On August 14, 1935, at the low point of the Great Depression, the United States’ most harrowing economic crisis, President Franklin D. Roosevelt signed into law the Social Security Act, a bold and vital element of the New Deal. While the Social Security Act was needed to provide immediate relief to older Americans, it also created a long-term national policy of providing security to retirees.
At the signing, President Roosevelt said, “We can never insure 100 percent of the population against 100 percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”
For more than 80 years, Social Security has provided federal support to retirees, the indigent, and millions of others. The Social Security Administration estimates that in 2018, 63 million Americans will receive approximately $1 trillion in Social Security benefits and nearly nine out of ten people aged 65 and older will receive benefits.
In this module, we’ll explore the roots of Social Security, how to obtain a Social Security number, Social Security’s components and offerings and explain why young Americans should care about the program’s future.
History of Social Security
When enacted in 1935, Social Security was hailed as a long overdue federal undertaking to guarantee direct income support for the nation’s elderly, so that they could retire without living in poverty. It wasn’t the first time that the federal government had provided retirement benefits to the elderly, as a program existed to provide pensions to elderly Civil War veterans. By 1910, this federal pension system paid benefits for up to 20% of Americans ages 65 and older.
During the Great Depression, unemployment reached 34% of the nonagricultural workforce and between 1929 and 1932, the country’s national and per capita income dropped dramatically. By 1935, millions of Americans had lost their life savings and were living in grinding poverty. State relief agencies and religious charities attempted to assist people, but neither could adequately see to the needs of the elderly.
The Social Security Act created a federally administered system of social insurance for the elderly financed through payroll taxes paid by employers and employees. Social Security differs from private pensions in that private pension plans are pre-funded for individuals. The money is accumulated in advance so that it will be available and paid out to a current worker when he retires. Social security, on the other hand, is funded by all workers and peoples’ contributions are not held specifically for them. Social security taxes are held in a pool that benefits all recipients of social security.
The Social Security system applies to over 90% of wage earners and almost every industry. The largest groups of non-Social Security covered wage earners are public school teachers and nationwide, approximately 1.2 million of them are not covered by Social Security. State employees who work in non-covered jobs will not receive Social Security benefits because the state already offers access to public-sector pensions. In California, for example, all teachers are enrolled in the California Teachers State Retirement System which provides access to a public education pension plan instead of social security.
Social Security is a “pay as you go” system, A wage earner pays into the Social Security system out of her paycheck through a payroll tax called the Federal Insurance Contributions Act (which is commonly abbreviated as “FICA”). The tax applies to both the employer and the employee. The employee pays 6.2% of earnings up to a cap, which in 2018, was $128,400 and usually increases slightly each year. The employer also pays 6.2% (subject to the same cap), though this amount is deductible against the employers’ income. Self-employed people must pay both sides of the social security tax, for a total of 12.4%, though the employer’s side is income tax deductible. (There is also a Medicare tax of 1.45% on each the employer’s and employee’s side that rounds out what we colloquially call the “payroll tax.”)
Social security taxes aren’t stashed away in the wage earner’s personal Social Security savings account. Instead, the Social Security Administration pools the money and uses it to cover current beneficiaries. Eighty-one cents of every Social Security tax dollar goes into a trust fund, called the Old-Age and Survivors Insurance Trust Fund, that pays benefits for current retirees, surviving spouses and dependents of deceased workers. The remaining 19 cents heads to a trust fund called the Disability Insurance Trust Fund, that pays disability benefits for qualified Americans.
A wage earner receives credits toward eligibility by earning money on which social security tax is assessed. As of 2018, Social Security awards a worker one credit for every $1,320 in earnings and the worker can earn a maximum of four credits annually. This collection of credits remains on the wage earner’s Social Security record even when she changes jobs or stops working.
To qualify for Social Security benefits, the wage earner must have earned at least 40 credits, achieved by working and paying taxes for ten years, prior to the date he begins to claim benefits.
Social security benefits vary greatly based on how much social security tax the beneficiary paid into the system, the person’s familial status and on the age that the beneficiary chooses to begin collecting benefits. As of June 2017, the average monthly Social Security benefit was about $1,400 for a single retired worker, with the maximum benefit being almost $2,700.
Obtaining a Social Security Number
A nine-digit Social Security number is each person’s continuous link with Social Security. The Social Security Administration assigns the nine-digit number to U.S. citizens, permanent residents and eligible nonimmigrant workers in the United States. The number is important for obtaining Social Security benefits and, of course, is routinely used for identification.
The Social Security Administration uses the number to report wages to the government, track Social Security benefits and for other identification purposes. While each person also receives a social security card, it is the number that is important, as the card rarely needs to be displayed except in some cases for identification purposes.
The parents of a newborn child can apply for a Social Security number for the child when they apply for the baby’s birth certificate. The state agency that issues birth certificates shares the child’s information with the Social Security Administration, which assigned a number and mails the social security card to the child’s parents.
A non-citizen can also apply for a Social Security number. She can do so by applying in her home country before immigrating to the United States. An application for a social security card is typically accompanied by or preceded by an application for an immigrant visa. Alternatively, a non-citizen can visit a Social Security office in person after arriving in the United States and prove her identity and work-authorized immigration status with immigration documents and an unexpired foreign passport. She will then fill out a Form SS-5, or Application for a Social Security Card. Typically, she’ll receive her Social Security card within three weeks of being admitted to the United States.
Social Security Benefits
The Social Security system consists of three major components: retirement benefits, survivors’ benefits, and disability insurance.
The most well-known component is the retirement benefits program. A retiree becomes eligible for Social Security benefits after accumulating 40 credits and can start claiming payments as soon as the first full month after his 62nd birthday. However, a person is not required to start claiming his Social Security benefits at that point. A person can choose to wait much longer to start receiving benefits. 67 is now considered the “full” or “normal” retirement age, though older people may be grandfathered in at lower full retirement ages. Recipients who start collecting benefits at 62 receive almost 33% less in monthly benefits than those who wait until age 67. In fact, recipients can increase their benefits by delaying receipt of benefits even further, as they receive “delayed retirement credits” that continue to increase until age 70. For each year that a retiree waits beyond age 67, benefits grow by about 8% each year. We will look at this in more detail and at examples in Module 2.
Several factors can influence a recipient’s decision on when to start collecting, including whether the recipient is in good health and can continue working, whether he is making enough to impact the taxability of his Social Security benefits, and whether the recipient is the higher-earning spouse who wants to ensure that his surviving spouse gets the highest possible benefit.
The second component of social security is survivors’ insurance, which assists families that lose their breadwinners. Survivor benefits also provide long-term support to young children and surviving spouses. To qualify, a surviving spouse must have been married to the deceased worker for at least nine months before his or her death, though there is an exception to this nine-month marriage rule if the worker dies in the line of duty as a member of the armed forces.
The Social Security Administration bases the surviving spouse’s benefit amount on the earnings of the deceased spouse. The more the deceased worker paid into Social Security, the greater the survivor’s benefits. Social Security uses the deceased worker’s basic benefit amount to calculate the amount survivors receive. The percentage of the deceased worker’s benefits that is available to the dependent depends on the survivor’s age and relationship to the worker.
Family members eligible to receive survivor benefits include: a surviving spouse aged 60 or older, surviving divorced spouse under certain circumstances, a surviving spouse of any age who is caring for the deceased’s child who is under age 16 or disabled, an unmarried child of the deceased who is younger than age 18 (or 19 if a full-time student) and children age 18 or older with disabilities.
A surviving spouse at full retirement age or older will typically receive 100% of the deceased worker’s basic benefit amount. A widow aged 60 or older, but under the age of 62, will receive 71% to 99% of the worker’s basic benefit amount. A surviving spouse with a child younger than age 16 will get 75% of the deceased worker’s benefit. A child will receive 75% of the deceased worker’s benefit.
The third major component of Social Security is disability benefits. The Social Security Administration defines disability as being unable “to engage in any substantial gainful activity because of a medically-determinable physical or mental impairments that is expected to result in death, or that has lasted or is expected to last for a continuous period of at least 12 months.”
Social Security pays disability benefits through two programs: Social Security disability insurance (often referred to as “SSD” or “SSDI”) and the Supplemental Security Income program (often referred to as “SSI”). Social Security disability insurance benefits are calculated using the disabled worker’s past earnings and are paid to the disabled worker or her dependent family members. Almost 9 million disabled workers receive SSDI benefits.
The Supplemental Security Income program is a means-tested income-assistance program for older, disabled or blind people.  It is available irrespective of whether the recipient engaged in prior participation in the labor force.
The Future of Social Security
Social Security is fully funded until 2034. After that date, if there are no changes to the system, there will be enough money to fund a little more than 75% of scheduled benefits. While the federal government may subsidize social security from elsewhere in the federal budget, the handwriting is on the wall that social security cannot sustain itself much longer. An aging population, people living longer, and diminished percentages of workers compared to previous generations are the primary causes of this phenomenon. A 2017 survey revealed that just 37 percent of Americans say that they are very or somewhat confident that the Social Security system will continue to provide benefits of at least equal value to the benefits received by retirees today.
Two out of every three senior citizens depend on Social Security for most of their income and one-third of seniors rely on it for at least 90% of their income. Social Security lifts 22.1 million Americans out of poverty. Currently, the poverty rate for senior citizens is just under 9%, but without Social Security, the senior citizen poverty rate would be nearly 41%.
Moreover, Americans are saving less in private individual retirement accounts such as IRAs and 401(k)-type accounts. Households whose incomes are in the middle fifth of national incomes have, on average, about $35,000 in individual retirement savings, while households in the top fifth of incomes averaged a little over $300,000. Other than high-income households, most Americans do not have enough savings to generate substantial retirement income. Because of this, Ross Eisenbrey, a senior fellow at the Economic Policy Institute, said “The only system that we have that works for most people is Social Security, in terms of providing any reliable retirement income that they won’t outlive.”
While the current system may have social security underfunded, it seems imperative that legislation and reformation of the system be enacted in the coming decade to ensure the perpetuation of a program that annually saves millions of Americans from poverty.
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