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 matched by 6.2% from your employer, 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 are responsible for both sides of the ledger, paying the full 12.4% tax ($22,878 in 2026). If you have both W-2 and 1099 self-employment income, you pay the combined 12.4% up to the FICA cap; W-2 wages fill the cap first, and 1099 earnings only face the FICA tax until the combined total hits the limit.
The latest Trustees Report projects that the system will exhaust its reserves around 2033, after which incoming payroll taxes will only cover roughly 77% of promised benefits. 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, simply discount your future benefits by 20% in 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.