyone born in 1960 or later. You can claim as early as age 62 at a permanently reduced rate, or delay up to age 70 to maximize your monthly benefit. Delaying benefits typically offers a significant actuarial advantage.
- Create your account at ssa.gov to monitor your earnings record, and immediately enable 2FA! Leaving your account unregistered is an open invitation for identity thieves to claim your benefits in your name.
- Pull your statement annually during your working years to verify that your wages were accurately reported. The window to correct mistakes is limited, and correcting a decade-old typo with a defunct employer is a bureaucratic nightmare.
- To qualify for benefits, you must earn a minimum of 40 credits (roughly 10 years of FICA-covered work). Credits only open the door to eligibility; your actual check is computed from your highest 35 years of wage-indexed earnings.
- Your spouse is eligible for their own work-record benefit or up to 50% of yours, whichever is higher.