November 26, 2014

What is Social Security?

In a Nutshell

Social Security consists of two separate parts: Old Age and Survivors Insurance (OASI) and Disability Insurance (DI). Under OASI, monthly benefits are paid to retired workers, their spouses and dependent children, and survivors of deceased workers (spouses, dependent children and dependent parents). Under DI, monthly benefits are paid to disabled workers(who have not yet reached retirement age) and their families.  he Social Security system is sustained by payroll taxes of 12.4%—half paid by employers and half by employees (with self-employed individuals paying roughly the full amount). Social Security payroll taxes are assessed on income up to a maximum amount ($97,500 for 2007). At the beginning of FY 2007, more than 150 million workers were paying Social Security taxes to fund current benefits for nearly 50 million beneficiaries.

Background

Social Security is the nation’s largest Federal program with an FY 2008 budget of $612 billion, amounting to one-fifth of the Federal Budget. (Total defense spending for FY 2008 is higher than Social Security, but the “base” defense budget—excluding Iraq war spending—is less than Social Security.) Looking at objective measures of poverty, Social Security has been the most effective antipoverty program in U.S. history. One recent study estimated that without Social Security, nearly half of elderly Americans would have incomes below the poverty line; but taking Social Security benefits into account, the percentage living in poverty is under 10%. As a “social insurance” program, Social Security spreads the cost of providing basic retirement and disability guarantees among all working Americans, as well as providing greater stability to the economy by insulating beneficiaries from economic downturns, which would otherwise depress consumer spending.

Social Security is actually two distinct programs: the Old Age and Survivors Insurance Program and the Disability Insurance Program.

Old Age and Survivors Insurance program (OASI)

OASI provides monthly cash benefits to retired workers, their spouses4 and dependent children, and survivors of deceased workers (spouses, dependent children, and dependent parents). Average monthly benefits for the more than 31 million retired workers is $1,050 per month. Generally, a worker must have 10 years (40 quarters) of covered employment to be eligible for retirement benefits. Initial benefits are based on a worker’s past average monthly earnings, indexed to reflect changes in national wage levels (and adjusted upward for low earners). Each subsequent year, benefits are adjusted upward to compensate for consumer price inflation. These annual adjustments are called “cost of living adjustments,” or COLAs. The COLA for 2007 was 3.3%.

The Survivors Insurance component of Social Security is similar to life insurance. When a worker dies, his or her spouse, dependent children, disabled children over 16, dependent parents, and former spouse caring for children may qualify for Social Security survivors benefits. The Social Security amendments of 1983 established a gradual schedule for increasing the full retirement eligibility age from 65 to 67. Workers born before 1938 were eligible to retire at age 65, and workers born 1960 or later will be eligible for full retirement at age 67.

Between those two groups, the retirement eligibility age slowly increases from 65 to 67. For example, for workers born in 1948, the full retirement age is 66, and for people born in 1958 the full retirement age is 66 and 8 months. The Social Security benefit formula is progressive, returning a higher percentage of a lower-wage worker’s average monthly earnings. For example, in 2007, the benefit formula for most workers returns 90% of a worker’s first $680 in monthly earnings, 32% between $680 and $4,100, and 15% over $4100.

Until 1984, Social Security benefits were exempt from the income tax. In 1983, Congress made up to 50% of Social Security benefits taxable for higher income beneficiaries; and in 993, up to 85% was made taxable. The taxes collected are credited to the OASDI Trust Funds and the Medicare Hospital Insurance (Part A) Trust Fund, respectively. According to CBO, about 40% of beneficiaries are impacted by the tax.

Social Security Disability Insurance (SSDI)

Disability Insurance replaces a portion of a worker’s income when illness or disability prevents him or her from working. Social Security’s Disability Insurance program, established in1956, provides monthly cash benefits for disabled workers (and their dependents) who have paid into the system, met minimum work requirements, and qualify as unable to engage in “substantial gainful activity” due to a physical or mental impairment. SSDI requires that a person wait five months from the onset of a disability before receiving SSDI benefits,14 the purpose being to discourage fraudulent claims. Twenty-four months after SSDI coverage begins, the disabled worker is also entitled to Medicare coverage. SSDI benefits, once approved, continue as long as the individual remains disabled or until he or she reaches the normal retirement age, at which time the benefits automatically convert to retirement benefits. Periodically, SSA conducts “continuing disability reviews” (CDRs) to determine whether the individual is still disabled. Similar to retirement benefits, initial benefits are based on a worker’s past average monthly earnings, indexed to reflect changes in national wage levels and adjusted upward for low earners. Each subsequent year, benefits are adjusted upward to compensate for consumer price inflation.

COMMON MYTHS ABOUT SOCIAL SECURITY

Myth: There are no Social Security Trust Funds.
Fact: Payroll taxes withheld from workers’ paychecks are deposited in the U.S. Treasury and credited to the Old Age, Survivors, and Disability Insurance Trust Funds in the form of U.S. Treasury securities.When benefit checks are issued by the U.S. Treasury, equivalent amounts of U.S. securities are debited from the Trust Funds.When payroll taxes exceed benefits in a particular year, the surpluses are reflected as increasing amounts of U.S. securities held by the Trust Funds.

Myth: Congress has been “raiding” the Social Security Trust Funds to pay for other government programs.
Fact: As noted above, Social Security surpluses are, by law, invested in U.S. Treasury securities. As with any public or private funds invested in Treasury securities, the Social Security surpluses become available for expenditure on other Federal programs. Beginning in 2017, when Social Security payroll taxes are projected to be insufficient to cover benefit payments, the Treasury will begin to draw down the accumulated Treasury securities held by the Trust Funds to cover the shortfall in payroll taxes.

Myth: Each worker has his or her own Social Security retirement “account” at the Social Security Administration.
Fact: No—Social Security is not a personal investment program. It is a “pay-as-you-go” Federal entitlement program where current workers fund benefits for current retirees and disabled Americans.

This article was adapted from the book: America's Priorities: How the U.S. Government Raises and Spends $3 Trillion Per Year, by Charles S. Konigsberg, Editor, The Concord Coalition's Washington Budget Report.