How Social Security Works — Benefits, Claiming Age, and What to Expect in 2026

Social Security benefits are based on your lifetime earnings, not a flat rate. The Social Security Administration (SSA) calculates your benefit using a three-step process that starts with your entire work history and ends with a monthly dollar amount called your Primary Insurance Amount (PIA).

First, the SSA takes your 35 highest-earning years and adjusts them for wage inflation using national average wage indexing. If you worked fewer than 35 years, zeros are averaged in for the missing years — which is why working a full 35-year career matters significantly for your benefit amount. Second, those adjusted earnings are used to calculate your Average Indexed Monthly Earnings (AIME), which represents your average monthly income across your best 35 years.

Finally, the SSA applies a progressive benefit formula to your AIME using "bend points" that change annually. The formula replaces a higher percentage of income for lower earners and a smaller percentage for higher earners. In 2026, the first $1,226 of AIME is replaced at 90%, the next portion up to $7,391 at 32%, and anything above that at 15%. This progressive structure means Social Security replaces roughly 75% of pre-retirement income for low earners but only about 27% for high earners — which is why higher-income workers need supplemental retirement savings through [401(k) plans](/posts/2026-02-27/what-is-a-401k-how-it-works-contribution-limits-and-employer-matching-in-2026) and [IRAs](/posts/2026-02-27/deep-dive-roth-ira-vs-traditional-ira-which-is-right-for-you-in-2026).

The age at which you claim Social Security dramatically affects your monthly benefit. The program defines three key ages: 62 (earliest eligibility), your Full Retirement Age (FRA), and 70 (when delayed retirement credits stop accruing).

Full Retirement Age depends on your birth year. For anyone born in 1960 or later, FRA is 67. Those born between 1955 and 1959 have an FRA between 66 and 2 months and 66 and 10 months. Claiming at your FRA gets you 100% of your Primary Insurance Amount — no reduction, no bonus.

Claiming early comes with a permanent reduction. If you file at 62 with an FRA of 67, your benefit is reduced by 30% — a reduction of 6.67% for each of the first 36 months before FRA, plus 5% for each additional month. That $2,500 PIA becomes roughly $1,750 per month, and that reduction lasts for life.

Conversely, delaying past FRA earns you delayed retirement credits of 8% per year, up to age 70. A worker with a $2,500 PIA at FRA who waits until 70 would receive approximately $3,100 per month — a 24% increase. After age 70, there is no additional benefit to waiting. This makes the claiming decision one of the most consequential financial choices in retirement planning.

Several important changes took effect for Social Security in 2026, driven by inflation adjustments and wage growth.

The 2026 cost-of-living adjustment (COLA) is 2.5%, a modest increase that reflects the cooling inflation environment. This follows a 2.5% COLA in 2025 and a 3.2% adjustment in 2024, both significantly below the 8.7% COLA in 2023 that was driven by post-pandemic inflation. FRED data shows the Consumer Price Index at 326.6 as of January 2026, up from 319.7 a year earlier — a year-over-year increase of approximately 2.2%, confirming the disinflationary trend.

The maximum taxable earnings cap — the income ceiling above which Social Security taxes are not collected — rises to $176,100 in 2026, up from $168,600 in 2025. Workers earning above this threshold pay Social Security tax (6.2% for employees, matched by employers) only on income up to this cap. Self-employed individuals pay the combined 12.4% rate. This cap increase means higher earners contribute more to the system and will receive marginally higher benefits in retirement.

The maximum monthly benefit at Full Retirement Age in 2026 is approximately $4,018, available only to workers who earned at or above the taxable maximum for at least 35 years. The average monthly retirement benefit is approximately $1,976, while the average for all Social Security beneficiaries (including disability and survivors) is about $1,900.

Social Security's financial sustainability is one of the most discussed policy topics in retirement planning. The program operates on a pay-as-you-go basis: current workers' payroll taxes fund current retirees' benefits. When tax revenue exceeds benefit payments, the surplus goes into the Old-Age and Survivors Insurance (OASI) Trust Fund.

According to the most recent Social Security Trustees' Report, the OASI Trust Fund is projected to be depleted by 2033. After that point, incoming payroll tax revenue would be sufficient to cover only about 79% of scheduled benefits. This does not mean Social Security "goes bankrupt" or that benefits disappear entirely — it means that without Congressional action, benefits would face an automatic reduction of roughly 21%.

The demographic pressure is real. In 1960, there were 5.1 workers paying into the system for every beneficiary. Today, that ratio has fallen to approximately 2.7 workers per beneficiary, driven by the massive Baby Boomer generation entering retirement combined with longer life expectancies and lower birth rates. The federal funds rate has fallen from 4.33% in August 2025 to 3.64% in January 2026 as the Federal Reserve continues its easing cycle — lower rates reduce the Trust Fund's investment returns on its Treasury holdings, adding additional pressure.

Potential legislative fixes include raising the payroll tax cap (or eliminating it entirely), increasing the payroll tax rate, adjusting the benefit formula, raising the Full Retirement Age, or means-testing benefits for high-income retirees. Most experts believe some combination of these approaches will be enacted before the 2033 deadline, as allowing a 21% across-the-board cut to retiree benefits would be politically untenable. Workers under 50 should plan conservatively — assume full benefits but build supplemental savings through [401(k)s](/posts/2026-02-27/what-is-a-401k-how-it-works-contribution-limits-and-employer-matching-in-2026) and [IRAs](/posts/2026-02-27/deep-dive-roth-ira-vs-traditional-ira-which-is-right-for-you-in-2026) that don't depend on the program's solvency.