In power rack-and-pinion steering, fluid pressurized by the pump pushes on either side of a piston mounted to the rack, helping you turn the wheels.
Simply put, power-steering fluid is the hydraulic fluid that transmits the power in power steering. Servicing it involves draining or flushing out your car's old power-steering fluid and then adding fresh power steering fluid.
Should I do this service when it's recommended?
Absolutely. The fluid is the cheapest component of your power-steering system. Changing it can help to prolong the life of other, more expensive power-steering components such as the power-steering pump and the stratospherically expensive power-steering rack.
Why do I have to do this?
Over time, the seals, O-rings and internal power-steering components will wear out. When they break apart, they contaminate the power-steering fluid, which forces the power-steering pump to work harder (having to pump little chunks instead of just fluid) and eventually break down.
What happens if I don't do this?
You'll eventually chew up your power-steering pump. It'll have to be replaced at a cost of several hundred dollars, or you'll have no power steering — and you can't easily drive a car that's equipped with power steering when the power-steering system fails. You also may damage the rack, which will require you to take out a small home-equity loan to replace.