What is Social Security?
Social Security is a US federal government program that provides social insurance and benefits to people with inadequate or no income, or who are retired from the workforce. The original Social Security Act was signed into law in 1935 by President Franklin D. Roosevelt. The law has undergone several modifications over the years to include several social welfare and social insurance programs.
The program was established as one of Roosevelt’s government strategies to lift the US out of the Great Depression. The term Social Security is used to refer to the Old Age, Survivors, and Disability Insurance (OASDI). Its benefits include retirement income, disability income, death and survivorship benefits, Medicare, and Medicaid.
Social Security is funded through payroll taxes referred to as the Federal Insurance Contributions Act Tax or the Self -Employed Contributions Act Tax. The Internal Revenue Service (IRS) collects these monies from employees and companies, and they are placed into the Social Security Trust Fund. This fund is made up of two funds – the Federal Old-Age and Survivors Insurance Trust Fund, and the Federal Disability Insurance Trust Fund. The Social Security Fund invests the monies in interest-bearing federal securities while they are held in trust.
History of Social Security
The original 37-page Social Security Act was signed into law in August 1935 by President Franklin Roosevelt. The act was enacted after the Great Depression as a way to protect US citizens from the financial risks of modern life, such as disability, retirement, unemployment, poverty, and the death of a family’s breadwinner. The initial act only covered retirement income for workers. Other benefits followed later through amendments to the 1935 law.
Amendments to the Social Security Act
The first amendment occurred in 1939 when the Act was expanded to include a spouse and minor children of retired American workers. In 1954, the Disability Program was added to the Act, and in 1960, the United States Supreme Court gave Congress the power to revise and amend the schedule of benefits.
In 1961, the retirement age was lowered to 62 years, but with reduced benefits. Medicare Health Care was added to the Social Security Act in 1965, with 20 million joining Medicare within the next three years. The Medicare tax was set at 0.7% in 1966 to cover increased medical expenses. The retirement age for younger workers was raised to 66 and 67 years in 1983.
Other amendments to Social Security include the introduction of taxes on Social Security benefits in 1983; modification of the Disability Benefits Reform Act in 1984; Temporary Assistance to Needy Families (TANF) replacing Aid to Families with Dependent Children (AFDC) in 1997; State Children’s Health Insurance Program for low-income citizens added in 1992; and No Social Security Benefits for Prisoners signed into law in 2009.
Types of Social Security Benefits
Retirement income makes up the bulk of the payments made by the Social Security Fund, accounting for approximately 71% of about 58 million people who receive social security benefits. For a person to qualify for these benefits, he or she must first meet the retirement age set by the government. The normal retirement age for a worker who was born in 1938 is 65 years.
The retirement age increases by two months for each ensuing year of birth until 1943. For people born from 1943 to 1954, they qualify to receive full benefits at the age of 66 years. For persons born between 1955 and 1959, two months are added for each additional year until those born in 1960 or later receive their benefits at the age of 67 years.
After the retirement age, retired workers receive increased disbursements for every year they delay receiving their benefits up to 70 years. The average retirement income is $1,294 based on the average earnings during the 35 years of work when an individual earned their highest income.
Spouses of retired workers are also eligible to receive Social Security benefits. To receive the payments, they must be at least 62 years of age, or caring for children under 16 years old, or caring for a child who is receiving Social Security benefits. Spouses who are also retired workers are eligible to receive the highest amount of benefits that they qualify for, either as a spouse or based on their own retirement and previous income history. High school students under 19, children under 18, and disabled children who became disabled before the age of 22 are also eligible to receive Social Security payments.
The Social Security survivor benefits make payments to surviving spouses and divorced spouses. The surviving spouse may only receive such payments after attaining 60 years of age, and the amount of payments equals the worker’s basic retirement benefit if the spouse starts receiving payment at or after attaining the normal retirement age. If the spouse begins receiving payments prior to the normal retirement age, there is a reduction in the disbursement amount.
In a situation where the worker had delayed receiving Social Security benefits until after their normal retirement age, the spouse will have those credits applied to the amount they receive. For a divorced spouse to receive the survivor benefits, they must have reached 60 years, the marriage must have lasted for at least ten years, and they must meet certain eligibility requirements. Where the deceased worker provided 50% or higher support to his or her parents, the parents may receive survivor benefits if they are 62 years old or older.
Social Security pays disability income to people who are unable to work because of a medical condition that is projected to last for at least 12 months or likely to result in death. The benefits start after five calendar months of disability, regardless of age. For a person to be eligible to receive disability income, they must have earned a specific number of credits based on their overall earnings and worked within the ten years preceding the disability.
In the case of younger workers who have not completed the ten years’ experience, the law provides for more lenient provisions to help them receive disability benefits. Also, the workers must be unable to continue with their previous job or adjust to other employment opportunities, taking into account their education level, age, and work experience. The value of disability benefits varies depending on the worker’s history of earnings and age.
CFI is a global provider of financial analyst certification and training for finance professionals. To learn more and expand your career, explore the additional relevant CFI resources below: