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The social security system in the United States was established on 14 August 1935, when President Franklin D. Roosevelt signed the Social Security Act. The act created a range of government programs, including unemployment insurance and federal welfare grants, but the term "social security" generally designates Old Age, Survivors, and Disability Insurance (OASDI) and related federal programs run by the Social Security Administration. In the second half of the twentieth century, social security grew to become the most expensive federal government program, directly touching the life of almost every American. It enjoyed widespread popularity for several decades, but by the end of the century worries about its future and concerns about its effects on the economy greatly diminished its popularity and led policy makers to consider major changes in its operation.

Before Social Security

Social security is primarily designed to provide income for the elderly by taxing the workforce. Before the establishment of social security, workers pursued a range of strategies to prepare themselves and their spouses for old age—relying primarily on the market and the family. The historians Carole Haber and Brian Gratton have shown that in the late nineteenth and early twentieth centuries, average annual household incomes of those sixty and over were only modestly lower than those in their forties and fifties and were rising over time along with overall economic growth. Most men continued to work into old age, but many were able to retire. The labor force participation rate of men aged sixty-five and over was about 76 percent to 78 percent between 1850 and 1880; thus the retirement rate was 22 percent to 24 percent. The retirement rate rose to 35 percent in 1900 and 42 percent in 1930. Social critics worried that elderly workers were adversely affected by industrialization and that many were becoming unemployable and were being thrown onto the "industrial scrap heap." Research by economic historians has shown that this was probably not the case, as increasing retirement rates were driven by rising incomes. The earnings of their children were an important component of the elderly's income during this period. Surveys from 1889–1890 and 1917–1919 show that children's wages provided about one-third of total income in households headed by those sixty and over. In addition, saving for old age was an important strategy, and nearly 30 percent of elderly households took in boarders. Nearly one million people received Civil War pensions in the 1890s and first decade of the 1900s, declining to about 600,000 by 1920. They covered over half of elderly native-born Northern males and made up 42 percent of the federal budget at their peak. However, by 1930 only about 10 percent of workers were covered by pensions, especially government workers and long-term employees of large corporations such as railroads.

Many of the elderly lived in poverty, especially widows and those who had low earnings before reaching old age. A traditional response was for a poor widow to move in with the family of an adult child. As a last resort, the indigent elderly could move into an almshouse or poor-house run by a charity or local government. Conditions in these institutions were often harsh and moving there was generally considered to be a deep humiliation. Fear of being consigned to the poorhouse haunted many, but no more than 2 percent of the elderly lived there in the nineteenth and early twentieth centuries.

In 1889 Germany, under Chancellor Otto Bismarck, adopted the first modern social insurance plan, in which workers were taxed to provide money for an old-age fund. Many European countries followed suit, including France (1910), the Netherlands (1913), Italy (1919), and Britain (1925), as did many Latin American nations. The first federal old-age pension bill was introduced into the U.S. Congress in 1909, and Theodore Roosevelt's Progressive Party made old-age insurance part of its platform in 1912, but very little progress was made toward this goal until the Great Depression struck the American economy. The depression caused massive unemployment, forced many employers to cancel pension promises, wiped out the savings of some older people, and squeezed many families who supported their elderly parents. Calls for assistance for the elderly and for a system that would encourage retirement, opening up jobs for younger workers, abounded. As the depression continued, more and more state governments provided reliefpayments to the elderly poor, but most observers considered these to be grossly inadequate.

Establishment of the Program

On 29 June 1934 Franklin Roosevelt created the Committee on Economic Security (CES), chaired by Secretary of Labor Frances Perkins and led by Executive Staff Director Edwin Witte, a University of Wisconsin economics professor, to study social insurance and recommend legislation. Roosevelt and Congress were faced with a growing call to provide large pensions to the elderly. Most prominent were the "Share Our Wealth" plan of the Louisiana senator Huey P. Long and especially the retired physician Francis Townsend's plan, which called for a pension of$200 per month for those sixty and over—an amount that was more than one-third of per capita annual income—on the condition that recipients not be employed and that they spend their pensions within thirty days. Instead the CES recommended and Congress adopted (by 372 to 33 in the House and 77 to 6 in the Senate) a plan that gave much more modest immediate aid to the elderly through the Old Age Assistance program and created a more permanent system, Old Age Insurance. Old Age Assistance was a joint federal-state venture with the federal government matching state expenditures on a one-to-one basis up to a specified maximum per recipient (originally $15 per month). It allowed states to establish their own eligibility criteria and benefits levels. Meanwhile, the Old Age Insurance system began to tax workers and promised benefits when they reached age sixty-five that were tied to the amount of taxes they had paid, much like a private-sector annuity. This lag between payments and promised benefits made it difficult for future legislation to repeal the social security system. Franklin Roosevelt recognized this, explaining "We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions. … With those taxes in there, no damn politician can ever scrap my social security program." Alf Landon, the Republicans' unsuccessful 1936 presidential candidate, criticized the Social Security Act as unjust, unworkable, stupidly drafted, and wastefully financed, but Gallup polls showed that voters overwhelmingly approved of it, with 73 percent approving the social security tax on their wages. In late 1936, the federal government began assigning social security account numbers, taking applications at post offices. On 1 January 1937 workers began paying social security taxes and acquiring credits toward old-age benefits. The Supreme Court upheld social security's constitutionality in Helvering v. Davis on 24 May 1937. However, the 7 to 2 ruling made it clear that social security taxes are simply taxes like any other, and individuals have no legal right to any benefit based on paying them.

Initially over 9 million workers, including agricultural workers, domestic servants, and government employees, were excluded from the social security system, as were railroad workers, who had their own retirement fund established by federal law in 1934. It was originally planned to begin paying monthly pensions to retirees in 1942, but the Social Security Amendments of 1939 brought this forward to 1940, and on 31 January 1940 Ida May Fuller, a retired legal secretary from Vermont, became the first recipient of a monthly benefit check. The 1939 amendments also added a program to provide dependents' and survivors' benefits—akin to private-sector life insurance—and the program was renamed Old Age and Survivors Insurance (OASI). The acceleration and expansion of social security benefits was driven by the political popularity of spending social security's amassed pool of savings rather than letting it accumulate, especially in light of the "Roosevelt Recession" that struck the economy in 1937. As OASI switched from a fully funded system to a pay-as-you-go system, it became even more difficult to undo the system. Simultaneously, it abandoned the principle of tying benefits exclusively to payments and added a number of redistributive elements, such as providing additional benefits to elderly recipients who were married. With its mix of insurance principles and redistribution, social security carefully straddled the political boundary between stressing self-reliance and welfare.

Expanding Coverage and Benefits

Over the course of the next few decades, as the economy grew rapidly, social security continued to expand, covering more and more workers and adding new benefits. As Andrew Achenbaum observes, "as long as the number of new and current contributors far exceeded the number of beneficiaries, legislators could liberalize existing provisions, expand coverage, and increase benefits—and still point to huge surpluses in the trust funds" (Social Security, p. 3). In 1940, 43.5 percent of the labor force was covered by social security's insurance program. This rose to 55 percent in 1949. In 1950 farm and domestic laborers were added to the system. A few years later most of the self-employed were added, as well as military personnel, and coverage reached 78 percent in 1955. Subsequent expansion of occupational coverage pushed this figure to 85 percent by 1968. September 1950 also saw the first across-the-board increase in social security benefits, by a dramatic 77 percent, and Old Age and Survivors Insurance benefit payments became larger than Old Age Assistance payments for the first time. Subsequent benefits increases were often passed just before elections, as they were in September of 1952,1954, and 1972. Social security's replacement rate—measured as the OASI benefit in the first twelve months of retirement as percentage of employment income in the preceding twelve months—was 39 percent for the average one-earner couple in 1940. Due to inflation, this fell to 23.5 percent before the 1950 benefits increase and then rose to 52 percent in 1955, 58 percent in 1975, and 62 percent in 1995. In 1956 the Social Security Act was amended to provide monthly benefits to permanently and totally disabled workers aged fifty to sixty-four and for disabled children of retired or deceased workers. Old Age, Survivors and Disability Insurance (OASDI) became the system's new name. In 1961 men were allowed to take early retirement at age sixty-two (with lower benefits) for the first time. In 1965 health insurance was added to the social insurance umbrella, with the establishment of Medicare, although the Social Security Administration did not run this program. In 1972 amendments were adopted that expanded benefits considerably, eased earnings restrictions on nonretired workers and began to automatically adjust future benefits for the impact of inflation. In addition, the state-based supplemental payments to the needy, blind, and disabled elderly were federalized as the Supplemental Security Income (SSI) program, administered by the Social Security Administration. By 1972 every major idea of the 1935 Committee on Economic Security had been enacted, coverage had become nearly universal, and older Americans had a deep sense of "entitwlement" to their social security benefits. The growth of social security can be seen in tables 1 and 2. (The SSI columns' figures before 1980 are for its predecessor programs: Old Age Assistance, Aid to the Blind, and Aid to Permanently and Totally Disabled.

Table 1

Table 2

These programs are not part of social security's insurance system.)

Operating Procedures

Before examining social security's evolution in the twentieth century's last quarter, it will be valuable to explain its operating procedures. The insurance portions of social security (retirement, survivors, and disability benefits) have always been paid for by a payroll tax. Initially, the tax was 2 percent of the first $3,000 earned by employees (the "earnings base"). The tax is automatically deducted from payroll and is officially evenly split between the employer and the employee. However, most economists believe that the tax is effectively paid completely by the employee, whose pay would rise by the entire amount of the tax if it did not exist. The tax rate rose to 3 percent in 1950, 6 percent in 1960, 8.4 percent in 1970, 10.16 percent in 1980, and 12.4 percent in 1990 and 2000. The earnings base was also gradually increased, generally much faster than the inflation rate, reaching $4,800 in 1960, $25,900 in 1980, and $76,200 in 2000.

Social security retirement benefits are calculated in several steps. First the worker's Average Indexed Monthly Earnings (AIME) are calculated. Under the procedures adopted in the 1970s, all earnings on which a worker paid social security taxes up until the year he or she turned sixty are "wage indexed" to compensate for past inflation and real wage growth. To accomplish this, each year's wage is multiplied by an "indexing factor" that equals the ratio of the average national wage in the year the worker turns sixty to the average national wage in the year to be indexed. From this set of earnings, the worker's thirty-five best years are selected, added together and divided by 420 (the number of months in thirty-five years). This amount is the AIME. The second step determines the worker's Primary Insurance Amount (PIA) by applying a progressive formula to the AIME to calculate the monthly benefit that the person would receive if he or she retired at the "normal" retirement age. (The normal retirement age was sixty-five from the beginning of the social security system until 2003, when it begins gradually increasing to age sixty-seven by 2025.) The progressive formula has been selected so that low-earning workers receive payments that are disproportionately higher—compared to the taxes that have been paid in—than for high-earning workers. For example, in 2001 the Primary Insurance Amount was 90 percent of the first $561 of the retiree's AIME, 32 percent of the AIME over $561 and up to $3381, and 15 percent of Average Indexed Monthly Earnings above $3381. Adjustments are made to the retiree's Primary Insurance Amount, which is reduced for those taking early retirement and can be increased by as much as 50 percent if the retiree has a spouse who had little or no earnings. Finally, the monthly benefit check is adjusted annually for changes in the cost of living. The adjustment is determined by the rate of inflation in the Consumer Price Index (CPI). Most economists believe that the CPI overstates inflation, so this means that the retiree's monthly benefit buys more over time.

One of social security's initial purposes was to reduce unemployment by inducing older workers to retire. Throughout its history, social security has had a retirement earnings test. The 1935 Social Security Act prohibited any payment when income was earned in "regular employment." In 1939 "regular employment" was defined as earning more than $15 per month—about 25 percent of the minimum wage. The economist Donald Parsons estimates that this earnings test increased the retirement rate for men sixty-five and over by about six percentage points in 1940. In 1950, the income threshold was raised to $50, and the retirement test was eliminated for those age seventy-five and older. In 1960, for the first time, earnings over the exempt amount did not produce total loss of benefits; instead, for income in a certain range, benefits were reduced $1 for every $2 in earnings. In 1990, this rate was cut to $1 for every $3 in earnings for workers above the normal age of retirement. In 2000, as unemployment reached its lowest rate in over thirty years, both houses of Congress unanimously voted to eliminate the retirement earnings test for workers above social security's normal retirement age.

Comparing taxes paid to benefits received, it is possible to calculate the rate of return on a worker's social security "investment," just as one would for a private investment. Such calculations show that social security's rate of return was very high for the first population cohorts covered by the system. Rates of return for those reaching sixty-five in 1950 averaged about 20 percent. By 1965 returns fell to about 10 percent and they continued this downward trend because tax rates had increased and retirees had now been taxed for all or most of their working lives. Inflation-adjusted average rates of return from OASI are given in table 3, which shows that lower-income workers have higher rates of return. Single males' average rates of return are lower than for single females because women live longer than men and therefore collect more benefits. Studies also show that blacks have lower rates of return due to their lower life expectancies. The table shows that rates of return are projected to continue declining—assuming that taxes and benefit formulas are unchanged.

Table 3

Problems and Changes

By the mid-1970s, it was becoming clear that the mature social security system could not continue to finance all the benefits it had promised. In 1975, for the first time since 1959, social security ran a deficit, spending more on benefits than it collected in taxes. Deficits occurred again in 1976 and 1977 and were projected to continue, exhausting the Social Security Trust Fund—U.S. government debt owned by the social security system—by the early 1980s. In response, Congress substantially increased social security taxes, and benefits were scaled back by reducing spousal benefits and amending the indexing procedure. President Carter, signing the bill into law, predicted that these moves would make the system sound for decades to come. He was wrong. By 1981 worries about funding shortfalls reappeared and the Reagan administration proposed additional cuts in benefits, including scaling back the cost-of-living inflation adjustment and reducing early retirement benefits. The powerful senior citizens' lobby greeted these proposals with a withering wave of protests and the Senate immediately rejected them, but polls showed that two-thirds of the public were "not too confident" or "not at all confident" in the system. To defuse the issue, the president and Congress appointed the bipartisan National Commission on Social Security Reform, chaired by Alan Greenspan, to make recommendations to solve social security's financing crisis. In 1983, after intense political bickering, Congress accepted the Greenspan commission's proposals to further increase taxes, begin taxing the benefits of higher-income retirees, and gradually increase the normal retirement age from sixty-five to sixty-seven. Taxes were expected to greatly exceed expenditures so that the system's trust fund could be built up in anticipation of the retirement of "baby boomers" born between the end of World War II and the early 1960s. The bill was signed amid predictions that the funding problem was solved for generations to come, and the Social Security Trust Fund, which had never exceeded $40 billion before 1983, began to grow. It reached $214 billion in 1990 and $931 billion in 2000.

Unfortunately, this nest egg did not appear to be large enough given demographic trends and somewhat pessimistic projections of economic growth. By 1993, social security's board of trustees projected that OASDI would begin running deficits around 2015. Social security's spending would then exceed income by an everincreasing margin, and the board expected the trust fund to be exhausted by about 2035. The number of OASDI beneficiaries per one hundred covered workers, which had been 6.1 in 1950 and 26.6 in 1990, was expected to climb to 42.7 by 2030—there would be only a little more than two workers paying for every beneficiary as the population aged and life expectancies increased. In light of these pessimistic predictions, the 1994–1996 Social Security Advisory Council released its report in early 1997. Unable to achieve consensus, the council offered three options. The "Maintain Benefits" option (supported by six of the thirteen council members) proposed to essentially maintain the historical structure of social security by increasing taxes and slightly reducing benefits. However, the other two options broke with tradition. The "Personal Security Accounts" option (supported by five members) advocated a partial privatization of social security, proposing to divert nearly half of the social security tax into mandatory personal retirement accounts, allowing individuals to put their own social security funds into the stock market. The "Individual Accounts" option (supported by two members) was in between the other two, proposing that social security payroll taxes be increased, but that this money be put into government-run individual retirement accounts.

Leading economists, including the former Council of Economic Advisors chairman Martin Feldstein, began to advocate a transition to a completely privatized social security system. They argued that social security had slowed economic growth by reducing the national savings rate, reasoning that if social security did not exist workers would have saved more for their retirements and this savings would have boosted the investment rate, increasing the nation's capital stock. Because social security is mostly a pay-as-you-go system, however, the money was never saved and any money in the trust fund was lent to the government rather than invested. Feldstein estimated that this effect probably had reduced national income by about 6 percent and that social security taxes further reduced national income by curbing work incentives. Privatization advocates pointed out that inflation-adjusted long-run stock market returns have been about 7 or 8 percent per year—much higher than the returns earned and promised by social security. Privatization would essentially be a forced savings plan, but its critics warned that many individuals were not competent to make their own investment decisions, that the stock market was very volatile, that privatization allowed no room for redistribution, and that privatized plans would have much higher administrative costs than the social security system. Privatization's fans pointed to the success of Chile, which in 1981 replaced its failing pay-as-you-go retirement system with a privately managed mandatory savings program. Chileans earned impressive returns in their new system, which was soon imitated around the world. Amid these developments and a booming stock market, politicians began to advocate similar plans. President Bill Clinton floated the idea of investing surplus social security funds in the stock market, and in his campaign for the presidency in 2000 George W. Bush advocated reforming social security so that it would offer private savings accounts.

Many have seen social security as the most successful government program in American history. It has been credited with bringing true security to American workers, reducing the fear of poverty in old age, allowing more of the elderly to retire and giving them the resources to live independently. Others see it as a flawed system, an inter-generational transfer mechanism that has benefited the earliest cohorts of retirees, but which promises too little to the current and future generations, explaining most of the elderly's rising retirement, income, and independence as extensions of historical trends caused by continued economic growth. By the early twenty-first century, social security had become the subject of an intense political argument.

Bibliography

Achenbaum, W. Andrew. Social Security: Visions and Revisions. New York: Cambridge University Press, 1986.

Berkowitz, Edward D., ed. Social Security after Fifty: Successes and Failures. New York: Greenwood Press, 1987.

Berkowitz, Edward D., and Kim McQuaid. Creating the Welfare State: The Political Economy of Twentieth-Century Reform. Lawrence: University Press of Kansas, 1992.

Costa, Dora L. The Evolution of Retirement: An American Economic History, 1880–1990. Chicago: University of Chicago Press, 1998.

Feldstein, Martin. "The Missing Piece in Policy Analysis: Social Security Reform." American Economic Review 86, no. 2 (1996): 1–14.

Ferrara, Peter J., and Michael Tanner. A New Deal for Social Security. Washington, D.C.: Cato Institute, 1998.

Haber, Carole, and Brian Gratton. Old Age and the Search for Security: An American Social History. Bloomington: Indiana University Press, 1994.

Lubove, Roy. The Struggle for Social Security, 1900–1935. Cambridge, Mass.: Harvard University Press, 1968.

Myers, Robert J. Social Security. 3d ed. Homewood, Ill.: Irwin, 1985.

Nash, Gerald D., Noel H. Pugach, and Richard Tomasson, eds. Social Security: The First Half-Century. Albuquerque: University of New Mexico Press, 1988.

Parsons, Donald O. "Male Retirement Behavior in the United States, 1930–1950." Journal of Economic History 51 (1991): 657–674.

Quadagno, Jill. The Transformation of Old Age Security: Class and Politics in the American Welfare State. Chicago: University of Chicago Press, 1988.

Rejda, George E. Social Insurance and Economic Security. 6th ed. Upper Saddle River, N.J.: Prentice Hall, 1999.

Rubinow, Isaac M. The Quest for Security. New York: Henry Holt, 1934.

Social Security Administration, Social Security Online: History Page. http://www.ssa.gov/history/

Steuerle, C. Eugene, and Jon M. Bakija. Retooling Social Security for the Twenty-first Century: Right and Wrong Approaches to Reform. Washington, D.C.: Urban Institute Press, 1994.

Weaver, Carolyn. "On the Lack of a Political Market for Compulsory Old-Age Insurance Prior to the Great Depression." Explorations in Economic History 20, no. 3 (1983): 294–328.

———. The Crisis in Social Security: Economic and Political Origins. Durham, N.C.: Duke University Press, 1982.

The Social Security Program was created by the Social Security Act of 1935 (42 U.S.C.A. § 301 et seq.) to provide old age, survivors, and disability insurance benefits to the workers of the United States and their families. The program, which is administered by the Social Security Administration (SSA), an independent federal agency, was expanded in 1965 to include health insurance benefits under the Medicare program and to assist the states in establishing unemployment compensation programs. Unlike welfare, which is financial assistance given to persons who qualify on the basis of need, Social Security benefits are paid to an individual or his family on the basis of that person's employment record and prior contributions to the system.

History

As a general term, social security refers to any plan designed to protect society from the instability that is caused by individual catastrophes, such as unemployment or the death of a wage earner. It is impossible to predict which families will have to endure these burdens in a given year, but disaster can be expected to strike a certain number of households each year. A government-sponsored plan of social insurance spreads the risk among all members of society so that no single family is completely ruined by an interruption of, or end to, incoming wages.

Germany was the first industrial nation to adopt a program of social security. In the 1880s Chancellor Otto von Bismarck instituted a plan of compulsory sickness and old age insurance to protect wage earners and their dependents. Over the next thirty years, other European and Latin American countries created similar plans with various features to benefit different categories of workers.

In the United States, the federal government accepted the responsibility of providing pensions to disabled veterans of the Revolutionary War. Pensions were later paid to disabled and elderly veterans of the Civil War. The first federal old age pension bill was not introduced until 1909, however. To fill this void, many workers joined together to form beneficial associations, which offered funeral, sickness, and old age benefit insurance. The federal government encouraged people to set aside money for future emergencies with a popular postal savings plan. People who could not manage were helped, if at all, by private charity because it was generally believed that those who wanted to help themselves would.

Congress enacted the Social Security Act of 1935 as part of the economic and social reforms that made up President Franklin D. Roosevelt's New Deal. The act provided for the payment of monthly benefits to qualified wage earners who were at least sixty-five years old or payment of a lump-sum death benefit to the estate of a wage earner who died before reaching age sixty-five.

In 1939 Congress created a separate benefit for secondary beneficiaries — the dependent spouses, children, widows, widowers, and parents of wage earners — to soften the economic hardship created when they lost a wage earner's support. Such beneficiaries are entitled to benefits because the wage earner made contributions to the plan. Beneficiaries can receive their payments directly upon the retirement or death of the worker.

Social Security originally protected only workers in industry and commerce. It excluded many classes of workers because collecting their contributions was considered too expensive or inconvenient. Congress exempted household workers, farmers, and workers in family businesses, for example, because it believed that they were unlikely to maintain adequate employment records. In the 1950s, however, Congress extended Social Security protection to most self-employed individuals, most state and local government employees, household and farm workers, members of the armed forces, and members of the clergy. Federal employees, who previously had their own retirement and benefit system, were given Social Security coverage in 1983.

Old Age, Survivors, and Disability Insurance

Federal Old Age, Survivors, and Disability Insurance (OASDI) benefits are monthly payments made to retired people, to families whose wage earner has died, and to workers who are unemployed because of sickness or accident. Workers qualify for such protection by having been employed for the mandatory minimum amount of time and by having made contributions to Social Security. There is no financial need requirement to be satisfied. Once a worker qualifies for protection, his family is also entitled to protection. The entire program is geared toward helping families as a matter of social policy.

Two large funds of money are held in trust to pay benefits earned by people under OASDI: the Old Age and Survivors Trust Fund and the Disability Insurance Trust Fund. As workers and employers make payroll contributions to these funds, money is paid out in benefits to people currently qualified to receive monthly checks.

The OASDI program is funded by payroll taxes levied on employees and their employers and on the self-employed. The tax is imposed upon the employee's taxable income, up to a maximum taxable amount, with the employer contributing an equal amount. The self-employed person contributes twice the amount levied on an employee. In 1996 the rate was 6.2 percent, levied on earned income up to a maximum of $62,887.

Old Age Benefits

A person becomes eligible for Social Security old age benefits by working a minimum number of calendar quarters. The number of quarters required for full insurance increases with the worker's age. Forty quarters is the maximum requirement. The individual is credited for income up to the maximum amount of money covered by Social Security for those years. This amount is adjusted to reflect the impact of inflation on normal earnings and ensure that a worker who pays increasing Social Security contributions during her work life will receive retirement benefits that keep pace with inflation.

Persons born before 1950 can retire at age sixty-five with full benefits based on their average income during their working years. For those born between 1950 and 1960, the retirement age for full benefits has increased to age sixty-six. Persons born in 1960 or later will not receive full retirement benefits until age sixty-seven. Any person, however, may retire at age sixty-two and receive less than full benefits. At age sixty-five, a worker's spouse who has not contributed to Social Security receives 50 percent of the amount paid to the worker.

Since 1975 Social Security benefits have increased annually to offset the corrosive effects of inflation on fixed incomes. These increases, known as cost of living allowances (COLAs), are based on the annual increase in consumer prices. Allowing benefits to increase automatically ended the need for special acts of Congress, but it has also steadily increased the cost of the Social Security Program.

A person who continues to work past the retirement age may lose some benefits because Social Security is designed to replace lost earnings. If earnings from employment do not exceed the amount specified by law, the person receives the full benefits. If earnings are greater than that amount, one dollar of benefit is withheld for every two dollars in wages earned above the exempt amount. Once a person reaches age seventy, however, he does not have to report earnings to the SSA, and the benefit is not reduced.

Survivors' Benefits

Survivors' benefits are paid to family members when a worker dies. Survivors can receive benefits if the deceased worker was employed and contributed to Social Security long enough for someone her age to qualify for Social Security.

Both mothers and fathers earn protection for their families by working and contributing to Social Security. If a wage earner dies, his unmarried children are entitled to receive benefits. If the child of a wage earner becomes permanently disabled before age twenty-two, she can continue to receive survivors' benefits at any age unless she becomes self-supporting or marries.

Survivors' benefits can also go to a surviving spouse when the worker dies. A surviving spouse who retires can begin collecting survivors' benefits as early as age sixty. If a worker dies leaving a divorced spouse who was married to the worker for at least ten years, the ex-spouse can receive survivors' benefits at age sixty if she retires. In addition to monthly checks, the worker's widow or widower, or if there is none, another eligible person, may receive a lump-sum payment of $255 on the worker's death.

Disability Benefits

In the 1970s, the SSA became responsible for a new program, Supplemental Security Income (SSI). The original 1935 Social Security Act had included programs for needy aged and blind individuals, and in 1950 programs for needy disabled individuals were added. These three programs were known as the "adult categories" and were administered by state and local governments with partial federal funding. Over the years the state programs became more complex and inconsistent until as many as 1,350 administrative agencies were involved and payments varied more than 300 percent from state to state. In 1969 President Richard M. Nixon identified a need to reform these and related welfare programs. In 1972 Congress federalized the "adult categories" by creating the SSI program and assigned responsibility for it to the SSA.

A person who becomes unable to work and expects to be disabled for at least twelve months or who will probably die from the condition can receive SSI payments before reaching retirement age. A worker is eligible for disability benefits if she has worked enough years under Social Security prior to the onset of the disability. The amount of work credit needed depends on the worker's age at the time of the disability. That time can be as little as one and one-half years of work in the three years before the onset of the disability for a worker under twenty-four years of age, but it is never more than a total of ten years.

A waiting period of five months after the onset of the disability is imposed before SSI payments begin. A disabled worker who fails to apply for benefits when eligible can sometimes collect back payments. No more than twelve months of back payments may be collected, however. Even if the worker recovers from a disability that lasted more than twelve months, she can apply for back benefits within fourteen months of recovery. If a worker dies after a long period of disability without having applied for SSI, her family may apply for disability benefits within three months of the date of the worker's death. The family members are also eligible for survivors' benefits.

A disability is any physical or mental condition that prevents the worker from doing substantial work. Examples of disabilities that meet the Social Security criteria include brain damage, heart disease, kidney failure, severe arthritis, and serious mental illness.

The SSA uses a sequential evaluation process to decide whether a person's disability is serious enough to justify the awarding of benefits. If the impairment is so severe that it significantly affects "basic work activity," the worker's medical data are compared with a set of guidelines known as the Listing of Impairments. A claimant found to suffer from a condition in this listing will receive benefits. If the condition is less severe, the SSA determines whether the impairment prevents the worker from doing his former work. If not, the application will be denied. If so, the SSA proceeds to the final step, determining whether the impairment prevents the applicant from doing other work available in the economy.

At this point, the SSA uses a series of medical-vocational guidelines that consider the applicant's residual functional capacity as well as his age, education, and experience. The guidelines look at three types of work: one type is for persons whose residual physical capacity enables them to perform only "sedentary" work on a sustained basis, another for those able to do "light" work, and a third for those able to do "medium" work.

If the SSA determines that an applicant can perform one of these types of work, benefits will be denied. A claimant may appeal this decision and ask for a hearing in which to present further evidence, including personal testimony. If the recommendation of the administrative law judge conducting the hearing is adverse, the claimant may appeal to the SSA's Appeals Council. If the claimant loses his appeal, he may file a civil action in federal district court seeking review of the agency's adverse determination.

Persons who meet the OASDI disability eligibility requirements may receive three types of benefits: monthly cash payments, vocational rehabilitation, and medical insurance. Provided proper application has been made, cash payments begin with the sixth month of disability. The amount of the monthly payment depends upon the amount of earnings on which the worker has paid Social Security taxes and the number of his eligible dependents. The maximum for a family is usually roughly equal to the amount to which the disabled worker is entitled as an individual plus allowances for two dependents.

Vocational rehabilitation services are provided through a joint federal-state program. A person receiving cash payments for disability may continue to receive them for a limited time after beginning to work at or near the end of a program of vocational rehabilitation. Called the "trial work period," this period may last as long as nine months.

Medical services are available through the Medicare Program (a federally sponsored program of hospital and medical insurance). A recipient of OASDI disability benefits begins to participate in Medicare twenty-five months after the onset of disability.

In 1980 Congress made many changes in the disability program. Most of these changes focused on various work incentive provisions for both Social Security and SSI disability benefits. The SSA was directed to review current disability beneficiaries periodically to certify their continuing eligibility. This produced a massive workload for the SSA and one that was highly controversial, as persons with apparently legitimate disabilities were removed from SSI. By 1983 the reviews had been halted.

The Contract with America Advancement Act of 1996 (Pub. L. No. 104-121) changed the basic philosophy of the disability program. New applicants for Social Security or SSI disability benefits are no longer eligible for benefits if drug addiction or alcoholism is a material factor in their disability. Unless they can qualify on some other medical basis, they cannot receive disability benefits. Individuals in this category already receiving benefits had their benefits terminated as of January 1, 1997.

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (Pub. L. No. 104-193), which concerns welfare reform, terminated SSI eligibility for most noncitizens. Previously, lawfully admitted aliens could receive SSI if they met the other requirements. All existing noncitizen beneficiaries were to be removed from the rolls unless they met one of the exceptions in the law.

Medicare

The Medicare Program provides basic health care benefits to recipients of Social Security and is funded through the Social Security Trust Fund. President Harry S. Truman first proposed a medical care program for the aged in the late 1940s, but it was not enacted until 1965, when Medicare was established as one of President Lyndon B. Johnson's Great Society programs (42 U.S.C.A. § 1395 et seq.).

The Medicare Program is administered by the Health Care Financing Administration (HCFA). The federal government enters into contracts with private insurance companies for the processing of Medicare claims. To qualify for Medicare payments for their services, health care providers must meet state and local licensing laws and standards set by the HCFA.

Medicare is divided into a hospital insurance program and a supplementary medical insurance program. The Medicare hospital insurance plan is funded through Social Security payroll taxes. It covers reasonable and medically necessary treatment in a hospital or skilled nursing home, meals, regular nursing care services, and the cost of necessary special care.

Medicare's supplementary medical insurance program is financed by a combination of monthly insurance premiums paid by people who sign up for coverage and money contributed by the federal government. The government contributes the major portion of the cost of the program, which is funded out of general tax revenues. Persons who enroll pay a small annual deductible fee for any medical costs incurred above that amount during the year and also a regular monthly premium. Once the deductible has been paid, Medicare pays 80 percent of any bills incurred for physicians' and surgeons' services, diagnostic and laboratory tests, and other services, but does not pay for routine physical checkups, drugs and medicines, eyeglasses, hearing aids, dentures, and orthopedic shoes. Doctors are not required to accept Medicare patients, but almost all do.

Medicare's hospital insurance is financed by a payroll tax of 2.9 percent, divided equally between employers and employees. The money is placed in a trust fund and invested in U.S. Treasury securities. The fund accumulated a surplus during the 1980s and early 1990s, but according to projections, it will run out of money by 2002 as outlays rise more rapidly than future payroll tax revenues.

The Future of Social Security

From its modest beginnings, Social Security has grown to become an essential facet of modern life. In 1940 slightly more than 222,000 people received monthly Social Security benefits; in 1997 more than 42 million people received such benefits. One in seven individuals receives a Social Security benefit, and more than 90 percent of all workers are covered by Social Security. The SSI program has nearly doubled in size since its inception in 1974.

By the 1980s the Social Security Program faced a serious long-term financing crisis. President Ronald Reagan appointed a blue-ribbon panel, known as the Greenspan Commission, to study the issues and recommend legislative changes. The final bill, signed into law in 1983 (Pub. L. 98-21, 97 Stat. 65), made numerous changes in the Social Security and Medicare Programs; these changes included taxing Social Security benefits, extending Social Security coverage to federal employees, and increasing the retirement age in the next century. By the 1990s, however, concerns were again raised about the long-term financial viability of Social Security and Medicare. Various ideas and plans to ensure the financial stability of these programs were put forward, but no political consensus as to what changes should be made had emerged by 1997.

See: Disabled Persons; Elder Law; Health Care Law; Senior Citizens.

A system of federally funded services and payments to help support the needy, the aged, and the temporarily unemployed as well as providing support for needy, dependent, disabled, or neglected children, rehabilitation for the disabled, and a host of other social services. The system was established as part of the New Deal and is funded by payroll taxes paid by workers and employers.

A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits include retirement income, disability income, Medicare and Medicaid, and death and survivorship benefits. Social Security is one of the largest government programs in the world, paying out hundreds of billions of dollars per year.  

Based on the year someone was born, retirement benefits may begin as early as age 62 and as late as age 67. The amount of income received is based on the average wages earned over the worker's lifetime, with a maximum calculable amount of $102,000 as of 2008. Spouses are also eligible to receive Social Security benefits, even if they have limited or non-existent work histories.  

Investopedia Says:
The original program was part of President Franklin D. Roosevelt's New Deal plan to lift the U.S. out of the Great Depression. Today, the program is funded through payroll taxes collected by employees and companies; monies are placed into the Social Security Trust Fund and payments are managed by the government along with the Federal Reserve Board.  

Social Security has faced serious solvency issues for many decades; today's payments are made from current payroll contributions by workers who may not have money available for them when they retire. Social security reform, whether through legislation, tax law changes, or privatization, has been a major political issue that draws strong opinions from different demographic segments.  

Social Security faces the real threat of becoming insolvent because of factors such as longer life expectancies, a large baby boomer population currently entering retirement age, and inflation.

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You've probably contributed to this fund, but will you reap the benefits? Find out here. Introduction To Social Security
Find out how to work the system to get the highest total benefits the law allows. 4 Unusual Ways To Boost Social Security Benefits
Altering retirement plans is tough, but when the retiree is unprepared, it's very necessary. Helping Your Clients Face The Financial Reality Of Retirement
You've been paying in for years - now it's time to find out what the system owes you. How Much Social Security Will You Get?
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The American system for distributing old age and disability pensions from the federal government. Initiated through the Social Security Act of 1935, Social Security pensions are financed by contributions from workers and employers. Benefits are also available to the survivors of workers covered under Social Security.

This article is about the retirement/disability program. For the general concept of providing welfare, see Social security. For other uses, see Social Security (disambiguation).

Part of a series of articles on
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v t e

A Social Security card issued in Florida in 1983

In the United States, Social Security refers to the Old-Age, Survivors, and Disability Insurance (OASDI) federal program.^[1] The original Social Security Act(1935)^[2] and the current version of the Act, as amended^[3] encompass several social welfare and social insurance programs.

Social Security is primarily funded through dedicated payroll taxes called Federal Insurance Contributions Act tax (FICA). Tax deposits are formally entrusted to the Federal Old-Age and Survivors Insurance Trust Fund, the Federal Disability Insurance Trust Fund, the Federal Hospital Insurance Trust Fund, or the Federal Supplementary Medical Insurance Trust Fund which comprise the Social Security Trust Fund.^[4]

By dollars paid, the U.S. Social Security program is the largest government program in the world and the single greatest expenditure in the federal budget, with 20.8% for Social Security, compared to 20.5% for discretionary defense and 20.1% for Medicare/Medicaid.^[5] In 2003 the combined spending for all social insurance programs constituted 37% of government expenditure and 7% of the gross domestic product.^[6] Social Security is currently estimated to keep roughly 40 percent of all Americans age 65 or older out of poverty.^[7]

The Social Security Administration is headquartered in Woodlawn, Maryland, just to the west of Baltimore.

Proposals to privatize Social Security became part of the Social Security debate during the Bill Clinton and George W. Bush presidencies.

Contents 1 History 2 Major Programs 3 Benefits 3.1 Totals By Year 3.2 Primary Insurance Amount 3.3 Normal retirement age 3.4 Spouse's benefit 3.5 Widowed benefits 3.6 Children's benefits 3.7 Disability 4 Current operation 4.1 Joining and quitting 4.2 Trust fund 4.3 Office of Disability Adjudication and Review (ODAR) 4.4 Benefit payout comparisons 4.5 International agreements 4.6 Social Security number 4.7 Demographic and revenue projections 4.8 Online benefits estimate 5 Taxation 5.1 Tax on wages and self-employment income 5.1.1 Wages not subject to tax 5.2 Federal income taxation of benefits 6 Criticisms 6.1 Claim that it discriminates against the poor and the middle class 6.2 Claim that politicians exempted themselves from the tax 6.3 Claim that the government lied about the maximum tax 6.4 Claim that it gives a low rate of return 6.5 Claim that it is a Ponzi scheme 6.6 Estimated net Social Security benefits under differing circumstances 7 Current controversies 7.1 Contrast with private pensions 7.2 Court interpretation of the Act to provide benefits 7.3 Constitutionality 8 Fraud and abuse 8.1 Social security number theft 8.2 Fraud in the acquisition and use of benefits 8.3 Restrictions on potentially deceptive communications 9 Public economics 9.1 Current Recipients 9.2 Consumption smoothing and the annuity market Life annuity 9.3 Economize on decision making and administrative costs 9.4 Income redistribution 9.5 Saving behavior 9.6 Improved income status of the aged 9.7 Raising the maximum taxable earning levels 9.8 Increasing retirement age 9.9 Reducing cost of living adjustment (COLA) 9.10 Changing of the benefit formula 10 See also 11 References 12 Further reading 13 External links

History

Main article: History of Social Security in the United States

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, when poverty rates among senior citizens exceeded 50 percent.^[8] The Act was an attempt to limit what were seen as dangers in the modern American life, including old age, poverty, unemployment, and the burdens of widows and fatherless children.

Opponents also decried the proposal as socialism. In a Senate Finance Committee hearing, one Senator 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?"^[9]

Most women and minorities were excluded from the benefits of unemployment insurance and old age pensions. Employment definitions reflected typical white male categories and patterns.^[10]

The provisions of Social Security have been changing since the 1930s, shifting in response to economic worries as well as concerns over changing gender roles and the position of minorities. Officials have responded more to the concerns of women than those of minority groups.^[11] Social Security gradually moved toward universal coverage. By 1950, debates moved away from which occupational groups should be included to how to provide more adequate coverage.^[12] Changes in Social Security have reflected a balance between promoting equality and efforts to provide adequate protection.^[13]

Major Programs

The larger and better known programs under the Social Security Act and amendments are:

• Federal Old-Age (Retirement), Survivors, and Disability Insurance
• Unemployment benefits
• Temporary Assistance for Needy Families
• Health Insurance for Aged and Disabled (Medicare)
• Grants to States for Medical Assistance Programs (Medicaid)
• State Children's Health Insurance Program (SCHIP)
• Supplemental Security Income (SSI)
• Patient Protection and Affordable Care Act

Benefits

The largest component of OASDI is the payment of retirement benefits. Throughout a worker's career, the Social Security Administration keeps track of his or her earnings. The amount of the monthly benefit to which the worker is entitled depends upon that earnings record and upon the age at which the retiree chooses to begin receiving benefits. For the entire history of Social Security, benefits have been paid almost entirely by using revenue from payroll taxes. This is why Social Security is referred to as a pay-as-you-go system. Around 2021, payroll tax revenue in combination with accruing interest on the Social Security Trust Fund is projected to be insufficient to cover Social Security benefits and the system will begin to withdraw money from the Social Security Trust Fund.^[14] The existence and economic significance of the Social Security Trust Fund is a subject of considerable dispute because its assets are special Treasury bonds; i.e. the money in the trust fund has been lent back to the federal government to pay for other expenses.

Totals By Year

• Year – Beneficiaries – Dollars^[15]
• 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

A worker's retirement income benefit is based on his Primary Insurance Amount, or PIA. The PIA is the average of the highest 35 years of the worker's covered earnings (before deduction for FICA). Covered earnings in any year are limited by that year's Social Security Wage Base, the maximum earnings that could be subject to the OASDI portion of FICA payroll tax ($110,100 in 2012).^[16] If the worker has fewer than 35 years of covered earnings, zeros are used to bring the total number of years of earnings up to 35. Years of covered work more than 2 years before the year the worker turns 62 are indexed upward to reflect the increase in the national wage via the average wage index (AWI) from the time at which the earnings were covered in the past to the value of the AWI two years before the worker turns 62 (which is the most recent year available at the date the worker turns 62). One-twelfth of this 35-year average is the average indexed monthly earnings (AIME). The PIA then is 90 percent of the AIME up to the first (low) bendpoint, and 32 percent of the excess of AIME over the first bendpoint but not in excess of the second (high) bendpoint, plus 15 percent of the AIME in excess of the second bendpoint. Bendpoints designate the point at which the rates of return on a beneficiary's AIME change.^[17][18] In 2008, the bendpoints for calculating the PIA are a change from 90% to 32% at $711 and a change to 15% at $4,288.^[18][19] This PIA is then adjusted by automatic cost-of-living adjustments annually starting with the year the worker turns 62. Similar computations based on career average earnings determine disability and survivor benefits. These alternate computations average less years of earnings when the worker dies or is disabled before age 62 and use different base years for the inflation adjustments.

Normal retirement age

Main article: Retirement Insurance Benefits

The earliest age at which (reduced) benefits are payable is 62. Full retirement benefits depend on a retiree's year of birth.^[20]

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

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.

It is perhaps instructive to look at the percentages of retirees in countries around the world. The breakdown in the more well known countries is as follows: Europe, Northern America, Australia, New Zealand, and Japan has increased from 8 percent in the 1950s to 14 percent in 2000, and is predicted to reach 26 percent in 2050. The reason for these high percentages is a result of a decline in the death and fertility rates.^[21]

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.

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

Any current spouse is eligible, and divorced or former spouses are eligible generally if the marriage lasts for at least 10 years. (Civil marriages of same sex couples are not recognized by OASDI for spousal benefits because the federal DOMA law excludes them for federal recognition.) While 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 of at least ten years. Because age 70 is the latest retirement age, and because no state recognizes marriage before teenage years, there are no more than 5 successive spousal benefits in ten-year intervals. This spousal retirement benefit is half the PIA of the worker; this is different from the spousal survivor benefit, which is the full PIA. The benefit is the product of the PIA, times one half, times the early-retirement factor if the spouse is younger than normal retirement age. There is no increase for starting spousal benefits after normal retirement age. This can occur if there is a married couple in which the younger person is the only worker and is more than 5 years younger. Only after the worker applies for retirement benefits may the non-working spouse apply for spousal retirement benefits.

Note that, since the passage of the Senior Citizens' Freedom to Work Act, in 2000, the spouse and children of a worker who has reached normal retirement age can receive benefits on the worker's record whether the worker is receiving benefits or not. Thus a worker can delay retirement without affecting spousal and children's benefits. The worker may have to begin receipt of benefits, to allow the spousal/children's benefits to begin, and then subsequently suspend his/her own benefits in order to continue the postponement of benefits in exchange for an increased benefit amount up to the age of 70.^{[citation needed]}

Widowed benefits

If a worker covered by Social Security dies, a surviving spouse can receive survivors' benefits. In some instances, survivors' benefits are available even to a divorced spouse. A father or mother with minor or disabled children in his or her care can receive benefits which are not actuarially reduced. The earliest age for a nondisabled widow(er)'s benefit is age 60. The benefit is equal to the worker's full retirement benefit for spouses who are at, or older than, normal retirement age. If the surviving spouse starts benefits before normal retirement age, there is an actuarial reduction.^[22] If the worker earned delayed retirement credits by waiting to start benefits after their normal retirement age, the surviving spouse will have those credits applied to their benefit.^{[citation needed]}

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 16, or are over the age of 18 and were disabled before the age of 22.^[22] In a landmark case, the 8th Circuit U.S. Court of Appeals decided that a child is entitled to survivor benefits even though she was born two years after her father's death, having been conceived by in vitro fertilization.^[23]

Disability

This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (November 2007)

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.^[24] 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 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.

Current operation

Joining and quitting

Obtaining a Social Security number for a child is voluntary.^[25] Further, there is no general legal requirement that individuals join the Social Security program (although, under normal circumstances, FICA taxes must be collected anyway). 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,^[26] 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.^[27]

Importantly, most parents apply for Social Security numbers for their dependent children in order to^[28] 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 FICA taxes are imposed on all workers and self-employed persons. Employers are required^[29] to report wages for covered employment to Social Security for processing Forms W-2 and W-3. There are some specific wages which are not a part of the Social Security program (discussed below). Internal Revenue Code provisions section 3101^[30] imposes payroll taxes on individuals and employer matching taxes. Section 3102^[31] 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^[32] of the Internal Revenue Code.^[33] and also taxes^[34] net earnings from self-employment.^[35]

Trust fund

Main article: Social Security 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 42 U.S.C. § 401(a)). Current year expenses are paid from current Social Security tax revenues. When revenues exceed expenditures, as they have in most years, the excess is invested in 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.^[36] The Trust Fund is regarded by some as an accounting trick which holds 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 the power to tax and the commitment of the 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 present value of the cost of Social Security and the present value of the assets in the Trust Fund and the future scheduled tax income of the program. In the Actuarial Note explaining the calculation, the Office of the Chief Actuary wrote 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."^[37][38]

Office of Disability Adjudication and Review (ODAR)

"The Office of Hearings and Appeals (OHA) administers the hearings and appeals program for the Social Security Administration (SSA). Administrative Law Judges (ALJs) conduct hearings and issue decisions. The Appeals Council considers appeals from hearing decisions, and acts as the final level of administrative review for the Social Security Administration."^[39] In 2006, OHA was renamed to ODAR.^[40]

Benefit payout comparisons

The current formula used in calculating the benefit level (primary insurance amount or PIA) is very progressive so that sizable benefits could be obtained with much less than the thirty five to forty years of covered wages. Workers who spend their entire careers in covered employment would be unfairly treated relative to workers who spend the first half of their careers not covered (as in municipal employment) by OASDI but are covered by an alternative plan. These people who later switch into covered employment would be entitled to both the alternative non OASDI pension (presumably from a state or municipality) and get an Old Age retirement benefit from Social Security. The progressivity of the PIA formula would in effect allow these workers to double dip. Therefore, there are two provisions that mitigate the effect of the double dipping: one for those who obtain OASDI benefits from a spouse who is a covered worker and the other for those who split their careers in covered and noncovered employment. This latter double dip has a claw back factor which starts at maximum at 10 years and grades out to zero at 30 years so that there is no clawback for those with 30 years or more of covered wages. This is to prevent those with abnormally low AIMEs due to few years of covered status from being treated as lifetime (say 44 years) career low wage earners with low AIMEs.

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.^[41]

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):^[42]

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) Mexico (Signed on June 29, 2004, but not yet in effect)

Social Security number

Main article: 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 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 42 U.S.C. § 405(c)(2). 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 (which prints it on service members' dog tags and uses it in a number of ways to identify personnel, including the name, rank and "serial number" one would furnish the enemy as a POW) as well as private agencies such as banks, colleges and universities, health insurance companies, and employers.

The Social Security Administration admits that the Social Security Act does not require a person to have a Social Security Number to live and work in the United States, nor does it require an SSN simply for the purpose of having one.^[26]

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, 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.^[43]

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.^[44]

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.^[45] 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 system income, including interest. At that point the system will begin drawing on its Treasury Notes, and will continue to pay benefits at the current levels until the Trust Fund is exhausted. At that point, benefits will be reduced to about three-fourths of current levels unless additional revenue is found.

In 2005, this exhaustion of the Trust Fund was projected to occur in 2041 (by the Social Security Administration)^[46] or 2052 (by the Congressional Budget Office).^[47] Thereafter, however, the projection for the date of this event was moved up by a few years after the recession worsened the system'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.^[48]

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.^[49]

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 trustees projects that life expectancy will increase just six years in the next seven decades, to 83 in 2075. A separate set of projections, by the Census Bureau, shows more rapid growth.

("Social Security Underestimates Future Life Spans, Critics Say"^{[50][dead link]}) 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 induce people to stay in the workforce longer.

Actuarial science, of the kind used to project the future solvency of social security, is by nature inexact. The SSA actually makes three predictions: optimistic, 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 which resulted in the projected exhaustion date being pushed back (from 2028 to 2042) with each successive Trustee's report.^{[citation needed]} During the heavy-boom years of the '90s, the midline projections were too pessimistic. Obviously, projecting out 75 years is a significant challenge and, as such, 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.^[51][52]

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

From 2004 to 2030, the combined spending on Social Security and Medicare is expected to rise from 7% of national income (gross domestic product) to 13%. Two-thirds of the increase occurs in Medicare.^[53]

Online benefits estimate

On July 22, 2008 the Social Security Administration introduced a new online benefits estimator.^[54][55] 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.

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 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, the employee's contribution was reduced to 4.2%, while the employer's portion remained at 6.2%.^[56] In 2012, the wage base increases to $110,100.^[16] 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 1937-2009 can be accessed on the Tax Foundation^[57] website.

The combined tax rate of these two federal programs was 15.30% (7.65% paid by the employee and 7.65% paid by the employer) and dropped to 13.30% (5.65% paid by the employee and 7.65% paid by the employer) in 2011.

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."^[58] 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.^[59][60]

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:^[61]

• 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, but only for "qualified services" performed for a religious organization.
• Other minor exceptions.

Federal income taxation of benefits

The benefits received by retirees were not originally taxed as income in the year of receipt. 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%.^[62] Under the Deficit Reduction Act of 1993, the portion of benefits potentially subject to tax was increased to 85% beginning with the 1994 tax year.^[63]

Criticisms

Claim that it discriminates against the poor and the middle class

Critics, such as libertarian Nobel Laureate economist Milton Friedman, say that Social Security redistributes wealth from the poor to the wealthy.^[64][65] 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.^[66][16] Therefore, high earners pay a lower percentage of their total income because of the income caps; because of this, payroll taxes are often viewed as being regressive. Furthermore, wealthier individuals generally have higher life expectancies and thus may expect to receive larger benefits for a longer period than poorer taxpayers.^[67] A single individual who dies before age 62, who is more likely to be poor, receives no retirement benefits despite his years of paying Social Security tax. On the other hand, an individual who lives to age 100, who is more likely to be wealthy, is guaranteed payments that are more than he paid into the system.^[68] An NBER volume edited by Martin Feldstein and Jeffrey Liebman called The Distributional Aspects of Social Security points out that members of racial minorities with lower than average life expectancies and lower than average rates of marriage may also suffer from the program on average.

Supporters of Social Security say that despite its regressive tax formula, 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).^[69] They 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, but this offset requires an individual to be disabled.^[70][71][72] 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 less than nine months (except in certain situations),^[73] divorced widow(er)s married less than 10 years,^[74] and co-habiting or same-sex couples, unless they are legally married in their state of residence.^{[75][76][77][78][79]} Unmarried individuals tend to be less wealthy and minorities.^[80]

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.^[81] Indeed, 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.^[82] 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.^[83]

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.^[84] 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."^[85]

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).^[86]

In 2005, 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."^[84]

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%."^[87]

Claim that it gives a low rate of return

Critics of Social Security^[88] claim that it gives a low rate of return, compared to what is obtained through private retirement accounts. For example, critics point out^[88] 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.^[88] 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^[89] 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.

Claim that it is a Ponzi scheme

See also: Criticism of Social Security as a pyramid or Ponzi scheme

Critics have drawn parallels between Social Security and Ponzi schemes,^[90][91][92] 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.^[93]

—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 a Ponzi scheme the fact there is no return generating mechanism beyond just contributions from new entrants is obscured^[94] whereas Social Security payouts have always been openly underwritten by incoming tax revenue and the interest on the Treasury bonds held by Social Security.^[95] Private sector Ponzi schemes cannot be sustained indefinitely without reducing payouts, whereas Social Security's benefits can theoretically always be sustained by raising taxes on new participants or reducing promised payouts. Because of these and other issues, Robert E. Wright calls Social Security a "quasi" pyramid scheme in his book, Fubarnomics.

Estimated net Social Security benefits under differing circumstances

Single men with different wages and retirement dates

In 2004, Urban Institute economists C. Eugene Steuerle and Adam Carasso created a Web-based Social Security benefits calculator.^[96] 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.

Impact of gender and wage levels on net SS benefits

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.^[97]

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.^[98]

Net lifetime SS benefits of married men and women where only one person works

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."^[99]

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.^[100]

Comparison of net SS benefits

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.^[101]

Current controversies

Main article: Social Security debate (United States)

Proposals to reform of the Social Security system have led to heated debate, centering around 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, and 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.^[102] He described the Social Security system as "headed for bankruptcy", and outlined, in general terms, a proposal based on partial privatization. Critics responded that privatization would worsen the program's solvency outlook and would require huge new borrowing. See Social Security debate (United States).

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).

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.^[103] 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.^[104] According to the court, that the Social Security Act "should be liberally construed in favor of those seeking its benefits can not be doubted."^[105] “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.”^[106]

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 Robert Nozick, have argued that Social Security should be unconstitutional.^{[citation needed]}

In the 1937 U.S. Supreme Court case of Helvering v. Davis,^[107] 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 High 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^[108] 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.”^[109]

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. See Press Release.

Fraud in the acquisition and use of benefits

Given the vast size of the program, fraud occurs. The Social Security Administration has its own investigatory group, Continuing Disability Investigations (CDI). In addition, the Social Security Administration may request investigatory assistance from other federal law enforcement agencies including the Office of the Inspector General and the FBI.^{[citation needed]}

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).^[110]

Public economics

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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. The trust fund would then be exhausted by 2036 without legislative action.^[111]

In 2004 the U.S. Social Security system paid out almost $500 billion in benefits.^[112]

Consumption smoothing and the annuity market Life annuity

Social Security provides insurance for the possibility of living longer than expected, when a person has consumed all the resources saved for retirement. Annuity is one answer to such an eventuality. A person will buy an annuity and will pay a certain amount during his working life up to around 65 and then receive benefits in return upon retirement. The larger the premium, the larger the benefits he will receive when all the other things remain same. The second concept of consumption smoothing means that a person reduces his consumption when he is earning at the highest level and saves for the years when he will be old and not able to earn at this level but wants to achieve a certain level of consumption for him or his family. A risk averse person will be willing to buy an annuity and reduce his consumption in return for a guaranteed level of income after his retirement and for his family after his death. But this has some problems like adverse selection due to asymmetric information.^[113]

Economize on decision making and administrative costs

It means that in order to properly decide what amount of money one should save and how to invest so that its returns can be used in the old age for one’s benefits. These are difficult things and by joining the social security relieve one from these issues but still problem with government program remains that it will not satisfy the choices of many people. In the same manner, the supply side has to deal with the issues of moral hazard, adverse selection and for this purpose they want a lot of information on life expectancies in order to determine annuities. Annuities also have to pay to the sales people high commissions. But making compulsory to join for everyone in a program saves all these costs.^[113]

Income redistribution

This is so planned that the benefits are lesser for the people with high income averages and high for the low income people. In this way, social security redistributes the incomes. Moreover, there is also intergenerational redistribution of income also. In the pay as you go system, the present generation of workers pays for the benefits of the earlier generation.^[113]

Saving behavior

Social security affects the saving behavior of the people in three different ways. In the wealth substitution effect when a person is paying for his social security, it is expected that he will save less because he knows that in the event of his old age social security will take care of him. In the retirement effect, increases the savings because people would like to retire earlier and this will induce them to save more because now they have to pay for more years after retirement. The bequest effect also increases saving. Because people want to save for children, when they will pay for social security, this will decrease resources and they will save.^[113]

Improved income status of the aged

Social security has decreased poverty in the elderly people. During 1974-2003, the median real income among the population above 15 increased by 30% and in the population over 65 this increase was 45%. But still the problem persists and still the women especially widows are likely to experience economic stress. ^[113]

Raising the maximum taxable earning levels

At present the limit is $110,100 in 2012.^[16] But if the cap is lifted and it includes all taxable income, it will be able to tackle the problem of increasing benefits, from an increase of revenues. A benefit of lifting the cap on the taxable income, but not increasing the benefits make some suggest that the revenue from high income earners will lead to solvency of social security.^[113]

Increasing retirement age

Because the life expectancy has increased and will increase further, even in the absence of other demographic factors the retirement age must be increased to maintain a sustainable system. Since payments began in 1940, life expectancy has increased by 5.1 years for men and 6 for women, yet the retirement age has only been increased by 2 years. To make expected time in retirement the same as in 1940, the retirement age would have to be increased to 73.^[114] If the retirement age is increased to 68 it will increase the payroll tax by 0.52 percentage point but it still falls far short of required 3.5 percentage point increase in payroll tax. The cost will be more working years and less leisure and benefit will be that payroll tax will be slightly low.^[113]

Reducing cost of living adjustment (COLA)

At present, a retiree’s benefit is each year increased by the cost of living measured in CPI. According to some economists the CPI overestimates the price increases so it is appropriate to adjust benefits less than CPI (Boskin et al., 1998). If the benefits adjustments is delinked from CPI and it will reduce cost of living and the reduction in cost of living will increase benefits by 0.79 dollar for every dollar reduced.^[113]

Changing of the benefit formula

At present, AIME is calculated on the average of 35 years of earnings, as discussed earlier, if the retirement is increased to 68 then the average for calculation of AIME may be increased to 38 years earnings. It will decrease the lifetime earnings and it will decrease the benefits. This would be equivalent to increasing the payroll tax by 0.26 percentage points. Another variant of this can be, now AIME uses the indexing based on average wage growth for 35 years but if it was based on CPI then it will also reduce the benefits. It will help in sustainable solvency because the wages tend to rise more as compared to prices. In order to help the poor, the lowest income 30% of the retirees may be given benefits based on wage indexing and all the rest on price indexing or the mix of both indexes.^[113]

See also

	Government of the United States portal
	Law portal

401(k) Federal Emergency Relief Administration Goldberg v. Kelly Government operations Michael J. Astrue, Commissioner Social Security Administration Social Security Administration Health savings account Individual Retirement Account

National Organization of Social Security Claimants' Representatives (NOSSCR) Ownership society Richardson v. Perales Social Security debate (United States) Steward Machine Company v. Davis Supplemental Security Income

References

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Works referenced

• Achenbaum, Andrew (1986). Social Security Visions and Revisions.
• Feldstein, Martin; Jeffrey Liebman (editors) (2002). The Distributional Aspects of Social Security and Social Security Reform. Chicago: University of Chicago Press.
• Kessler-Harris, Alice (2001). In Pursuit of Equity: Women, Men, and the Quest for Economic Citizenship in 20th Century America. New York City: Oxford University Press.
• Social Security Administration Beneficiaries and costs information
• Wright, Robert E. (2010). Fubarnomics: A Lighthearted, Serious Look at America's Economic Ills. Buffalo, New York: Prometheus Books.

Further reading

• "Community of Minds: Working Together – The $44 Trillion Abyss – 2003 Fortune Magazine". http://solutions.synearth.net/2003/12/17. Retrieved December 3, 2005. 
• "Social Security Suicide". http://www.alternet.org/election04/20746/. Retrieved December 3, 2005. 
• Brown, Jeffrey R.; Liebman, Jeffrey B.; Wise, David A. (2009). Social Security Policy in a Changing Environment. University of Chicago Press. ISBN 978-0-226-07648-5. 
• "What Does Price Indexing Mean for Social Security Benefits? (explanation of wage indexing versus price indexing)" (PDF). Center for Retirement Research. January, 2005. Archived from the original on November 4, 2005. http://web.archive.org/web/20051104150159/http://www.bc.edu/centers/crr/facts/jtf_14.pdf. Retrieved December 3, 2005. 
• "Getting a grip on Social Security: The flaw in the system". http://rationalrevolution0.tripod.com/blog/index.blog?entry_id=647053. Retrieved December 3, 2005. 
• "Center for American Progress: Social Security by the Numbers (reference guide with stats)". http://www.americanprogress.org/site/pp.asp?c=biJRJ8OVF&b=306535. Retrieved 2005-12-03. 
• Berkowitz, Edward D.; Kingson, Eric R. Social Security and Medicare: A Policy Primer Auburn House. 1993. 214 pp
• Jenkins, Shirley; et al., eds. Social Security in International Perspective Essays in Honor of Eveline M. Burns. Columbia University Press, 1969
• Martin, Patricia P.; Weaver, David A. "Social Security: A Program and Policy History," Social Security Bulletin, Vol. 66 No. 1, 2005
• Myers, Robert J. Social Security. University of Pennsylvania Press. 1993.
• Schieber, Sylvester J., and John B. Shoven. The Real Deal. Yale University Press 1999.
• Skidmore, Max J. Social Security and Its Enemies: The Case for America's Most Efficient Insurance Program. Westview Press, 1999
• Tanner, Michael D. Social Security and Its Discontents: Perspectives on Choice. Cato Institute, 2004. Comment: libertarian criticism
• Traver, David (2006). Social Security Disability Advocate's Handbook. James Publishing. ISBN 1-58012-033-4.
• Social Security Handbook, Germania Publishing, 2006.
• S044a90.ssa.gov Social Security Program Operations Manual System. Social Security Administration.
• Casamatta, G., Cremer, H., & Pestieau P. (2000). The political economy of Social Security. The Scandinavian Journal of Economics 102(3), 503-522.
• Cerda, R. A. (2005). On Social Security financial crisis. Journal of Population Economics 18(3), 509-517.
• Cogan, J. F. & Mitchell, O. S. (2003). Perspectives from the President’s Commission on Social Security reform. Journal of Economic Perspectives 17(2), 149–172.
• Galasso, V. (1999). The U.S. Social Security system: what does sustainability imply? Review of Economic Dynamics 2(3), 698-730.
• Galasso, V. & Profeta, P. (2004). Lessons for an aging society: the political sustainability of social security systems. Economic Policy 19(38), 63–115.
• Goss, S. C. (2010). The future financial status of the Social Security program. Social Security Bulletin 70(3), 111-125.
• Pecchenino, R. A. & Utendorf, K. R. (1999). Social Security, social welfare and the aging population. Journal of Population Economics 12(4), 607-623.

External links

• Old-Age, Survivors, and Disability Insurance ("OASDI')
  • Social Security Administration
  • Social Security Advisory Board
  • Social Security Retirement Questions FAQ
  • Social Security Internet Myths part 1, Social Security Internet Myths part 2
  • Congressional Budget Office: Social Security Primer (2001)
  • US Government Accountability Office, Social Security Reform: Answers to Key Questions
• Calculators
  • Social Security benefit calculators
  • Urban Institute's USA TODAY Lifetime Social Security and Medicare Benefits Calculator

• More information
  • Commission to Strengthen Social Security
  • Social Security Advisory Board
  • President's Commission to Strengthen Social Security
  • 75th Anniversary of Social Security at the Franklin D. Roosevelt Presidential Museum and Library
  • TimeLines of US SSI Numbers (Years Numbers States)
  • Social Security Death Index Information

• Articles
  • NBER paper, Internal Rate of Return, coauthored by Olivia Mitchell, member of President's Commission to Strengthen Social Security (2001)
  • Social Security's Financial Outlook and Reforms: An Independent Evaluation, Jagadeesh Gokhale, member of the Social Security Advisory Board advising Congress and the President
  • Time Archives A Collection regarding Social Security's progression and perception over time

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