In the United States, Social Security is the commonly used term for the federal Old-Age, Survivors, and Disability Insurance (OASDI) program and is administered by the Social Security Administration. The original Social Security Act was signed into law by President Franklin D. Roosevelt in 1935, and the current version of the Act, as amended, encompasses several social welfare and social insurance programs.
Social Security is funded primarily through payroll taxes called Federal Insurance Contributions Act tax (FICA) or Self Employed Contributions Act Tax (SECA). Tax deposits are collected by the Internal Revenue Service (IRS) and are formally entrusted to the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund, the two Social Security Trust Funds. These two trust funds purchase government securities, the interest income from which is used presently to fund the monthly allocations to qualifying citizens. With a few exceptions, all salaried income, up to an amount specifically determined by law (see tax rate table below), is subject to the Social Security payroll tax. All income over said amount is not taxed. In 2020, the maximum amount of taxable earnings is $137,700.
With few exceptions, all legal residents working in the United States now have an individual Social Security number. Indeed, nearly all working (and many non-working) residents since Social Security's 1935 inception have had a Social Security number because it is requested by a wide range of businesses.
In 2017, Social Security expenditures totaled $806.7 billion for OASDI and $145.8 billion for DI. Income derived from Social Security is currently estimated to have reduced the poverty rate for Americans age 65 or older from about 40% to below 10%. In 2018, the trustees of the Social Security Trust Fund reported that the program will become financially insolvent in the year 2034 unless corrective action is enacted by Congress.
History
Historical Social Security Tax Rates Maximum Salary FICA or SECA taxes paid on | |||||||
---|---|---|---|---|---|---|---|
| |||||||
Year | Maximum Earnings taxed |
OASDI Tax rate |
Medicare Tax Rate |
Year | Maximum Earnings taxed |
OASDI Tax rate |
Medicare Tax Rate |
1937 | 3,000 | 2% | — | 1978 | 17,700 | 10.1% | 2.0% |
1938 | 3,000 | 2% | — | 1979 | 22,900 | 10.16% | 2.1% |
1939 | 3,000 | 2% | — | 1980 | 25,900 | 10.16% | 2.1% |
1940 | 3,000 | 2% | — | 1981 | 29,700 | 10.7% | 2.6% |
1941 | 3,000 | 2% | — | 1982 | 32,400 | 10.8% | 2.6% |
1942 | 3,000 | 2% | — | 1983 | 35,700 | 10.8% | 2.6% |
1943 | 3,000 | 2% | — | 1984 | 37,800 | 11.4% | 2.6% |
1944 | 3,000 | 2% | — | 1985 | 39,600 | 11.4% | 2.7% |
1945 | 3,000 | 2% | — | 1986 | 42,000 | 11.4% | 2.9% |
1946 | 3,000 | 2% | — | 1987 | 43,800 | 11.4% | 2.9% |
1947 | 3,000 | 2% | — | 1988 | 45,000 | 12.12% | 2.9% |
1948 | 3,000 | 2% | — | 1989 | 48,000 | 12.12% | 2.9% |
1949 | 3,000 | 2% | — | 1990 | 51,300 | 12.4% | 2.9% |
1950 | 3,000 | 3% | — | 1991 | 53,400 | 12.4% | 2.9% |
1951 | 3,600 | 3% | — | 1992 | 55,500 | 12.4% | 2.9% |
1952 | 3,600 | 3% | — | 1993 | 57,600 | 12.4% | 2.9% |
1953 | 3,600 | 3% | — | 1994 | 60,600 | 12.4% | 2.9% |
1954 | 3,600 | 4% | — | 1995 | 61,200 | 12.4% | 2.9% |
1955 | 4,200 | 4% | — | 1996 | 62,700 | 12.4% | 2.9% |
1956 | 4,200 | 4% | — | 1997 | 65,400 | 12.4% | 2.9% |
1957 | 4,200 | 4.5% | — | 1998 | 68,400 | 12.4% | 2.9% |
1958 | 4,200 | 4.5% | — | 1999 | 72,600 | 12.4% | 2.9% |
1959 | 4,800 | 5% | — | 2000 | 76,200 | 12.4% | 2.9% |
1960 | 4,800 | 6% | — | 2001 | 80,400 | 12.4% | 2.9% |
1961 | 4,800 | 6% | — | 2002 | 84,900 | 12.4% | 2.9% |
1962 | 4,800 | 6.25% | — | 2003 | 87,000 | 12.4% | 2.9% |
1963 | 4,800 | 7.25% | — | 2004 | 87,900 | 12.4% | 2.9% |
1964 | 4,800 | 7.25% | — | 2005 | 90,000 | 12.4% | 2.9% |
1965 | 4,800 | 7.25% | — | 2006 | 94,200 | 12.4% | 2.9% |
1966 | 6,600 | 7.7% | 0.7% | 2007 | 97,500 | 12.4% | 2.9% |
1967 | 6,600 | 7.8% | 1.0% | 2008 | 102,000 | 12.4% | 2.9% |
1968 | 7,800 | 7.6% | 1.2% | 2009 | 106,800 | 12.4% | 2.9% |
1969 | 7,800 | 8.4% | 1.2% | 2010 | 106,800 | 12.4% | 2.9% |
1970 | 7,800 | 8.4% | 1.2% | 2011 | 106,800 | 10.4% | 2.9% |
1971 | 7,800 | 9.2% | 1.2% | 2012 | 110,100 | 10.4% | 2.9% |
1972 | 9,000 | 9.2% | 1.2% | 2013 | 113,700 | 12.4% | 2.9% |
1973 | 10,800 | 9.7% | 2.0% | 2014 | 117,000 | 12.4% | 2.9% |
1974 | 13,200 | 9.9% | 1.8% | 2015 | 118,500 | 12.4% | 2.9% |
1975 | 14,100 | 9.9% | 1.8% | 2016 | 118,500 | 12.4% | 2.9% |
1976 | 15,300 | 9.9% | 1.8% | 2017 | 127,200 | 12.4% | 2.9% |
1977 | 16,500 | 9.9% | 1.8% | 2018 | 128,400 | 12.4% | 2.9% |
Notes: Tax rate is the sum of the OASDI and Medicare rate for employers and workers. In 2011 and 2012, the OASDI tax rate on workers was set temporarily to 4.2% while the employers OASDI rate remained at 6.2% giving 10.4% total rate. Medicare taxes of 2.9% now (2013) have no taxable income ceiling. Sources: Social Security Administration |
Social Security timeline
- 1935 The 37-page Social Security Act signed August 14 by President Franklin D. Roosevelt. Retirement benefits only to worker, welfare benefits started
- 1936 The new Social Security Board contracts the Post Office Department in late November to distribute and collect applications.
- 1937 Over 20 million Social Security Cards issued. Ernest Ackerman receives first lump-sum payout (of 17 cents) in January.
- 1939 Two new categories of beneficiaries added: spouse and minor children of a retired worker
- 1940 First monthly benefit check issued to Ida May Fuller for $22.54
- 1950 Benefits increased and cost of living adjustments (COLAs) made at irregular intervals – 77% COLA in 1950
- 1954 Disability program added to Social Security
- 1960 Flemming v. Nestor. Landmark U.S. Supreme Court ruling that gave Congress the power to amend and revise the schedule of benefits. The Court also ruled that recipients have no contractual right to receive payments.
- 1961 Early retirement age lowered to age 62 at reduced benefits
- 1965 Medicare health care benefits added to Social security – 20 million joined in three years
- 1966 Medicare tax of 0.7% added to pay for increased Medicare expenses
- 1972 Supplemental Security Income (SSI) program federalized and assigned to Social Security Administration
- 1975 Automatic cost of living adjustments (COLAs) mandated
- 1977 COLA adjustments brought back to "sustainable" levels
- 1980 Amendments are made in disability program to help solve some problems of fraud
- 1983 Taxation of Social Security benefits introduced, new federal hires required to be under Social Security, retirement age increased for younger workers to 66 and 67 years
- 1984 Congress passed the Disability Benefits Reform Act modifying several aspects of the disability program
- 1996 Drug addiction or alcoholism disability benefits could no longer be eligible for disability benefits. The Earnings limit doubled exemption amount for retired Social Security beneficiaries. Terminated SSI eligibility for most non-citizens
- 1997 The law requires the establishment of federal standards for state-issued birth certificates and requires SSA to develop a prototype counterfeit-resistant Social Security card – still being worked on.
- 1997 Temporary Assistance for Needy Families, (TANF), replaces Aid to Families with Dependent Children (AFDC) program placed under SSA
- 1997 State Children's Health Insurance Program for low income citizens – (SCHIP) added to Social Security Administration
- 2003 Voluntary drug benefits with supplemental Medicare insurance payments from recipients added
- 2009 No Social Security Benefits for Prisoners Act of 2009 signed.
A limited form of the Social Security program began, during President Franklin D. Roosevelt's first term, as a measure to implement "social insurance" during the Great Depression of the 1930s.
The Act was an attempt to limit unforeseen and unprepared-for dangers
in modern life, including old age, disability, poverty, unemployment,
and the burdens of widow(er)s with and without children.
Opponents, however, decried the proposal as socialism. In a Senate Finance Committee hearing, Senator Thomas Gore (D-OK) asked Secretary of Labor Frances Perkins, "Isn't this socialism?" She said that it was not, but he continued, "Isn't this a teeny-weeny bit of socialism?"
The provisions of Social Security have been changing since the
1930s, shifting in response to economic worries as well as coverage for
the poor, dependent children, spouses, survivors and the disabled.
By 1950, debates moved away from which occupational groups should be
included to get enough taxpayers to fund Social Security to how to
provide more benefits.
Changes in Social Security have reflected a balance between promoting
"equality" and efforts to provide "adequate" and affordable protection
for low wage workers.
Major programs
The larger and better known programs under the Social Security Administration, SSA, are:
- Federal Old-Age (Retirement), Survivors, and Disability Insurance, OASDI
- Temporary Assistance for Needy Families, TANF
- Health Insurance for Aged and Disabled, Medicare
- Grants to States for Medical Assistance Programs for low income citizens, Medicaid
- State Children's Health Insurance Program for low income citizens, SCHIP
- Supplemental Security Income, SSI
Benefits
Benefits and Income 2012
2013 Social Security Trustee Report All funds in billions of dollars | ||||
---|---|---|---|---|
| ||||
Category | Retirement OASI |
Disability DI |
Medicare Part A HI |
Medicare Part B & D SMI |
Income during 2012 | 731.1 | 109.1 | 243.0 | 293.9 |
Total paid 2012 | 645.4 | 140.3 | 266.8 | 307.4 |
Net change in Reserves | 85.6 | −31.2 | −23.8 | −13.5 |
Reserves (end of 2012) | 2,609.7 | 122.7 | 220.4 | 67.2 |
Benefit payments | 637.9 | 136.9 | 262.9 | 303.0 |
Railroad Retirement accounts | 4.1 | 0.5 | — | — |
Administrative expenses | 3.4 | 2.9 | 3.9 | 4.4 |
Social Security Income | ||||
Payroll taxes | 503.9 | 85.6 | 205.7 | — |
Taxes on OASDI benefits | 26.7 | 0.6 | 18.6 | — |
Beneficiary premiums | — | — | 3.7 | 66.6 |
Transfers from States | — | — | — | 8.4 |
General Fund reimbursements | 97.7 | 16.5 | 0.5 | — |
General revenue transfers1 | — | — | — | 214.8 |
Interest earnings | 102.8 | 6.4 | 10.6 | 2.8 |
Other | — | 3.9 | 2.2 | |
Total | 731.1 | 109.1 | 243.0 | 293.9 |
1. To prevent Social Security from losing tax revenue during the reduced Social Security worker 2.0% tax rate reduction in 2011 and 2012, Congress borrowed money from the federal general tax fund and transferred it to the Social Security trust funds. Sources: Social Security Administration, Centers for Medicare & Medicaid Services (CMS) |
The largest component of OASDI is the payment of retirement
benefits. These retirement benefits are a form of social insurance that
is heavily biased toward lower paid workers to make sure they do not
have to retire in relative poverty. With few exceptions, throughout a
worker's career, the Social Security Administration and the Internal Revenue Service (IRS) keeps track of his or her earnings and requires Federal Insurance Contribution Act, FICA
or Self Employed Contribution Act, SECA, taxes to be paid on the
earnings. The OASI accounts plus trust funds are the only Social
Security funding source that brings in more than it sends out.
Social Security revenues exceeded expenditures between 1983 and 2009.
The disability insurance (DI) taxes of 1.4% are included in the
OASDI rate of 6.2% for workers and employers or 12.4% for the
self-employed. Outgo of $140.3 billion while having income of only
$109.1 billion means the disability trust fund is rapidly being depleted
and may require either revisions on what "disabilities" are
included/allowed/defined as, fraud minimization, or tax increases.
The Medicare hospital insurance, HI (Part A: Hospital Insurance,
inpatient care, skilled nursing facility care, home health care, and
hospice care), expenditure rate of $266.8 billion in 2012—while bringing
in only $243.0 billion—means that the Medicare HI trust funds are being
seriously depleted and increased taxes or reduced coverage will be
required. The additional retirees expected under the "baby boom bulge"
will hasten this trust fund depletion. Medicare expenses, tied to
medical costs growth rates, have traditionally increased much faster
than GDP growth rates.
The Supplementary Medical Insurance, SMI (otherwise known as
Medicare Part B & D), expenditure rate of $307.4 billion in 2012
while bringing in only $293.9 billion means that the Supplementary
Medical Insurance trust funds are also being seriously depleted and
increased tax rates or reduced coverage will be required. The additional
retirees expected under the "baby boom bulge" will hasten this trust
fund depletion as well as legislation to end the Medicare Part D medical
prescription drug funding "donut hole" are all tied to medical costs
growth rates, which have traditionally increased much faster than GDP
growth rates.
For workers the Social Security tax rate is 6.2% on income under $127,200 through the end of 2017.
The worker Medicare tax rate is 1.45% of all income—employers pay
another 1.45%. Employers pay 6.2% up to the wage ceiling and the
Medicare tax of 1.45 percent on all income. Workers defined as "self
employed" pay 12.4% on income under $113,700 and a 2.9% Medicare tax on
all income.
The amount of the monthly Social Security benefit to which a
worker is entitled depends upon the earnings record they have paid FICA
or SECA taxes on and upon the age at which the retiree chooses to begin
receiving benefits.
Total benefits paid, by year
Year | Beneficiaries | Dollars |
---|---|---|
1937 | 53,236 | $1,278,000 |
1938 | 213,670 | $10,478,000 |
1939 | 174,839 | $13,896,000 |
1940 | 222,488 | $35,000,000 |
1950 | 3,477,243 | $961,000,000 |
1960 | 14,844,589 | $11,245,000,000 |
1970 | 26,228,629 | $31,863,000,000 |
1980 | 35,584,955 | $120,511,000,000 |
1990 | 39,832,125 | $247,796,000,000 |
1995 | 43,387,259 | $332,553,000,000 |
1996 | 43,736,836 | $347,088,000,000 |
1997 | 43,971,086 | $361,970,000,000 |
1998 | 44,245,731 | $374,990,000,000 |
1999 | 44,595,624 | $385,768,000,000 |
2000 | 45,414,794 | $407,644,000,000 |
2001 | 45,877,506 | $431,949,000,000 |
2002 | 46,444,317 | $453,746,000,000 |
2003 | 47,038,486 | $470,778,000,000 |
2004 | 47,687,693 | $493,263,000,000 |
2005 | 48,434,436 | $520,748,000,000 |
2006 | 49,122,624 | $546,238,000,000 |
2007 | 49,864,838 | $584,939,000,000 |
2008 | 50,898,244 | $615,344,000,000 |
Primary Insurance Amount and benefit calculations
All workers paying FICA (Federal Insurance Contributions Act)
and SECA (Self Employed Contributions Act) taxes for forty quarters of
credit (QC) or more on a specified minimum income or more are "fully
insured" and eligible to retire at age 62 with reduced benefits and
higher benefits at full retirement ages, FRA, of 65, 66 or 67 depending on birth date.
Retirement benefits depend upon the "adjusted" average wage earned in
the last 35 years. Wages of earlier years are "adjusted" before
averaging by multiplying each annual salary by an annual adjusted wage
index factor, AWI, for earlier salaries.
Adjusted wages for 35 years are always used to compute the 35 year
"average" indexed monthly salary. Only wages lower than the "ceiling"
income are considered in calculating the adjusted average wage. If the
worker has fewer than 35 years of covered earnings these
non-contributory years are assigned zero earnings. If there are more
than 35 years of covered earnings only the highest 35 are considered.
The sum of the 35 adjusted salaries (or less if worker has less than 35
years of covered income) times its inflation index, AWI divided by 420
(35 years x 12 months per year) gives the 35-year covered Average
Indexed Monthly salary, AIME.
To calculate a person's Average Indexed Monthly salary (AIME)
earnings, A detailed earnings summary may be obtained from the Social
Security Administration by requesting it and paying a fee of $91.00. The adjusted wage indexes are available at Social Security's "Benefit Calculation Examples For Workers Retiring In 2013".
Benefit Calculations Social Security Benefits vs. 35-year "Averaged" Salary Percent of Average Indexed Monthly salary (AIME) Earnings Salary eligible for in Social Security, PIA, Benefits | ||||
---|---|---|---|---|
| ||||
AIME Salary per month |
Single Benefits |
Married Benefits* |
Single Benefits at age 62 |
Married Benefits* at age 62 |
$ 791 | 90% | 135% | 68% | 101% |
$ 1,000 | 78% | 117% | 58% | 88% |
$ 2,000 | 55% | 82% | 41% | 62% |
$ 3,000 | 47% | 71% | 35% | 53% |
$ 4,000 | 43% | 65% | 33% | 49% |
$ 5,000 | 40% | 60% | 30% | 45% |
$ 6,000 | 36% | 54% | 27% | 41% |
$ 7,000 | 33% | 50% | 25% | 32% |
$ 8,000 | 31% | 46% | 23% | 35% |
$ 9,000 | 29% | 44% | 22% | 33% |
$ 10,000 | 28% | 42% | 21% | 31% |
$ 11,000 | 23% | 34% | 17% | 26% |
$ 12,000 | 21% | 32% | 16% | 24% |
$ 13,000 | 19% | 29% | 15% | 22% |
* Married spousal benefits may be reduced or eliminated if spouse receiving a government pension. Spouse still eligible for Medicare. Maximum percent of salary received before Medicare or tax deductions. Retirement benefits are calculated at full retirement ages. Age 62 retirement benefits are assumed to be 75% of full benefits. Approximately AIME salary = 90% present salary. Approximate only, contact Social Security for more detailed calculations. |
To calculate the total benefits a retiree is eligible for, the
average indexed monthly salary (AIME) is then divided into three
separate salary brackets—each multiplied by a different benefit
percentage. The benefits receivable (the so-called Primary Insurance
Amount, PIA) are the sum of the salary in each bracket times the benefit
percentages that apply to each bracket. The benefit percentages are set
by Congress and so can easily change in the future. The bendpoints,
where the brackets change, are adjusted for inflation each year by
Social Security. For example, in 2013 the first bracket runs from $1 to
$791/month and is multiplied by the benefit percentage of 90%, the
second salary bracket extends from $791 to $4,781/month is multiplied by
32%, the third salary bracket of more than $4,781/month is multiplied
by 15%. Any higher incomes than the ceiling income are not FICA covered
and are not considered in the benefits calculation or in determining the
average indexed monthly salary, AIME. At full retirement age the
projected retirement income amount (PIA) is the sum of these three
brackets of income multiplied by the appropriate benefit
percentages—90%, 32% and 15%. Unlike income tax brackets, the Social
Security benefits are heavily biased towards lower salaried workers.
Social Security has always been primarily a retirement, disability and
spousal insurance policy for low wage workers and a very poor retirement
plan for higher salaried workers who hopefully have a supplemental
retirement plan unless they want to live on significantly less after
retirement than they used to earn.
Full retirement age spouses and divorced spouses (married over 10
years before divorce) are entitled to the higher of 50% of the wage
earners benefits or their own earned benefits. A low salary worker and
his full retirement age spouse making less than or equal to $791/month
with 40 quarters of employment credit and at full retirement age (65 if
born before 1938, 66 if born from 1938 to 1954 and 67 if born after
1960) could retire with 135% of his indexed average salary. A full
retirement age worker and his full retirement age spouse making the
ceiling income or more would be eligible for 43% of the ceiling FICA
salary (29% if single) and even less if making more than the ceiling
income.
During working years, the low wage worker is eligible for the
Earned Income Tax Credit (FICA refunds) and federal child credits and
may pay little or no FICA tax or Income tax. By Congressional Budget
Office (CBO) calculations the lowest income quintile (0–20%) and second
quintile (21–40%) of households in the U.S. pay an average income tax of
−9.3% and −2.6% and Social Security taxes of 8.3% and 7.9%
respectively. By CBO calculations the household incomes in the first
quintile and second quintile have an average Total Federal Tax rate of 1.0% and 3.8% respectively.
Higher income retirees will have to pay income taxes on 85% of their
Social Security benefits and 100% on all other retirement benefits they
may have.
All workers paying FICA and SECA taxes for forty quarters of
credit (QC) or more on a specified minimum income is "fully insured" and
eligible to retire at age 62 with reduced benefits.
In general the Social Security Administration tries to limit the
projected lifetime benefits to the same amounts of retirement income the
recipient would receive if retiring at full retirement age. If a
recipient retires earlier he/she draws a lower Social Security benefit
income for a longer prospective lifetime after retirement. The basic
correction of benefits are age 62 retirees can only draw 75% of what
they would draw at full retirement age with higher percentages at
different ages more than 62 and less than full retirement age.
Similar computations based on career average adjusted earnings and age of recipient determine disability and survivor benefits.
Federal, state and local employees who have elected (when they could)
NOT to pay FICA taxes are eligible for a reduced FICA benefits and full
Medicare coverage if they have more than forty quarters of qualifying
Social Security covered work.
To minimize the Social Security payments to those who have not
contributed to FICA for 35+ years and are eligible for federal, state
and local benefits, which are usually more generous, Congress passed the
Windfall Elimination Provision, WEP.
The WEP provision will not eliminate all Social Security or Medicare
eligibility if the worker has 40 quarters of qualifying income, but
calculates the benefit payments by reducing the 90% multiplier in the
first PIA bendpoint to 40–85% depending on the number of Years of
Coverage. Foreign pensions are subject to WEP.
For those few cases where workers with very low earnings over a
long working lifetime that were too low to receive full retirement
credits
and the recipients would receive a very small Social Security
retirement benefit a "special minimum benefit" (special minimum PIA)
provides a "minimum" of $804 per month in Social Security benefits in
2013. To be eligible the recipient along with their auxiliaries and
survivors must have very low assets and not be eligible for other
retirement system benefits. About 75,000 people in 2013 receive this
benefit.
The benefits someone is eligible for are potentially so
complicated that potential retirees should consult the Social Security
Administration directly for advice. Many questions are addressed and at
least partially answered on many online publications and online
calculators.
Online benefits estimate
On July 22, 2008, the Social Security Administration introduced a new online benefits estimator.
A worker who has enough Social Security credits to qualify for
benefits, but who is not currently receiving benefits on his or her own
Social Security record and who is not a Medicare beneficiary, can obtain
an estimate of the retirement benefit that will be provided, for
different assumptions about age at retirement. This process is done by
opening a secure online account called my Social Security. For retirees who have non FICA or SECA taxed wages the rules get complicated and probably require additional help.
Normal retirement age
The earliest age at which (reduced) benefits are payable is 62. Full retirement benefits depend on a retiree's year of birth.
Year of birth | Normal retirement age |
---|---|
1937 and prior | 65 |
1938 | 65 and 2 months |
1939 | 65 and 4 months |
1940 | 65 and 6 months |
1941 | 65 and 8 months |
1942 | 65 and 10 months |
1943 to 1954 | 66 |
1955 | 66 and 2 months |
1956 | 66 and 4 months |
1957 | 66 and 6 months |
1958 | 66 and 8 months |
1959 | 66 and 10 months |
1960 and later | 67 |
Age when filing | Change in benefits from full amount |
---|---|
62 | -25% |
63 | -20% |
64 | -13.3% |
65 | -6.7% |
66 | ---- |
67 | +8% |
68 | +16% |
69 | +24% |
70 | +32% |
Based on a normal retirement age of 66 |
This table was copied in November 2011 from the Social Security
Administration web site cited above and referenced in the footnotes.
There are different rules for widows and widowers. Also from that site,
come the following two notes:
Notes:
1. Persons born on January 1 of any year should refer to the normal
retirement age for the previous year.
2. For the purpose of determining benefit reductions for early
retirement, widows and widowers whose entitlement is based on having
attained age 60 should add 2 years to the year of birth shown in the
table.
Those born before 1938 have a normal retirement age of 65. Normal
retirement age increases by two months for each ensuing year of birth
until 1943, when it reaches 66 and stays at 66 until 1955. Thereafter
the normal retirement age increases again by two months for each year
until 1960, when normal retirement age is 67 and remains 67 for all
individuals born thereafter.
A worker who starts benefits before normal retirement age has
their benefit reduced based on the number of months before normal
retirement age they start benefits. This reduction is 5/9 of 1% for each
month up to 36 and then 5/12 of 1% for each additional month. This
formula gives an 80% benefit at age 62 for a worker with a normal
retirement age of 65, a 75% benefit at age 62 for a worker with a normal
retirement age of 66, and a 70% benefit at age 62 for a worker with a
normal retirement age of 67. The Great Recession has resulted in an increase in long-term unemployment and an increase in workers taking early retirement.
A worker who delays starting retirement benefits past normal
retirement age earns delayed retirement credits that increase their
benefit until they reach age 70. These credits are also applied to their
widow(er)'s benefit. Children and spouse benefits are not affected by
these credits.
The normal retirement age for widow(er) benefits shifts the
year-of-birth schedule upward by two years, so that those widow(er)s
born before 1940 have age 65 as their normal retirement age.
Spouse's benefit and government pension offsets
The spousal retirement benefit is one-half the PIA
benefit amount of their spouse or their own earned benefits, whichever
is higher, if they both retire at "normal" retirement ages. Only after
the working spouse applies for retirement benefits may the non-working
spouse apply for spousal retirement benefits. The spousal benefit is the
PIA times an "early-retirement factor" if the spouse is younger than
the "normal" full retirement age. The early-retirement factor is
50% minus 25/36 of 1% per month for the first 36 months and 5/12 of 1%
for each additional month earlier than the "normal" full retirement
date. This typically works out to between 50% and 32.5% of the primary
workers PIA benefit. There is no increase for starting spousal benefits after full retirement age. A spouse is eligible, after a one-year duration of marriage is met and divorced
or former spouses are eligible for spousal benefits if the marriage
lasted for at least 10 years and the person applying is not currently
married. It is arithmetically
possible for one worker to generate spousal benefits for up to five of
his/her spouses that he/she may have, each must be in succession after a
proper divorce for each after a marriage that lasted at least ten years
each.
There is a Social Security government pension offset
that will reduce or eliminate any spousal (or ex-spouse) or widow(er)'s
benefits if the spouse or widow(er) is also receiving a government
(federal, state, or local) pension that did not require paying Social
Security taxes. The basic rule is that Social Security benefits will be
reduced by 2/3's of the spouse or widow(er)'s non-FICA taxed government
pension. If the spouse's or widow(er)'s government (non-FICA paying)
pension exceeds 150% of the "normal" spousal or widow(er)'s benefit the
spousal benefit is eliminated. For example, a "normal" spousal or
widow(er)'s benefit of $1,000/month would be reduced to $0.00 if the
spouse or widow(er)'s if already drawing a non-FICA taxed government
pension of $1,500/month or more per month. Pensions not based on income
do not reduce Social Security spousal or widow(er)'s benefits. Pensions
received from foreign countries do not cause GPO; however, a foreign
pension may be subject to the WEP.
The passage of the Senior Citizens' Freedom to Work Act,
in 2000, allows the worker to earn unlimited outside income without
offsets in the year after they reach full retirement. It also allows the
spouse and children of a worker who has reached normal full retirement
age to receive benefits under some circumstances while he/she does not.
The full retirement age worker must have begun the receipt of benefits,
to allow the spousal/children's benefits to begin, and then subsequently
suspended their own benefits in order to continue the postponement of
benefits in exchange for an increased benefit amount (5.5–8.0%/yr
increase) up to the age of 70. Thus a worker can delay retirement up to age seventy without affecting spousal or children's benefits.
Delayed benefits
Delayed Social Security Increases for retiring after full retirement age | ||
---|---|---|
| ||
Year of birth |
Yearly % increase |
Monthly % increase |
1933–34 | 5.5% | 11/24 of 1% |
1935–36 | 6.0% | 1/2 of 1% |
1937–38 | 6.5% | 13/24 of 1% |
1939–40 | 7.0% | 7/12 of 1% |
1941–42 | 7.5% | 5/8 of 1% |
1943+ | 8.0% | 2/3 of 1% |
If a worker delays receiving Social Security retirement benefits until after they reach full retirement age, the benefit will increase by two-thirds of one percent of the PIA per month.
After age 70 there are no more increases as a result of delaying
benefits. Social Security uses an "average" survival rate at your full
retirement age to prorate the increase in the amount of benefit increase
so that the total benefits are roughly the same whenever you retire.
Women may benefit more than men from this delayed benefit increase since
the "average" survival rates are based on both men and women and women
live approximately three years longer than men. The other consideration
is that workers only have a limited number of years of "good" health
left after they reach full retirement age and unless they enjoy their
job they may be passing up an opportunity to do something else they may
enjoy doing while they are still relatively healthy.
Benefits while continuing work
Due
to changing needs or personal preferences, a person may go back to work
after retiring. In this case, it is possible to get Social Security
retirement or survivors benefits and work at the same time. A worker who
is of full retirement age or older may (with spouse) keep all benefits,
after taxes, regardless of earnings. But, if this worker or the
worker's spouse are younger than full retirement age and receiving
benefits and earn "too much", the benefits will be reduced. If working
under full retirement age for the entire year and receiving benefits,
Social Security deducts $1 from the worker's benefit payments for every
$2 earned above the annual limit of $15,120 (2013). Deductions cease
when the benefits have been reduced to zero and the worker will get one
more year of income and age credit, slightly increasing future benefits
at retirement. For example, if you were receiving benefits of
$1,230/month (the average benefit paid) or $14,760 a year and have an
income of $29,520/year above the $15,120 limit ($44,640/year) you would
lose all ($14,760) of your benefits. If you made $1,000 more than
$15,200/year you would "only lose" $500 in benefits. You would get no
benefits for the months you work until the $1 deduction for $2 income
"squeeze" is satisfied. Your first social security check will be delayed
for several months—the first check may only be a fraction of the "full"
amount. The benefit deductions change in the year you reach full
retirement age and are still working—Social Security only deducts $1 in
benefits for every $3 you earn above $40,080 in 2013 for that year and
has no deduction thereafter. The income limits change (presumably for
inflation) year by year.
Widow(er) benefits
If
a worker covered by Social Security dies, a surviving spouse can
receive survivors' benefits if a 9-month duration of marriage is met. If
a widow waits until Full Retirement Age, they are eligible for 100 percent of their deceased spouse's PIA. If the death of the worker was accidental the duration of marriage test may be waived.
A divorced spouse may qualify if the duration of marriage was at least
10 full years and the widow(er) is not currently married, or remarried
after attainment of age 60 (50 if disabled and eligible for specific
types of benefits
prior to the date of marriage). A father or mother of any age with a
child age 16 or under or a disabled adult child in his or her care may
be eligible for benefits. The earliest age for a non-disabled
widow(er)'s benefit is age 60. If the worker received retirement
benefits prior to death, the benefit amount may not exceed the amount
the worker was receiving at the time of death or 82.5% of the PIA of the
deceased worker (whichever is more). If the surviving spouse starts benefits before full retirement age, there is an actuarial reduction.
If the worker earned delayed retirement credits by waiting to start
benefits after their full retirement age, the surviving spouse will have
those credits applied to their benefit.
If the worker died before the year of attainment of age 62, the
earnings will be indexed to the year in which the surviving spouse
attained age 60.
Children's benefits
Children
of a retired, disabled or deceased worker receive benefits as a
"dependent" or "survivor" if they are under the age of 18, or as long as
attending primary or secondary school up to age 19 years, 2 months; or
are over the age of 18 and were disabled before the age of 22.
The benefit for a child on a living parent's record is 50% of the
PIA, for a surviving child the benefit is 75% of the PIA. The benefit
amount may be reduced if total benefits on the record exceed the family
maximum.
In Astrue v. Capato (2012), the Supreme Court unanimously held that children conceived after a parent's death (by in vitro fertilization
procedure) are not entitled to Social Security survivors' benefits if
the laws of the state in which the parent's will was signed do not
provide for such benefits.
Disability
A worker who has worked long enough and recently enough (based on "quarters of coverage" within the recent past) to be covered can
receive disability benefits. These benefits start after five full
calendar months of disability, 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 immediately preceding the disability, but with more-lenient
provisions for younger workers who become disabled before having had a
chance to compile a long earnings history.
The worker must be unable to continue in his or her previous job
and unable to adjust to other work, with age, education, and work
experience taken into account; furthermore, the disability must be
long-term, lasting 12 months, expected to last 12 months, resulting in
death, or expected to result in death.
As with the retirement benefit, the amount of the disability benefit
payable depends on the worker's age and record of covered earnings.
Supplemental Security Income
(SSI) uses the same disability criteria as the insured social security
disability program, but SSI is not based upon insurance coverage.
Instead, a system of means-testing is used to determine whether the
claimants' income and net worth fall below certain income and asset
thresholds.
Severely disabled children may qualify for SSI. Standards for child disability are different from those for adults.
Disability determination at the Social Security Administration
has created the largest system of administrative courts in the United
States. Depending on the state of residence, a claimant whose initial
application for benefits is denied can request reconsideration or a hearing before an Administrative Law Judge (ALJ).
Such hearings sometimes involve participation of an independent
vocational expert (VE) or medical expert (ME), as called upon by the
ALJ.
Reconsideration involves a re-examination of the evidence and, in some cases, the opportunity for a hearing before a (non-attorney)
disability hearing officer. The hearing officer then issues a decision
in writing, providing justification for his/her finding. If the claimant
is denied at the reconsideration stage, (s)he may request a hearing
before an Administrative Law Judge. In some states, SSA has implemented a
pilot program that eliminates the reconsideration step and allows
claimants to appeal an initial denial directly to an Administrative Law
Judge.
Because the number of applications for Social Security disability
is very large (approximately 650,000 applications per year), the number
of hearings requested by claimants often exceeds the capacity of
Administrative Law Judges. The number of hearings requested and
availability of Administrative Law Judges varies geographically across
the United States. In some areas of the country, it is possible for a
claimant to have a hearing with an Administrative Law Judge within 90
days of his/her request. In other areas, waiting times of 18 months are
not uncommon.
After the hearing, the Administrative Law Judge (ALJ) issues a decision in writing. The decision can be Fully Favorable (the ALJ finds the claimant disabled as of the date that (s) he alleges in the application through the present), Partially Favorable
(the ALJ finds the claimant disabled at some point, but not as of the
date alleged in the application; OR the ALJ finds that the claimant was disabled but has improved), or Unfavorable
(the ALJ finds that the claimant was not disabled at all). Claimants
can appeal decisions to Social Security's Appeals Council, which is in Virginia.
The Appeals Council does not hold hearings; it accepts written briefs.
Response time from the Appeals Council can range from 12 weeks to more
than 3 years.
If the claimant disagrees with the Appeals Council's decision, (s)he can appeal the case in the federal district court
for his/her jurisdiction. As in most federal court cases, an
unfavorable district court decision can be appealed to the appropriate United States Court of Appeals, and an unfavorable appellate court decision can be appealed to the United States Supreme Court.
The Social Security Administration has maintained its goal for
judges to resolve 500–700 cases per year but an Administrative Law Judge
on the average nationwide disposes of approximately 400 cases per year.
The debate about the social security system in the United States has
been ongoing for decades and there is much concern about its
sustainability.
Current operation
Joining and quitting
Obtaining a Social Security number for a child is voluntary.
Further, there is no general legal requirement that individuals join
the Social Security program unless they want or have to work. Under
normal circumstances, FICA taxes or SECA taxes will be collected on all
wages. About the only way to avoid paying either FICA or SECA taxes is
to join a religion that does not believe in insurance, such as the Amish, Christian Science or a religion whose members have taken a vow of poverty (see IRS publication 517 and 4361).
Federal workers employed before 1987, various state and local workers
including those in some school districts who had their own retirement
and disability programs were given the one-time option of joining Social
Security. Many employees and retirement and disability systems opted to
keep out of the Social Security system because of the cost and the
limited benefits. It was often much cheaper to obtain much higher
retirement and disability benefits by staying in their original
retirement and disability plans.
Now only a few of these plans allow new hires to join their existing
plans without also joining Social Security. In 2004, the Social Security
Administration estimated that 96% of all U.S. workers were covered by
the system with the remaining 4% mostly a minority of government
employees enrolled in public employee pensions and not subject to Social Security taxes due to historical exemptions.
It is possible for railroad employees to get a "coordinated" retirement and disability benefits. The U.S. Railroad Retirement Board (or "RRB") is an independent agency in the executive branch of the United States government created in 1935
to administer a social insurance program providing retirement benefits
to the country's railroad workers. Railroad retirement Tier I payroll
taxes are coordinated with social security taxes so that employees and
employers pay Tier I taxes at the same rate as social security taxes and
have the same benefits. In addition, both workers and employers pay
Tier II taxes (about 6.2% in 2005), which are used to finance railroad
retirement and disability benefit payments that are over and above
social security levels. Tier 2 benefits are a supplemental retirement
and disability benefit system that pays 0.875% times years of service
times average highest five years of employment salary, in addition to
Social Security benefits.
The FICA taxes are imposed on nearly all workers and self-employed persons. Employers are required
to report wages for covered employment to Social Security for
processing Forms W-2 and W-3. Some specific wages are not part of the
Social Security program (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 workers' wages
before they are paid. Generally, the payroll tax is imposed on everyone
in employment earning "wages" as defined in 3121 of the Internal Revenue Code. and also taxes net earnings from self-employment.
Trust fund
Social Security taxes are paid into the Social Security Trust Fund maintained by the U.S. Treasury (technically, the "Federal Old-Age and Survivors Insurance Trust Fund", as established by ).
Current year expenses are paid from current Social Security tax
revenues. When revenues exceed expenditures, as they did between 1983
and 2009, the excess is invested in special series, non-marketable U.S. government bonds. Thus, the Social Security Trust Fund indirectly finances the federal government's general purpose deficit spending. In 2007, the cumulative excess of Social Security taxes and interest received over benefits paid out stood at $2.2 trillion.
Some regard the Trust Fund as an accounting construct with no economic
significance. Others argue that it has specific legal significance
because the Treasury securities it holds are backed by the "full faith
and credit" of the U.S. government, which has an obligation to repay its
debt.
The Social Security Administration's authority to make benefit
payments as granted by Congress extends only to its current revenues and
existing Trust Fund balance, i.e., redemption of its holdings of
Treasury securities. Therefore, Social Security's ability to make full
payments once annual benefits exceed revenues depends in part on the
federal government's ability to make good on the bonds that it has
issued to the Social Security trust funds. As with any other federal
obligation, the federal government's ability to repay Social Security is
based on its power to tax and borrow and the commitment of Congress to
meet its obligations.
In 2009 the Office of the Chief Actuary of the Social Security
Administration calculated an unfunded obligation of $15.1 trillion for
the Social Security program. The unfunded obligation is the difference
between the future cost of Social Security (based on several demographic
assumptions such as mortality, work force participation, immigration,
and age expectancy) and total assets in the Trust Fund given the
expected contribution rate through the current scheduled payroll tax.
This unfunded obligation is expressed in present value dollars and is a
part of the Fund's long-range actuarial estimates, not necessarily a
certainty of what will occur in the long run. An Actuarial Note to the
calculation says that "The term obligation is used in lieu of the term
liability, because liability generally indicates a contractual
obligation (as in the case of private pensions and insurance) that
cannot be altered by the plan sponsor without the agreement of the plan
participants."[
Office of Hearings Operations (OHO, formerly ODAR or OHA)
On
August 8, 2017, Acting Commissioner Nancy A. Berryhill informed
employees that the Office of Disability Adjudication and Review ("ODAR")
would be renamed to Office of Hearings Operations ("OHO").
The hearing offices had been known as "ODAR" since 2006, and the
Office of Hearings and Appeals ("OHA") before that. OHO administers the
ALJ hearings for the Social Security Administration.
Administrative Law Judges ("ALJs") conduct hearings and issue
decisions. After an ALJ decision, the Appeals Council considers
requests for review of ALJ decisions, and acts as the final level of
administrative review for the Social Security Administration (the stage
at which "exhaustion" could occur, a prerequisite for federal court
review).
Benefit payout comparisons
Some
federal, state, local and education government employees pay no Social
Security but have their own retirement, disability systems that nearly
always pay much better retirement and disability benefits than Social
Security. These plans typically require vesting—working for 5–10 years
for the same employer before becoming eligible for retirement. But their
retirement typically only depends on the average of the best 3–10 years
salaries times some retirement factor (typically 0.875%–3.0%) times
years employed. This retirement benefit can be a "reasonably good"
(75–85% of salary) retirement at close to the monthly salary they were
last employed at. For example, if a person joined the University of
California retirement system at age 25 and worked for 35 years they
could receive 87.5% (2.5% × 35) of their average highest three year
salary with full medical coverage at age 60. Police and firefighters who
joined at 25 and worked for 30 years could receive 90% (3.0% × 30) of
their average salary and full medical coverage at age 55. These
retirements have cost of living adjustments (COLA) applied each year but
are limited to a maximum average income of $350,000/year or less.
Spousal survivor benefits are available at 100–67% of the primary
benefits rate for 8.7% to 6.7% reduction in retirement benefits,
respectively.
UCRP retirement and disability plan benefits are funded by
contributions from both members and the university (typically 5% of
salary each) and by the compounded investment earnings of the
accumulated totals. These contributions and earnings are held in a trust
fund that is invested. The retirement benefits are much more generous
than Social Security but are believed to be actuarially sound. The main
difference between state and local government sponsored retirement
systems and Social Security is that the state and local retirement
systems use compounded investments that are usually heavily weighted in
the stock market securities—which historically have returned more than
7.0%/year on average despite some years with losses.
Short term federal government investments may be more secure but pay
much lower average percentages. Nearly all other federal, state and
local retirement systems work in a similar fashion with different
benefit retirement ratios. Some plans are now combined with Social
Security and are "piggy backed" on top of Social Security benefits. For
example, the current Federal Employees Retirement System,
which covers the vast majority of federal civil service employees hired
after 1986, combines Social Security, a modest defined-benefit pension
(1.1% per year of service) and the defined-contribution Thrift Savings Plan.
The current Social Security formula used in calculating the
benefit level (primary insurance amount or PIA) is progressive vis-à-vis
lower average salaries. Anyone who worked in OASDI covered employment
and other retirement would be entitled to both the alternative non-OASDI
pension and an Old Age retirement benefit from Social Security. Because
of their limited time working in OASDI covered employment the sum of
their covered salaries times inflation factor divided by 420 months
yields a low adjusted indexed monthly salary over 35 years, AIME. The
progressive nature of the PIA formula would in effect allow these
workers to also get a slightly higher Social Security Benefit percentage
on this low average salary. Congress passed in 1983 the Windfall
Elimination Provision to minimize Social Security benefits for these
recipients. The basic provision is that the first salary bracket,
$0–791/month (2013) has its normal benefit percentage of 90% reduced to
40–90%—see Social Security for the exact percentage. The reduction is
limited to roughly 50% of what you would be eligible for if you had
always worked under OASDI taxes. The 90% benefit percentage factor is
not reduced if you have 30 or more years of "substantial" earnings.
The average Social Security payment of $1,230/month ($14,760/year) in 2013 is only slightly above the federal poverty level for one—$11,420/yr and below the poverty guideline of $15,500/yr for two.
For this reason, financial advisers often encourage those who
have the option to do so to supplement their Social Security
contributions with private retirement plans. One "good" supplemental
retirement plan option is an employer-sponsored 401(K) (or 403(B)) plan when they are offered by an employer. 58% of American workers have access to such plans.
Many of these employers will match a portion of an employee's savings
dollar-for-dollar up to a certain percentage of the employee's salary.
Even without employer matches, individual retirement accounts
(IRAs) are portable, self-directed, tax-deferred retirement accounts
that offer the potential to substantially increase retirement savings.
Their limitations include: the financial literacy to tell a "good"
investment account from a less advantageous one; the savings barrier
faced by those who are in low-wage employment or burdened by debt; the
requirement of self-discipline to allot from an early age the required
percentage of salary into "good" investment account(s); and the
self–discipline needed to leave it there to earn compound interest
until needed after retirement. Financial advisers often suggest that
long-term investment horizons should be used, as historically short-term
investment losses "self correct", and most investments continue to
deliver good average investment returns.
The IRS has tax penalties for withdrawals from IRAs, 401(K)s, etc.
before the age of 59½, and requires mandatory withdrawals once the
retiree reaches 70; other restrictions may also apply on the amount of
tax-deferred income one can put in the account(s).
For people who have access to them, self-directed retirement savings
plans have the potential to match or even exceed the benefits earned by
federal, state and local government retirement plans.
International agreements
People
sometimes relocate from one country to another, either permanently or
on a limited-time basis. This presents challenges to businesses,
governments, and individuals seeking to ensure future benefits or having
to deal with taxation authorities in multiple countries. To that end,
the Social Security Administration has signed treaties, often referred
to as Totalization Agreements, with other social insurance programs in various foreign countries.
Overall, these agreements serve two main purposes. First, they
eliminate dual Social Security taxation, the situation that occurs when a
worker from one country works in another country and is required to pay
Social Security taxes to both countries on the same earnings. Second,
the agreements help fill gaps in benefit protection for workers who have
divided their careers between the United States and another country.
The following countries have signed totalization agreements with the SSA (and the date the agreement became effective):
- Italy (November 1, 1978)
- Germany (December 1, 1979)
- Switzerland (November 1, 1980)
- Belgium (July 1, 1984)
- Norway (July 1, 1984)
- Canada (August 1, 1984)
- United Kingdom (January 1, 1985)
- Sweden (January 1, 1987)
- Spain (April 1, 1988)
- France (July 1, 1988)
- Portugal (August 1, 1989)
- Netherlands (November 1, 1990)
- Austria (November 1, 1991)
- Finland (November 1, 1992)
- Ireland (September 1, 1993)
- Luxembourg (November 1, 1993)
- Greece (September 1, 1994)
- South Korea (April 1, 2001)
- Chile (December 1, 2001)
- Australia (October 1, 2002)
- Japan (October 1, 2005)
- Denmark (October 1, 2008)
- Czech Republic (January 1, 2009)
- Poland (March 1, 2009)
- Slovak Republic (May 1, 2014)
- Mexico (Signed on June 29, 2004, but not yet in effect)
Social Security number
A side effect of the Social Security program in the United States has
been the near-universal adoption of the program's identification
number, the Social Security number, as the de facto U.S. national identification number. The social security number, or SSN, is issued pursuant to section 205(c)(2) of the Social Security Act, codified as . The government originally stated that the SSN would not be a means of identification,
but currently 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, the military as well as private agencies such as banks, colleges and universities, health insurance companies, and employers.
Although the Social Security Act itself does not require a person
to have a Social Security Number (SSN) to live and work in the United
States, the Internal Revenue Code does generally require the use of the social security number by individuals for federal tax purposes:
-
- The social security account number issued to an individual for purposes of section 205(c)(2)(A) of the Social Security Act shall, except as shall otherwise be specified under regulations of the Secretary [of the Treasury or his delegate], be used as the identifying number for such individual for purposes of this title.
Importantly, most parents apply for Social Security numbers for their dependent children in order to
include them on their income tax returns as a dependent. Everyone
filing a tax return, as taxpayer or spouse, must have a Social Security
Number or Taxpayer Identification Number (TIN) since the IRS is unable to process returns or post payments for anyone without an SSN or TIN.
The Privacy Act of 1974
was in part intended to limit usage of the Social Security number as a
means of identification. Paragraph (1) of subsection (a) of section 7 of
the Privacy Act, an uncodified provision, states in part:
-
- (1) It shall be unlawful for any Federal, State or local government agency to deny to any individual any right, benefit, or privilege provided by law because of such individual's refusal to disclose his social security account number.
However, the Social Security Act provides:
-
- It is the policy of the United States that any State (or political subdivision thereof) may, in the administration of any tax, general public assistance, driver's license, or motor vehicle registration law within its jurisdiction, utilize the social security account numbers issued by the Commissioner of Social Security for the purpose of establishing the identification of individuals affected by such law, and may require any individual who is or appears to be so affected to furnish to such State (or political subdivision thereof) or any agency thereof having administrative responsibility for the law involved, the social security account number (or numbers, if he has more than one such number) issued to him by the Commissioner of Social Security.
Further, paragraph (2) of subsection (a) of section 7 of the Privacy Act provides in part:
-
- (2) the provisions of paragraph (1) of this subsection shall not apply with respect to –
-
-
- (A) any disclosure which is required by Federal statute, or
-
-
-
- (B) the disclosure of a social security number to any Federal, State, or local agency maintaining a system of records in existence and operating before January 1, 1975, if such disclosure was required under statute or regulation adopted prior to such date to verify the identity of an individual.
-
The exceptions under section 7 of the Privacy Act include the
Internal Revenue Code requirement that social security numbers be used
as taxpayer identification numbers for individuals.
Demographic and revenue projections
In
each year since 1982, OASDI tax receipts, interest payments and other
income have exceeded benefit payments and other expenditures, for
example by more than $150 billion in 2004. As the "baby boomers"
move out of the work force and into retirement, however, expenses will
come to exceed tax receipts and then, after several more years, will
exceed all OASDI trust income, including interest. At that point the
system will begin drawing on its trust fund Treasury Notes, and will
continue to pay benefits at the current levels until the Trust Fund is
exhausted. In 2013, the OASDI retirement insurance fund collected $731.1
billion and spent $645.5 billion; the disability program (DI) collected
$109.1 billion and spent $140.3 billion; Medicare (HI) collected $243.0
and spent $266.8 billion and Supplementary Medical Insurance, SMI,
collected $293.9 billion and spent $307.4 billion. In 2013 all Social
Security programs except the retirement trust fund (OASDI) spent more
than they brought in and relied on significant withdrawals from their
respective trust funds to pay their bills. The retirement (OASDI) trust
fund of $2,541 billion is expected to be emptied by 2033 by one estimate
as new retirees become eligible to join. The disability (DI) trust
fund's $153.9 billion will be exhausted by 2018; the Medicare (HI) trust
fund of $244.2 billion will be exhausted by 2023 and the Supplemental
Medical Insurance (SMI) trust fund will be exhausted by 2020 if the
present rate of withdrawals continues—even sooner if they increase. The
total "Social Security" expenditures in 2013 were $1,360 billion
dollars, which was 8.4% of the $16,200 billion GNP (2013) and 37.0% of
the federal expenditures of $3,684 billion (including a $971.0 billion
deficit).
All other parts of the Social Security program: medicare (HI),
disability (DI) and Supplemental Medical (SMI) trust funds are already
drawing down their trust funds and are projected to go into deficit in
about 2020 if the present rate of withdrawals continue. As the trust funds are exhausted either benefits will have to be cut, fraud minimized or taxes increased. According to the Center for Economic and Policy Research, upward redistribution of income is responsible for about 43% of the projected Social Security shortfall over the next 75 years.
In 2005, this exhaustion of the OASDI Trust Fund was projected to occur in 2041 by the Social Security Administration or by 2052 by the Congressional Budget Office, CBO.
Thereafter, however, the projection for the exhaustion date of this
event was moved up slightly after the recession worsened the U.S.
economy's financial picture. The 2011 OASDI Trustees Report stated:
Annual cost exceeded non-interest income in 2010 and is projected to continue to be larger throughout the remainder of the 75-year valuation period. Nevertheless, from 2010 through 2022, total trust fund income, including interest income, is more than is necessary to cover costs, so trust fund assets will continue to grow during that time period. Beginning in 2023, trust fund assets will diminish until they become exhausted in 2036. Non-interest income is projected to be sufficient to support expenditures at a level of 77 percent of scheduled benefits after trust fund exhaustion in 2036, and then to decline to 74 percent of scheduled benefits in 2085.
In 2007, the Social Security Trustees suggested that either the
payroll tax could increase to 16.41 percent in 2041 and steadily
increased to 17.60 percent in 2081 or a cut in benefits by 25 percent in
2041 and steadily increased to an overall cut of 30 percent in 2081.
The Social Security Administration projects that the demographic
situation will stabilize. The cash flow deficit in the Social Security
system will have leveled off as a share of the economy. This projection
has come into question. Some demographers argue that life expectancy
will improve more than projected by the Social Security Trustees, a
development that would make solvency worse. Some economists believe
future productivity growth will be higher than the current projections
by the Social Security Trustees. In this case, the Social Security
shortfall would be smaller than currently projected.
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 Agency (SSA) 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.
The Census Bureau projection is that the longer life spans 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 or reduced
retirement benefits 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 subject to uncertainty. The
SSA actually makes three predictions: optimistic, midline, and
pessimistic (until the late 1980s it made 4 projections). The Social
Security crisis that was developing prior to the 1983 reforms resulted
from midline projections that turned out to be too optimistic. It has
been argued that the overly pessimistic projections of the mid to late
1990s were partly the result of the low economic growth (according to
actuary David Langer) assumptions that resulted in pushing back the
projected exhaustion date (from 2028 to 2042) with each successive
Trustee's report.
During the heavy-boom years of the 1990s, the midline projections were
too pessimistic. Obviously, projecting out 75 years is a significant
challenge and, as such, the actual situation might be much better or
much worse than predicted.
The Social Security Advisory Board has on three occasions since
1999 appointed a Technical Advisory Panel to review the methods and
assumptions used in the annual projections for the Social Security trust
funds. The most recent report of the Technical Advisory Panel, released
in June 2008 with a copyright date of October 2007, includes a number
of recommendations for improving the Social Security projections.
As of December 2013, under current law, the Congressional Budget Office
reported that the "Disability Insurance trust fund will be exhausted in
fiscal year 2017 and the Old-Age and Survivors Insurance trust fund
will be exhausted in 2033".
Costs of Social Security have already started to exceed income since
2018. This means the trust funds have already begun to be empty and will
be fully depleted in the near future. As of 2018, the projections made
by the Social Security Administration estimates that Social Security
program as a whole will deplete all reserves by the year 2034.
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 8% of national income (gross domestic product) to 13%. Two-thirds of the increase occurs in Medicare.
Ways to eliminate the projected shortfall
Social Security is predicted to start running out of having enough
money to pay all prospective retirees at today's benefit payouts by
2034.
- Lift the payroll ceiling. The payroll ceiling is now adjusted for inflation. Robert Reich, former United States Secretary of Labor, suggests lifting the ceiling on income subject to Social Security taxes, which is $127,200 as of January 1, 2017.
- Increase Social Security taxes. If workers and employers each paid 7.6% (up from today's 6.2%), it would eliminate the financing gap altogether. This 1.4% increase (2.8% for self-employed) has over 60% support in surveys conducted by the National Academy of Social Insurance (NASI).
- Raise the retirement age(s). Raising the early retirement option from age 62 to 64 would help cut down on Social Security benefit payouts.
- Means-test benefits. Phase out of Social Security benefits for those who already have income over $48,000/year ($4,000/month) would eliminate over 20% of the funding gap. This is not very popular, with only 31% of surveyed households favoring it.
- Change the cost-of-living adjustment, COLA. Several proposals have been discussed. Effects of COLA reductions would be cumulative over time and would affect some groups more than others. Poverty rates would increase.
- Reduce benefits for new retirees. If Social Security benefits were reduced by 3% to 5% for new retirees, about 18% to 30% percent of the funding gap would be eliminated.
- Average in more working years. Social Security benefits are now based on an average of a worker's 35 highest paid salaries with zeros averaged in if there are fewer than 35 years of covered wages. The averaging period could be increased to 38 or 40 years, which could potentially reduce the deficit by 10 to 20%, respectively.
- Require all newly hired people to join Social Security. Over 90% of all workers already pay FICA and SECA taxes, so there is not much to gain by this. There would be an early increase in Social Security income that would be partially offset later by the benefits they might collect when they retire.
Taxation
Tax on wages and self-employment income
Benefits
are funded by taxes imposed on wages of employees and self-employed
persons. As explained below, in the case of employment, the employer and
employee are each responsible for one half of the Social Security tax,
with the employee's half being withheld from the employee's pay check.
In the case of self-employed persons (i.e., independent contractors),
the self-employed person is responsible for the entire amount of Social
Security tax.
The portion of taxes collected from the employee for Social
Security are referred to as "trust fund taxes" and the employer is
required to remit them to the government. These taxes take priority over
everything, and represent the only debts of a corporation or LLC that
can impose personal liability upon its officers or managers. A sole
proprietor and officers of a corporation and managers of an LLC can be
held personally liable for non-payment of the income tax and social
security taxes whether or not actually collected from the employee.
The Federal Insurance Contributions Act (FICA) (codified in the Internal Revenue Code) imposes a Social Security withholding tax equal to 6.20% of the gross wage amount, up to but not exceeding the Social Security Wage Base
($97,500 for 2007; $102,000 for 2008; and $106,800 for 2009, 2010, and
2011). The same 6.20% tax is imposed on employers. For 2011 and 2012,
the employee's contribution was reduced to 4.2%, while the employer's
portion remained at 6.2%. In 2012, the wage base increased to $110,100. In 2013, the wage base increased to $113,700.
For each calendar year for which the worker is assessed the FICA
contribution, the SSA credits those wages as that year's covered wages.
The income cutoff is adjusted yearly for inflation and other factors.
A separate payroll tax of 1.45% of an employee's income is paid
directly by the employer, and an additional 1.45% deducted from the
employee's paycheck, yielding a total tax rate of 2.90%. There is no
maximum limit on this portion of the tax. This portion of the tax is
used to fund the Medicare program, which is primarily responsible for providing health benefits to retirees.
The Social Security tax rates from 1937–2010 can be accessed on the Social Security Administration's website.
The combined tax rate of these two federal programs is 15.30%
(7.65% paid by the employee and 7.65% paid by the employer). In
2011–2012 it temporarily dropped to 13.30% (5.65% paid by the employee
and 7.65% paid by the employer).
For self-employed workers
(who technically are not employees and are deemed not to be earning
"wages" for federal tax purposes), the self-employment tax, imposed by
the Self-Employment Contributions Act of 1954, codified as Chapter 2 of
Subtitle A of the Internal Revenue Code, 26 U.S.C. §§ 1401–1403, is 15.3% of "net earnings from self-employment."
In essence, a self-employed individual pays both the employee and
employer share of the tax, although half of the self-employment tax (the
"employer share") is deductible when calculating the individual's
federal income tax.
If an employee has overpaid payroll taxes by having more than one
job or switching jobs during the year, the excess taxes will be
refunded when the employee files his federal income tax return. Any excess taxes paid by employers, however, are not refundable to the employers.
Wages not subject to tax
Workers are not required to pay Social Security taxes on wages from certain types of work:
- Wages received by certain state or local government workers participating in their employers' alternative retirement system.
- Net annual earnings from self-employment of less than $400.
- Wages received for service as an election worker, if less than $1,400 a year (in 2008).
- Wages received for working as a household employee, if less than $1,700 per year (in 2009–2010).
- Wages received by college students working under Federal Work Study programs, graduate students receiving stipends while working as teaching assistants, research assistants, or on fellowships, and most postdoctoral researchers. Eliminated starting January 2011.
- Earnings received for serving as a minister (or for similar religious service) if the person has a conscientious objection to public insurance because of personal religious considerations.
Federal income taxation of benefits
Originally the benefits received by retirees were not taxed as income. Beginning in tax year 1984, with the Reagan-era
reforms to repair the system's projected insolvency, retirees with
incomes over $25,000 (in the case of married persons filing separately
who did not live with the spouse at any time during the year, and for
persons filing as "single"), or with combined incomes over $32,000 (if
married filing jointly) or, in certain cases, any income amount (if
married filing separately from the spouse in a year in which the
taxpayer lived with the spouse at any time) generally saw part of the
retiree benefits subject to federal income tax. In 1984, the portion of the benefits potentially subject to tax was 50%. The Deficit Reduction Act of 1993 set the portion to 85%.
Criticisms
Claim of discrimination against the poor and the middle class
Workers must pay 12.4 percent, including a 6.2 percent employer contribution, on their wages below the Social Security Wage Base ($110,100 in 2012), but no tax on income in excess of this amount.
Therefore, high earners pay a lower percentage of their total income
because of the income caps; because of this, and the fact there is no
tax on unearned income, social security taxes are often viewed as being regressive.
However, benefits are adjusted to be significantly more progressive,
even when accounting for differences in life expectancy. According to
the non-partisan Congressional Budget Office, for people in the bottom
fifth of the earnings distribution, the ratio of benefits to taxes is
almost three times as high as it is for those in the top fifth.
Despite its regressive tax rate, Social Security benefits are
calculated using a progressive benefit formula that replaces a much
higher percentage of low-income workers' pre-retirement income than that
of higher-income workers (although these low-income workers pay a
higher percentage of their pre-retirement income).
Supporters of the current system also point to numerous studies that
show that, relative to high-income workers, Social Security disability
and survivor benefits paid on behalf of low-income workers more than
offset any retirement benefits that may be lost because of shorter life
expectancy (this offset would only apply at a population level).
Other research asserts that survivor benefits, allegedly an offset,
actually exacerbate the problem because survivor benefits are denied to
single individuals, including widow(er)s married fewer than nine months
(except in certain situations), divorced widow(er)s married fewer than 10 years, and co-habiting or same-sex couples, unless they are legally married in their state of residence. Unmarried individuals and minorities tend to be less wealthy.
Social Security's benefit formula provides 90% of average indexed
monthly earnings (AIME) below the first "bend point" of $791/month, 32%
of AIME between the first and second bend points $791 to $4781/month,
and 15% of AIME in excess of the second bend point up to the Ceiling cap
of $113,700 in 2013.
The low income bias of the benefit calculation means that a lower paid
worker receives a much higher percentage of his or her salary in benefit
payments than higher paid workers. Indeed, a married low salaried
worker can receive over 100% of their salary in benefits after retiring
at the full retirement age. High-salaried workers receive 43% or less of
their salary in benefits despite having paid into the "system" at the
same rate (see benefit calculations above). To minimize the impact of
Social Security taxes on low salaried workers the Earned Income Tax
Credit and the Child Care Tax Credit were passed, which largely refund
the FICA and or SECA payments of low-salaried workers through the income
tax system.
By Congressional Budget Office (CBO) calculations the lowest income
quintile (0–20%) and second quintile (21–40%) of households in the U.S.
pay an average federal income tax of −9.3% and −2.6% of income and
Social Security taxes of 8.3% and 7.9% of income respectively. By CBO
calculations the household incomes in the first and second quintiles
have an average total federal tax rate of 1.0% and 3.8% respectively.
However, these groups also have by far the smallest percentage of
American household incomes – the first quintile earns just 3.2% of all
income, while the second quintile earns only 8.4% of all income.
Higher-income retirees will have to pay income taxes on 85% of their
Social Security benefits and 100% on all other retirement benefits they
may have.
Marital status
The
Social Security Act defines the rules for determining marital
relationships for SSI recipients. The act requires that if a man and a
woman are found to be "holding out"—that is, presenting themselves to
the community as husband and wife—they should be considered married for
purposes of the SSI program.
Consequently, if the claimant is found disabled and found to be
"holding out"; this claimant will be entitled of reduced or no SSI
benefits.
However, the Social Security Act does not accept that a claimant
"holding out as husband or wife" should be entitled of Survivor,
Retirement or Widows benefits, when the claimant's "husband or wife"
dies.
SSA rules and regulations about marital status either prohibit (SRDI
program) or reduce (SSI program) benefits to indigent claimants.
Claim that politicians exempted themselves from the tax
Critics
of Social Security have said that the politicians who created Social
Security exempted themselves from having to pay the Social Security tax.
When the federal government created Social Security, all federal
employees, including the president and members of Congress, were exempt
from having to pay the Social Security tax, and they received no Social
Security benefits. This law was changed by the Social Security
Amendments of 1983, which brought within the Social Security system all
members of Congress, the president and the vice president, federal
judges, and certain executive-level political appointees, as well as all
federal employees hired in any capacity on or after January 1, 1984.
Many state and local government workers, however, are exempt from
Social Security taxes because they contribute instead to alternative
retirement systems set up by their employers.
Claim that the government lied about the maximum tax
George Mason University economics professor Walter E. Williams claimed that the federal government has broken its own promise regarding the maximum Social Security tax. Williams used data from the federal government to back up his claim.
According to a 1936 pamphlet on the Social Security website, the
federal government promised the following maximum level of taxation for
Social Security, "... beginning in 1949, twelve years from now, you and
your employer will each pay 3 cents on each dollar you earn, up to
$3,000 a year. That is the most you will ever pay."
However, according to the Social Security website, by the year
2008, the tax rate was 6.2% each for the employer and employee, and the
maximum income level that was subject to the tax was $102,000 raising
the bar to $6,324 maximum contribution by both employee and employer
(total $12,648).
In 2005, Dr. Williams wrote, "Had Congress lived up to those
promises, where $3,000 was the maximum earnings subject to Social
Security tax, controlling for inflation, today's $50,000-a-year wage
earner would pay about $700 in Social Security taxes, as opposed to the
more than $3,000 that he pays today."
According to the Social Security website, "The tax rate in the
original 1935 law was 1% each on the employer and the employee, on the
first $3,000 of earnings. This rate was increased on a regular schedule
in four steps so that by 1949 the rate would be 3% each on the first
$3,000. The figure was never $1,400, and the rate was never fixed for
all time at 1%."
Claim that it gives a low rate of return
Critics of Social Security
claim that it gives a low rate of return, compared to what is obtained
through private retirement accounts. For example, critics point out
that under the Social Security laws as they existed at that time,
several thousand employees of Galveston County, Texas were allowed to
opt out of the Social Security program in the early 1980s, and have
their money placed in a private retirement plan instead. While employees
who earned $50,000 per year would have collected $1,302 per month in
Social Security benefits, the private plan paid them $6,843 per month.
While employees who earned $20,000 per year would have collected $775
per month in Social Security benefits, the private plan paid them $2,740
per month, at interest rates prevailing in 1996.
While some advocates of privatization of Social Security point to the
Galveston pension plan as a model for Social Security reform, critics
point to a GAO report
to the House Ways and Means Committee, which indicates that, for low
and middle income employees, particularly those with shorter work
histories, the outcome may be less favorable.
This claim also discounts the fact that investment in private
markets is not risk-free and private investments can and often do lose
value. A person whose investments fail for whatever reason may lose
everything they invest and enter their retirement years penniless.
Therefore, advocates argue, Social Security plays an important role by
providing every American worker a guaranteed minimum level of retirement
income that cannot be lost to market fluctuations, disappear through
business failures or be stolen by fraudulent investment schemes.
Claim that it is a Ponzi scheme
Critics have drawn parallels between Social Security and Ponzi schemes, e.g.:
...the vast majority of the money you pay in Social Security taxes is not invested in anything. Instead, the money you pay into the system is used to pay benefits to those "early investors" who are retired today. When you retire, you will have to rely on the next generation of workers behind you to pay the taxes that will finance your benefits.
As with Ponzi's scheme, this turns out to be a very good deal for those who got in early. The very first Social Security recipient, Ida Mae Fuller of Vermont, paid just $44 in Social Security taxes, but the long-lived Mrs. Fuller collected $20,993 in benefits. Such high returns were possible because there were many workers paying into the system and only a few retirees taking benefits out of it. In 1950, for instance, there were 16 workers supporting every retiree. Today, there are just over three. By around 2030, we will be down to just two.
As with Ponzi's scheme, when the number of new contributors dries up, it will become impossible to continue to pay the promised benefits. Those early windfall returns are long gone. When today's young workers retire, they will receive returns far below what private investments could provide. Many will be lucky to break even.
— Michael Tanner
One criticism of the analogy is that while Ponzi schemes and Social Security have similar structures (in particular, a sustainability problem when the number of new people paying in is declining), they have different transparencies.
In the case of a Ponzi scheme, the fact that there is no
return-generating mechanism other than contributions from new entrants
is obscured whereas Social Security payouts have always been openly underwritten by incoming tax revenue and the interest on the Treasury bonds held by or for the Social Security system.
The sudden loss of confidence resulting in a collapse of a conventional
Ponzi scheme when the scheme's true nature is revealed is unlikely to
occur in the case of the Social Security system.
Private sector Ponzi schemes are also vulnerable to collapse because
they cannot compel new entrants, whereas participation in the Social
Security program is a condition for joining the U.S. labor force. In
connection with these and other issues, Robert E. Wright calls Social Security a "quasi" pyramid scheme in his book, Fubarnomics.
Estimated net benefits under differing circumstances
In 2004, Urban Institute economists C. Eugene Steuerle and Adam Carasso created a Web-based Social Security benefits calculator.
Using this calculator it is possible to estimate net Social Security
benefits (i.e., estimated lifetime benefits minus estimated lifetime
FICA taxes paid) for different types of recipients. In the book Democrats and Republicans – Rhetoric and Reality
Joseph Fried used the calculator to create graphical depictions of the
estimated net benefits of men and women who were at different wage
levels, single and married (with stay-at-home spouses), and retiring in
different years. These graphs vividly show that generalizations about
Social Security benefits may be of little predictive value for any given
worker, due to the wide disparity of net benefits for people at
different income levels and in different demographic groups. For
example, the graph below (Figure 168) shows the impact of wage level and
retirement date on a male worker. As income goes up, net benefits get
smaller – even negative.
However,
the impact is much greater for the future retiree (in 2045) than for
the current retiree (2005). The male earning $95,000 per year and
retiring in 2045 is estimated to lose over $200,000 by participating in
the Social Security system.
In the next graph (Figure 165) the depicted net benefits are
averaged for people turning age 65 anytime during the years 2005 through
2045. (In other words, the disparities shown are not related to
retirement.) However, we do see the impact of gender and wage level.
Because women tend to live longer, they generally collect Social
Security benefits for a longer time. As a result, they get a higher net
benefit, on average, no matter what the wage level.
The
next image (Figure 166) shows estimated net benefits for married men
and women at different wage levels. In this particular scenario it is
assumed that the spouse has little or no earnings and, thus, will be
entitled to collect a spousal retirement benefit. According to Fried:
Two significant factors are evident: First, every column in Figure 166 depicts a net benefit that is higher than any column in Figure 165. In other words, the average married person (with a stay-at-home spouse) gets a greater benefit per FICA tax dollar paid than does the average single person – no matter what the gender or wage level. Second, there is only limited progressivity among married workers with stay-at-home spouses. Review Figure 166 carefully: The net benefits drop as the wage levels increase from $50,000 to $95,000; however, they increase as the wage levels grow from $5,000 to $50,000. In fact, net benefits are lowest for those earning just $5,000 per year.
The last graph shown (Figure 167) is a combination of Figures 165 and
166. In this graph it is very clear why generalizations about the value
of Social Security benefits are meaningless. At the $95,000 wage level a
married person could be a big winner – getting net benefits of about
$165,000. On the other hand, he could lose an estimated $152,000 in net
benefits if he remains single. Altogether, there is a "swing" of over
$300,000 based upon the marriage decision (and the division of earnings
between the spouses). In addition there is a large disparity between the
high net benefits of the married person earning $95,000 ($165,152)
versus the relatively low net benefits of the man or woman earning just
$5,000 ($30,025 or $41,890, depending on gender). In other words, the
high earner, in this scenario, gets a far greater return on his FICA tax
investment than does the low earner.
In the book How Social Security Picks Your Pocket other
factors affecting Social Security net benefits are identified:
Generally, people who work for more than 35 years get a lower net
benefit – all other factors being equal. People who do not live long
after retirement age get a much lower net benefit. Finally, people who
derive a high percentage of income from non-wage sources get high Social
Security net benefits because they appear to be poor, when they are
not. The progressive benefit formula for Social Security is blind to the
income a worker may have from non-wage sources, such as spousal
support, dividends and interest, or rental income.
Current controversies
Proposals to reform of the Social Security system have led to heated
debate, centering on funding of the program. In particular, proposals to
privatize funding have caused great controversy.
Contrast with private pensions
Although Social Security is sometimes compared to private pensions,
the two systems are different in a number of respects. It has been
argued that Social Security is an insurance plan as opposed to a
retirement plan. Unlike a pension, for example, Social Security pays
disability benefits. 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; and a private system is not universal.
Social Security cannot "prefund" by investing in marketable assets such
as equities, because federal law prohibits it from investing in assets
other than those backed by the U.S. government. As a result, its
investments to date have been limited to special non-negotiable
securities issued by the U.S. Treasury, although some[citation needed] argue that debt issued by the Federal National Mortgage Association
and other quasi-governmental organizations could meet legal standards.
Social Security cannot by law invest in private equities, although some
other countries (such as Canada) and some states permit their pension
funds to invest in private equities. As a universal system, Social
Security generally operates as a pipeline, through which current tax
receipts from workers are used to pay current benefits to retirees,
survivors, and the disabled. When there is an excess of taxes withheld
over benefits paid, by law this excess is invested in Treasury
securities (not in private equities) as described above.
Two broad categories of private pension plans are "defined
benefit pension plans" and "defined contribution pension plans." Of
these two, Social Security is more similar to a defined benefit pension
plan. In a defined benefit pension plan, the benefits ultimately
received are based on some sort of pre-determined formula (such as one
based on years worked and highest salary earned). Defined benefit
pension plans generally do not include separate accounts for each
participant. By contrast, in a defined contribution pension plan each
participant has a specific account with funds put into that account (by
the employer or the participant, or both), and the ultimate benefit is
based on the amount in that account at the time of retirement. Some have
proposed that the Social Security system be modified to provide for the
option of individual accounts (in effect, to make the system, at least
in part, more like a defined contribution pension plan). Specifically,
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 require huge new government
borrowing to fund benefit payments during the transition years.
Both "defined benefit" and "defined contribution" private pension plans are governed by the Employee Retirement Income Security Act
(ERISA), which requires employers to provide minimum levels of funding
to support "defined benefits" pensions. The purpose is to protect the
workers from corporate mismanagement and outright bankruptcy,
although in practice many private pension funds have fallen short in
recent years. In terms of financial structure, the current Social
Security system is analogous to an underfunded "defined benefit" pension
("underfunded" meaning not that it is in trouble, but that its savings
are not enough to pay future benefits without collecting future tax
revenues).
Contrast with insurance
Besides
the argument over whether the returns on Social Security contributions
should or can be compared to returns on private investment instruments,
there is the question of whether the contributions are nonetheless
analogous to pooled insurance premiums charged by for-profit commercial
insurance companies to maintain and generate a return on a "risk pool of
funds".
Like any insurance program, Social Security "spreads risk" as the
program protects workers and covered family members against loss of
income from the wage earner's retirement, disability, or death. For
example, a worker who becomes disabled at a young age could receive a
large return relative to the amount they contributed in FICA before
becoming disabled, since disability benefits can continue for life. As
in private insurance plans, everyone in the particular insurance pool is
insured against the same risks, but not everyone will benefit to the
same extent.
The analogy to insurance, however, is limited by the fact that paying FICA taxes creates no legal right to benefits
and by the extent to which Social Security is, in fact, funded by FICA
taxes. During 2011 and 2012, for example, FICA tax revenue was
insufficient to maintain Social Security's solvency without transfers
from general revenues. These transfers added to the general budget
deficit like general program spending.
Private retirement savings crisis
While inflation-adjusted stock market values generally rose from 1978 to 1997, from 1998 through 2007 they were higher than in March 2013. This has caused workers' supplemental retirement plans such as 401(k)s to perform substantially more poorly than expected when current retirees were investing the bulk of their savings in them.
In 2010, the median household retirement account balance for workers
aged 55 to 64 was $120,000, which will provide only a trivial supplement
to Social Security benefits, but about a third of households had no retirement savings at all. 75% of Americans nearing retirement age had less than $30,000 in their retirement accounts, which Forbes called "the greatest retirement crisis in American history."
Court interpretation of the Act to provide benefits
The
United States Court of Appeals for the Seventh Circuit has indicated
that the Social Security Act has a moral purpose and should be liberally
interpreted in favor of claimants when deciding what counted as covered
wages for purposes of meeting the quarters of coverage requirement to
make a worker eligible for benefits.
That court has also stated: "...[T]he regulations should be liberally
applied in favor of beneficiaries" when deciding a case in favor of a
felon who had his disability payments retroactively terminated upon
incarceration.
According to the court, that the Social Security Act "should be
liberally construed in favor of those seeking its benefits can not be
doubted."
"The hope behind this statute is to save men and women from the rigors
of the poor house as well as from the haunting fear that such a lot
awaits them when journey's end is near."
Constitutionality
The
constitutionality of Social Security is intricately linked to the
evolving nature of Supreme Court jurisprudence on federal power (the
20th century saw a dramatic increase in allowed congressional action).
When Social Security was first passed, there were significant questions
over its constitutionality as the Court had found another pension
scheme, the original Railroad Retirement Act, to violate the due process
clause of the Fifth Amendment. Some, such as University of Chicago law professor Richard Epstein and Harvard University professor Robert Nozick, have argued that Social Security should be unconstitutional.
In the 1937 U.S. Supreme Court case of Helvering v. Davis,
the Court examined the constitutionality of Social Security when George
Davis of the Edison Electric Illuminating Company of Boston sued in
connection with the Social Security tax. The U.S. District Court for the
District of Massachusetts first upheld the tax. The District Court
judgment was reversed by the Circuit Court of Appeals. Commissioner Guy
Helvering of the Bureau of Internal Revenue (now the Internal Revenue
Service) took the case to the Supreme Court, and the Court upheld the
validity of the tax.
During the 1930s President Franklin Delano Roosevelt was in the midst of promoting the passage of a large number of social welfare programs under the New Deal and the Supreme Court struck down many of those programs (such as the Railroad Retirement Act and the National Recovery Act)
as unconstitutional. Modified versions of the affected programs were
afterwards approved by the Court, including Social Security.
When Helvering v. Davis was argued before the Court, the
larger issue of constitutionality of the old-age insurance portion of
Social Security was not decided. The case was limited to whether the
payroll tax was a suitable use of Congress's taxing power. Despite this,
no serious challenges regarding the system's constitutionality are now
being litigated, and Congress's spending power may be more coextensive,
as shown in cases like South Dakota v. Dole during the Reagan Administration.
Fraud and abuse
Social Security Number theft
Because Social Security Numbers have become useful in identity theft and other forms of crime, various schemes have been perpetrated to acquire valid Social Security Numbers and related identity information.
In February 2006, the Social Security Administration received
several reports of an email message being circulated addressed to "Dear
Social Security Number And Card owner" and purporting to be from the
Social Security Administration. The message informs the reader "that
someone illegally is using your Social Security number and assuming your
identity" and directs the reader to a website designed to look like
Social Security's Internet website.
"I am outraged that someone would target an unsuspecting public in this manner," said Commissioner Jo Anne B. Barnhart. "I have asked the Inspector General to use all the resources at his command to find and prosecute whoever is perpetrating this fraud."
Once directed to the phony website, the individual is reportedly
asked to confirm his or her identity with "Social Security and bank
information." Specific information about the individual's credit card
number, expiration date and PIN
is then requested. "Whether on our online website or by phone, Social
Security will never ask you for your credit card information or your
PIN," Commissioner Jo Anne B. Barnhart reported.
Social Security Administration Inspector General O'Carroll
recommended people always take precautions when giving out personal
information. "You should never provide your Social Security number or
other personal information over the Internet or by telephone unless you
are extremely confident of the source to whom you are providing the
information," O'Carroll said.
Fraud in the acquisition and use of benefits
Given the vast size of the program, fraud sometimes occurs. The Social Security Administration has its own investigatory unit
to combat and prevent fraud, the Cooperative Disability Investigations
Unit (CDIU). The Cooperative Disability Investigations (CDI) Program
continues to be one of the most successful initiatives, contributing to
the integrity of SSA's disability programs. In addition when
investigating fraud in other SSA programs, the Social Security Administration
may request investigatory assistance from other federal law enforcement
agencies including the Office of the Inspector General and the FBI.
Restrictions on potentially deceptive communications
Because of the importance of Social Security to millions of Americans, many direct-mail
marketers packaged their mailings to resemble official communications
from the Social Security Administration, hoping that recipients would be
more likely to open them. In response, Congress amended the Social
Security Act in 1988 to prohibit the private use of the phrase "Social
Security" and several related terms in any way that would convey a false
impression of approval from the Social Security Administration. The constitutionality of this law (42 U.S.C. § 1140) was upheld in United Seniors Association, Inc. v. Social Security Administration, 423 F.3d 397 (4th Cir. 2005), cert den 547 U.S. 1162; 126 S.Ct. 2346 (2006) (text at Findlaw).
Public economics
Current recipients
The 2011 annual report by the program's Board of Trustees noted the
following: in 2010, 54 million people were receiving Social Security
benefits, while 157 million people were paying into the fund; of those
receiving benefits, 44 million were receiving retirement benefits and 10
million disability benefits. In 2011, there will be 56 million
beneficiaries and 158 million workers paying in. In 2010, total income
was $781.1 billion and expenditures were $712.5 billion, which meant a
total net increase in assets of $68.6 billion. Assets in 2010 were $2.6
trillion, an amount that is expected to be adequate to cover the next 10
years. In 2023, total income and interest earned on assets are
projected to no longer cover expenditures for Social Security, as
demographic shifts burden the system. By 2035, the ratio of potential
retirees to working age persons will be 37 percent—there will be less
than three potential income earners for every retiree in the population.
At this rate the Social Security Trust Fund would be exhausted by 2036.
Saving behavior
Social Security affects the saving behavior of the people in three different ways. The wealth substitution effect
occurs when a person saving for retirement recognizes that the Social
Security system will take care of him and decreases his expectations
about how much he needs to personally save. The retirement effect
occurs when a taxpayer saves more each year in an effort to reduce the
total number of years he must work to accumulate enough savings before
retirement. The bequest effect occurs when a taxpayer recognizes a
decrease in resources stemming from the Social Security tax and
compensates by increasing personal savings to cover future expected
costs of having children.
Reducing cost of living adjustment (COLA)
At present, a retiree's benefit is annually adjusted for inflation to reflect changes in the consumer price index.
Some economists argue that the consumer price index overestimates price
increases in the economy and therefore is not a suitable metric for
adjusting benefits, while others argue that the CPI underestimates the
effect of inflation on what retired people actually need to buy to live.
The current cost of living adjustment is based on the consumer price index for Urban Wage Earners and Clerical Workers (CPI-W). The Bureau of Labor Statistics
routinely checks the prices of 211 different categories of consumption
items in 38 geographical areas to compute 8,018 item-area indices. Many
other indices are computed as weighted averages of these base indices.
CPI-W is based on a market basket
of goods and services consumed by urban wage earners and clerical
workers. The weights for that index are updated in January of every
even-numbered year. People who say that the CPI-W overestimates
inflation recommend updating the weights each month; this produces the Chained Consumer Price Index for all urban consumers (C-CPI-U). People who say that the C-CPI-U [or the unchained CPI for All Urban Consumers (CPI-U)]
disadvantages the elderly point out that seniors consume more medical
care than younger people, and that the costs of medical care have been
rising faster than inflation in other parts of the economy. According to
this view, the costs of the things the elderly buy have been rising
faster than the market basket averaged to obtain CPI-W, CPI-U or C-CPI-U. Some have recommended fixing this by using a CPI for the Elderly (CPI-E).
In 2003 economics researchers Hobijn and Lagakos estimated that
the social security trust fund would run out of money in 40 years using
CPI-W and in 35 years using CPI-E.
Consumption
According to a 2016 study in the American Economic Journal: Macroeconomics,
the Social Security benefit increases from 1952 to 1991 have a "large,
immediate, and significant positive response of consumption".