Social Security in the United States currently refers to the federal Old-Age, Survivors, and Disability Insurance (OASDI) program.
For additional information about
Social Security, consider the following: RESOURCES
The original Social Security Act and the current version of the Act, as amended encompass several social welfare or social insurance programs. The larger and better known initiatives of the program are:
Federal Old-Age, Survivors, and Disability Insurance
Unemployment benefits
Temporary Assistance for Needy Families
Health Insurance for Aged and Disabled (Medicare)
Grants to States for Medical Assistance Programs (Medicaid)
State Children's Health Insurance Program (SCHIP)
Supplemental Security Income (SSI)
U.S. Social Security is a social insurance program funded through dedicated payroll taxes called Federal Insurance Contributions Act (FICA). Tax deposits are formally entrusted to Federal Old-Age and Survivors Insurance Trust Fund, or Federal Disability Insurance Trust Fund, Federal Hospital Insurance Trust Fund or the Federal Supplementary Medical Insurance Trust Fund. The main part of the program is sometimes abbreviated OASDI (Old Age, Survivors, and Disability Insurance) or RSDI (Retirement, Survivors, and Disability Insurance). When initially signed into law by President Franklin D. Roosevelt in 1935 as part of his New Deal, the term Social Security covered unemployment insurance as well. The term, in everyday speech, is used to refer only to the benefits for retirement, disability, survivorship, and death, which are the four main benefits provided by traditional private-sector pension plans.
The Social Security Act was drafted by President Roosevelt's committee on economic security, under Edwin Witte, and passed by Congress as part of the New Deal. The act was an attempt to limit what were seen as dangers in the modern American life, including old age, poverty, unemployment, and the burdens of widows and fatherless children. By passing this act, President Roosevelt became the first president to advocate the protection of the elderly.
In almost every financial situation that we deal with on a regular basis, there is the idea of an "account". For example, when you put money into a bank, it is understood to be "your money" and it goes into an account with your name on it. The same thing happens when you contribute to your 401(k) plan at work -- you have an account with your money in it, and if you change employers the money in the account is yours. You also have accounts for your credit card, mortgage, car loan, and so on. In any of these accounts, you add money to the account and take money out of it, and whoever holds the account keeps track of how much you have or you owe.
The Social Security system is nothing like that. In the Social Security system, the money you pay into the system gets immediately paid back out to the people who are currently getting Social Security checks. This arrangement came into being because of the way the system started. In 1935, when Roosevelt signed the Social Security Act into law, there were a lot of people who needed benefits (because of the Great Depression), but there was no money to pay those benefits with. The idea at the time was that people currently working would pay into the system, and their money would immediately go back out in the form of benefit checks. Each generation of retiring workers would get paid by the people currently working, and therefore the system would fund itself forever despite the fact that the system had no money to start with.
This clever idea worked great in 1935 (and for many years after that), but it is going to have a problem in the future for two reasons. In 1935, there were many more people paying into the system than those receiving benefits. The ratio of workers to retirees meant that workers did not have to pay much into the system in 1935 to support the retirees (this table shows that up through 1950, only 2% of income (1% employee, 1% employer) was withheld for Social Security, compared to 15.30% (7.65% employee, 7.65% employer) today). In the future, the retirement of millions of baby boomers will hurt the ratio -- there will be so many retired people that the working people will not be able to support them. If the population had grown steadily this would not have been a problem, but there is no good way for the design of the Social Security System to handle a population spike like the baby boomers.
Many people have become so used to the idea of a 401(k) plan (where your money belongs to you and grows to a large sum over time through investment compounding), that the idea behind the Social Security system becomes hard to swallow. Currently a worker pays 7.65% of his or her gross income into the Social Security system (with a cap at a gross income of around $70,000), and the employer pays another 7.65% for the worker as well. If you could take that 15.30% of gross income and invest it in a 401(k) plan for the same period of time, it would generate an immense sum of money based on historical returns -- far more than a person with average income (or greater) would get from Social Security. A retiree's Social Security benefit is calculated using a complex formula rather than an account balance, because there is no "account" in the traditional sense.
You might have heard that the Social Security system currently takes in more money than it pays out in order to try to handle the baby boomer problem. What happens with the excess money the system collects? The Social Security system buys U.S. Treasury bonds with the surplus. Essentially, the government (in the form of the Social Security Administration) loans the surplus to itself.
In future decades, when it comes time to start drawing on the collected surplus, the government will pay itself back through tax revenue (or additional borrowing). The Social Security system will start cashing in the bonds, and the government will have to make good on them with tax revenue. That sounds weird because it is weird -- Whether or not it will work is a source of significant debate right now. The effect it will have is that it will shift the payment of Social Security benefits over to the government as a whole. The government as a whole, rather than the Social Security system, will have to repay the treasury bonds that the Social Security system will be cashing in.
Social Security payroll taxes are collected under authority of the Federal Insurance Contributions Act (FICA). The payroll taxes are sometimes even called "FICA taxes."
The payroll taxes collected for Social Security are of course taxes, but they can also be described as contributions to the social insurance system that is Social Security. Hence the name "Federal Insurance Contributions Act." FICA refers to the tax provisions of the Social Security Act, as they appear in the Internal Revenue Code.
Dates of coverage for various workers:
1935 All workers in commerce and industry (except railroads) under age 65.
1939 Age restriction eliminated; seamen, bank employees added; additional domestic workers and food-processing workers removed.
1946 Railroad and Social Security earnings combined to determine eligibility for and amount of survivor benefits.
1950 Regularly employed farm and domestic workers and nonfarm self-employed (except professional groups). Federal civilian employees not under retirement system. Americans employed outside the United States by an American employer. Puerto Rico and Virgin Islands. At the option of the State, State and local government employees not under retirement system. Nonprofit organizations could elect coverage for their employees (other than ministers).
1951 Railroad workers with less than 10 years of service, for all benefits. (After October 1951, coverage is retroactive to 1937.)
1954 Farm self-employed. Professional self-employed except lawyers, dentists, doctors, and other medical groups. Additional regularly employed farm and domestic workers. Home workers. State and local government employees (except firemen and policemen) under retirement system if agreed to by referendum. Ministers could elect coverage.
1956 Members of the uniformed services. Remainder of professional self-employed except doctors. By referendum, firemen and policemen in designated States.
1965 Interns. Self-employed doctors. Tips.
1967 Ministers (unless exemption is claimed on grounds of conscience or religious principles). Firemen under retirement system in all States.
1972 Members of a religious order subject to a vow of poverty.
1983 All federal civilian employees hired after 1983; all employees of nonprofit organizations. Covered state and local government employees prohibited from opting out of Social Security.
1990 Employees of state and local governments not covered under a retirement plan.
Cited Source: The above statements, regulations, policies, procedures, forms, governance, or laws, are cited from "The U.S. Social Security Administration", "The Department of Social Security", and/or their agencies, departments, affiliates, and/or subsidiaries. Any inaccuracies or misstatements should be brought to our attention immediately via the "Contact Us" link which can be found at the bottom of each page.
