Social Security (United States)

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Social Security in the United States is a social insurance program funded through a dedicated payroll tax. It is also known as the Old Age, Survivors and Disability Insurance program (OASDI), in reference to its three components. In the calendar year 2004, it paid out almost $500 billion in benefits. [1] (

In 2005, the possibility of changing the Social Security system became a major political issue; see Social Security debate (United States).

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United States Social Security Card


This article concerns the OASDI program, which is administered by the Social Security Administration. Related programs that are not part of the Social Security Administration include Aid to Families with Dependent Children, Black Lung (Pneumoconiosis) benefits, Medicare, railroad retirement benefits, unemployment insurance, and veterans' benefits. The Social Security Administration is also responsible for some programs other than OASDI, such as Supplemental Security Income.

Retirement benefits

The largest component of OASDI is the payment of retirement benefits. Throughout a worker's career, the Social Security Administration keeps track of his or her earnings. The amount of the monthly benefit to which the worker is entitled depends upon that earnings record and upon the age at which the retiree chooses to begin receiving benefits. As of 2005, the earliest age at which benefits are payable is 62.


A worker who has worked long enough and recently enough to be covered can receive benefits upon becoming totally disabled, regardless of his or her age. The eligibility formula requires a certain number of credits (based on earnings) to have been earned overall, and a certain number within the ten years preceding the disability [2] (, but with more lenient provisions for younger workers who become disabled before having had a chance to compile a long earnings history [3] ( The definition of total disability is fairly strict. The worker must be unable to continue in his or her previous job and unable to adjust to other work; furthermore, the disability must be long-term (lasting or expected to last for at least one year or to result in death). [4] ( As with the retirement benefit, the amount of the disability benefit payable depends on the worker's age and record of covered earnings.

Survivors' benefits

If a worker covered by Social Security dies, a surviving spouse or children can receive survivors' benefits. In some instances, survivors' benefits are available even to a divorced spouse. Survivors' benefits to children are not payable past age 19 unless the child was disabled before age 22. [5] ( dsdsdsdsdsdsdsds



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President Roosevelt signs Social Security Act, August 14, 1935. Standing with Roosevelt are: Rep. Robert Doughton (D-NC); Sen. Robert F. Wagner (D-NY); Rep. John D. Dingell, Sr. (D-MI) (the father of the current As of 2005 rep. Dingell); Unknown man in bowtie; Secretary of Labor, Frances Perkins; Senator Pat Harrison (D-MS); Congressman David L. Lewis (D-MD)

A limited form of the Social Security program began as a measure to implement "social insurance" during the Great Depression of the 1930s when poverty rates among senior citizens exceeded 50% [6] (

The law was drafted by President Franklin Delano Roosevelt's committee on economic security under Edwin E. Witte, and passed by Congress in 1935 as part of the New Deal. The law included benefits for the retired and the unemployed. Social Security was not designed as a savings program. This allowed elderly Americans, hard hit by the depression, to begin receiving benefits soon after the law was enacted. Payments to current retirees were (and continue to be) financed by a payroll tax on current workers' wages, half directly as a payroll tax, and half paid by the employer.

A series of Supreme Court rulings affirmed the constitutionality of the Social Security Act.

  • Stewart Machine Company vs. Davis, 301 U.S, 548 ( held in a 5-4 decision that given the exigencies of the Great Depression, "[i]t is too late today for the argument to be heard with tolerance that in a crisis so extreme the use of the moneys of the nation to relieve the unemployed and their dependents is a use for any purpose narrower than the promotion of the general welfare..." The arguments opposed to the social security act (articulated by justices Butler, McReynolds, and Sutherland in their opinions) were that the social security act went beyond the powers that were granted to the federal government in the constitution. They argued that by imposing a tax on employers that could be avoided only by contributing to a state unemployment compensation fund, that the federal government was essentially forcing each state to establish an unemployment compensation fund that would meet its criteria, and that the federal government had no power to enact such a program.
  • Helvering vs. Davis, 301 U.S. 619. upheld the program because, "The proceeds of both [employee and employer] taxes are to be paid into the Treasury like internal-revenue taxes generally, and are not earmarked in any way." That is, the Social Security Tax is constitutional as a mere exercise of Congress's general taxation powers.


The original 1935 law only paid retirement benefits to the primary worker. It also contained the first national unemployment compensation program, aid to the states for various health and welfare programs, and the Aid to Dependent Children program. The initial tax rate was 2.0 percent of the first $3,000 of the employee's earnings, shared equally between the employee and the employer. The tax rate has been raised in several steps over the years. [7] (

A 1939 change in the law added survivors benefits and benefits for the retiree's spouse and children. Originally, many types of people were excluded, primarily farm workers, self employed people, and anyone employed by an employer of less than ten people. These exclusions, intended to exclude those from whom it would be difficult to monitor compliance, covered approximately half of the civilian labor force in the United States.

In 1956 disability benefits were added. Medicare was added in 1965 by the Social Security Act of 1965, part of President Lyndon B. Johnson's "Great Society" program. See List of Social Security legislation (United States).

Changes made in 1983

In the early 1980s, there was concern about the long-term prospects for Social Security because of demographic considerations, particularly what would happen when people born during the Post-World War II baby boom retired. A commission chaired by Alan Greenspan made several recommendations for addressing the issue. [8] ( Under the 1983 Amendments to Social Security, signed into law by President Ronald Reagan, the Social Security payroll tax rate was increased, additional employees were added to the system, the full benefit retirement age was slowly increased, and up to one-half of the value of the Social Security benefit was made potentially taxable income. [9] (

As a result of these changes, the Social Security system began to generate a large surplus of funds, intended to cover the added retirment costs of the "boomers." The surplus was invested in U.S. Government bonds held by the Social Security trust fund. Under the law, the Government bonds held by Social Security are backed by the full faith and credit of the U.S. government, like all other Government bonds. Since the changes of 1983, some have raised the specter that the bonds held in the trust fund are only "IOUs" that the government has written to itself. However, it would require an unprecedented vote of Congress to default on those bonds.

In 1983, the U.S. Congress also closed a loophole in the original Social Security Act that allowed municipal governments to opt out of the Social Security system, and also brought all civilian federal employees whose employment began in 1984 or later part of the system.

Commission to Strengthen Social Security (2001)

On May 21, 2001, President George W. Bush established a 16-member, ostensibly bipartisan Commission to Strengthen Social Security to consider how to incorporate "individually controlled, voluntary personal retirement accounts". [10] ( On December 21, 2001, the Commission released its report, which analyzed three different models for privatization.

Current operation

Contrast with private pensions

Although Social Security is sometimes compared to private pensions, the two systems are fundamentally different. A private pension fund accumulates the money paid into it, eventually using those reserves to pay pensions to the workers who contributed to the fund. Social Security, on the other hand, is fundamentally a wealth transfer system. It operates as a pipeline, through which current tax receipts from workers are used to pay current benefits to retirees, survivors, and the disabled. There is, however, a Social Security Trust Fund that holds the cumulative excess of taxes withheld over benefits paid. The inclusion of disability benefits also distinguishes Social Security from most private pensions.

Private pensions are governed by the Employee Retirement Income Security Act, which requires minimum levels of funding. The purpose is to protect the workers from corporate mismanagement and outright bankruptcy. In terms of financial structure, Social Security would be analogous to an underfunded pension ("underfunded" meaning not that it's in trouble, but that its "savings" are not enough to pay future benefits without collecting future tax revenues).

For solvency, Social Security relies on its tax revenues and broad base of public support. Since millions of retirees have paid into the system during their working lives, it would be politically difficult for Congress to allow it to fail.

Social Security tax

Benefits are funded through the FICA tax on wages and salaries. The Social Security portion of this tax is 6.2% of the first $90,000 (in 2005) of an employee's income paid directly by the employer, and an additional 6.2% of the first $90,000 (in 2005) deducted from the employee's paycheck, yielding an effective rate of 12.4% of an employee's income. Self-employed people are responsible for the entire tax. The income cutoff is adjusted yearly for inflation and other factors.

If an employee pays excess taxes, due to multiple jobs being held by the employee during a single calendar year, the employee will receive a refund of the excess taxes withheld from their paychecks on their Form 1040. The excess taxes paid by employers is not returned to the employers.

A separate payroll tax of 1.45% of an employee's income paid directly by the employer, and an additional 1.45% deducted from the employee's paycheck, yielding an effective rate of 2.9%, funds the Medicare program. This program is primarily responsible for providing health benefits to retirees.

The combined tax rate of these two federal programs is 15.3%.

Social Security Trust Fund

Social Security taxes are paid into the Social Security Trust Fund maintained by the U.S. Treasury. Current year expenses are paid from current Social Security tax revenues. When revenues exceed expenditures, as they have in most years, the excess is invested in U.S. Treasury bonds, thus the Social Security Trust fund indirectly finances the federal government's general purpose deficit spending. At the end of 2004, the cumulative excess of Social Security taxes and interest received over benefits paid out stood at $1.7 trillion. [11] (

Social Security number

A side effect of the Social Security program in the United States has been the near-universal adaptation of the program's identification number, the Social Security number, as a form of unique identification in the U.S. A multitude of U.S. entities use the Social Security number as a personal identifier. These include government agencies such as the Internal Revenue Service, as well as private agencies such as banks, creditors, health insurance companies, and employers. Laws are in place governing acceptable uses for the number; these laws are, however, often unenforced.

Opting out of Social Security

While there is no requirement for individuals to join the Social Security program, there is no general provision for individuals to opt out of the program (some specific exemptions are discussed below). Internal Revenue Code Provisions section 3101 imposes payroll taxes on individuals and employer matching taxes. Section 3102 mandates that employers deduct these payroll taxes from worker's wages before they are paid. Generally, the payroll tax is mandatory on every worker, including the self-employed.

Groups not required to pay Social Security

There are a number of groups of workers who are exempted from Social Security taxes:

  • Federal employees hired before 1984 who elected to continue to participate in the federal retirement program instead of receiving part of their retirement under Social Security coverage.
  • State, or local government workers participating in their employers' alternative retirement system.
  • Ministers may choose whether or not they will participate in the Social Security program.
  • Self-employed workers with annual net earnings below $400.
  • Election workers earning $1,000 or less a year.
  • Household workers earning less than $1,100 per year.
  • Minor children with earnings from household work but for whom household work is not their principal occupation.
  • College students working at their school.
  • Individuals who are members of certain religious groups such as the Amish and Mennonites.
  • Some primary and secondary school educators have their own pension and disability insurance system that predates Social Security. They are allowed to pay in to their own system instead of the government system. Partly because these funds can be invested in securities, teachers' pension plans tend to be fairly generous.

Before the 1983 changes, three counties in Texas (Galveston, Brazoria, and Matagorda) opted out of the system and now use an Alternate Plan, a private pension plan created and administered by First Financial Benefits, Inc.

Demographic and revenue projections

In each year since 1982, OASDI tax receipts, interest payments and other income have exceeded benefit payments and other expenditures, most recently (in 2004) by more than $150 billion. [12] ( As the "baby boomers" move out of the work force and into retirement, however, it is anticipated that expenses will come to exceed Social Security tax revenues, if there are no changes in current law concerning taxes, benefits, and the retirement age.

According to most projections, the Social Security trust fund will begin drawing on its Treasury Notes toward the end of the next decade (around 2018 or 2019), at which time the repayment of these notes will have to be financed from the general fund. At some time thereafter, variously estimated as 2042 (by the Social Security Administration ( or 2052 (by the Congressional Budget Office (, the Social Security Trust Fund will have exhausted the claim on general revenues that had been built up during the years of surplus. At that point, current Social Security payroll tax receipts would be sufficient to fund 73 or 78 percent of the promised benefits, according to the two respective projections. The libertarian Cato Institute estimates that the annual shortfall will reach almost $700 billion in today's dollars by 2075. [13] (

The Social Security Administration projects that the demographic situation will stabilize. The current accounts deficit in the Social Security system will have ended, but the system will still require higher levels of revenue as a percentage of GDP and total wages than is currently the case. Recently, this projection has come into question, because of uncertainty about changes in life expectancy. The Social Security Administration forecast, based on a slowing of the rate of increase of life expectancy, is challenged by population experts who predict more rapid increases:

Tables published by the government's National Center for Health Statistics show that life expectancy at birth was 47.3 years in 1900, rose to 68.2 by 1950 and reached 77.3 in 2002. The latest annual report of the Social Security trustees projects that life expectancy will increase just six years in the next seven decades, to 83 in 2075. A separate set of projections, by the Census Bureau, shows more rapid growth.

("Social Security Underestimates Future Life Spans, Critics Say" ( The Census Bureau projection is that the longer lifespans projected for 2075 by the Social Security Administration will be reached in 2050. Other experts, however, think that the past gains in life expectancy cannot be repeated, and add that the adverse effect on the system's finances may be partly offset if health improvements induce people to stay in the workforce longer.

Actuarial science, of the kind used to project the future solvency of social security, is by nature inexact. The SSA actually makes three predictions: optimistic, mid-line, and pessimistic. The social security crisis that was developing prior to the 1983 reforms resulted from midline projections that turned out to be too optimistic. During the heavy-boom years of the 90s, the midline projections were too pessimistic. Obviously, projecting out 75 years is a significant challenge and, as such, all predictions must be taken with a grain of salt. The actual situation might be much better or much worse than predicted.

Increased spending for Social Security will occur at the same time as increases in Medicare, as a result of the aging of the baby boomers. One projection illustrates the relationship between the two programs:

From 2004 to 2030, the combined spending on Social Security and Medicare is expected to rise from 7 percent of national income (gross domestic product) to 13 percent. Two-thirds of the increase occurs in Medicare. [14] (

Political developments

On February 2, 2005, President George W. Bush made Social Security a prominent theme of his State of the Union Address. He described the Social Security system as "headed for bankruptcy", and outlined, in general terms, a proposal based on partial privatization. Critics responded that privatization would worsen the program's solvency outlook and would require huge new borrowing. For further information, see Social Security debate (United States).

See also



External links


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