Social Security (United States)

Social Security, in the United States, refers to the Federal Old-Age, Survivors, and Disability Insurance (OASDI) program. The original Social Security Act and the current version of the Act, as amended encompass several social welfare or social insurance programs.

Social Security in the United States is a social insurance program funded through dedicated payroll taxes called FICA (Federal Insurance Contributions Act). Tax deposits are formally entrusted to Federal Old-Age and Survivors Insurance Trust Fund, or Federal Disability Insurance Trust Fund, Federal Hospital Insurance Trust Fund or the Federal Supplementary Medical Insurance Trust Fund. The main part of the program is sometimes abbreviated (OASDI), in reference to its three beneficiaries (OA for retirement, S for widows and survivors income, D for the disabled, and I for insurance). When initially signed into law by President Franklin D. Roosevelt in 1935, the term Social Security covered unemployment insurance as well. The term, in everyday speech, is used only to refer to the benefits for retirement, disability, survivorship, and death, which are the four main benefits provided by traditional private-sector pension plans. In 2004 the U.S. Social Security system paid out almost $500 billion in benefits. By dollars paid, the U.S. Social Security program is the largest government program in the world.

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

Largely because of solvency problems ranging from immediate crisis to large projected future shortfalls, reform of the Social Security system has been a major political issue for more than three decades during the presidencies of Jimmy Carter, Ronald Reagan, George H. W. Bush, Bill Clinton, and George W. Bush.

History
A limited form of the Social Security program began as a measure to implement "social insurance" during the Great Depression of the 1930s, when poverty rates among senior citizens exceeded 50%.

Social Security was controversial when enacted and remains so today. When advancing the new plan, advocates suggested that the money that the participants elected to put into the Program be deductible for Federal income tax purposes. That proposal was not enacted.

The benefit payments to the retirees were therefore intended not to be taxed as income in the year of receipt. Beginning in tax year 1984, with the Reagan-era reforms to repair the system's solvency, retirees with incomes over $32,000 generally saw part (50%–85%) of the retiree benefits subject to Federal income tax.

Creation: The Social Security Act
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The Social Security Act was drafted by President Roosevelt's committee on economic security, under Edwin E. Witte, and passed by Congress as part of the New Deal. It was controversial when originally proposed, with one point of opposition being that it would cause a loss of jobs. Historian Edward Berkowitz subsequently contended that the Act was a cause of the "Roosevelt Recession" in 1937 and 1938. However, the program has gone on to be one of the most popular government programs in American history.

The Act is formally cited as the Social Security Act, ch. 531, (14 August 1935), now codified as. The Act is also known as the Old Age Pension Act. The Act provided benefits to retirees and the unemployed, and a lump-sum benefit at death. Payments to current retirees were (and continue to be) financed by a payroll tax on current workers' wages, half directly as a payroll tax and half paid by the employer.

In the 1930s, the Supreme Court struck down many pieces of Roosevelt's New Deal legislation. In the spring of 1935, Justice Roberts joined with the conservatives to invalidate the Railroad Retirement Act. In May, the Court threw out a centerpiece of the New Deal, the National Industrial Recovery Act. In January 1936, a passionately split Court ruled the Agricultural Adjustment Act unconstitutional. In another case from 1936, the Court ruled New York state's minimum-wage law unconstitutional. President Roosevelt responded with an attempt to pack the court via the Judiciary Reorganization Bill of 1937. On 5 February 1937, he sent a special message to Congress proposing legislation granting the President new powers to add additional judges to all federal courts whenever there were sitting judges age 70 or older who refused to retire. The practical effect of this proposal was that the President would get to appoint six new Justices to the Supreme Court (and 44 judges to lower federal courts), thus instantly tipping the political balance on the Court dramatically in his favor. The debate on this proposal was heated, widespread, and over in six months. Beginning with a set of decisions in March, April, and May 1937 (including the Social Security Act cases), the Court would sustain a series of New Deal legislation.

Two Supreme Court rulings affirmed the constitutionality of the Social Security Act.
 * Steward Machine Company v. Davis, 301 U.S, 548 (1937) held, in a 5–4 decision, that, given the exigencies of the Great Depression, "[i]t is too late today for the argument to be heard with tolerance that in a crisis so extreme the use of the moneys of the nation to relieve the unemployed and their dependents is a use for any purpose narrower than the promotion of the general welfare". The arguments opposed to the Social Security Act (articulated by justices Butler, McReynolds, and Sutherland in their opinions) were that the social security act went beyond the powers that were granted to the federal government in the Constitution. They argued that, by imposing a tax on employers that could be avoided only by contributing to a state unemployment-compensation fund, the federal government was essentially forcing each state to establish an unemployment-compensation fund that would meet its criteria, and that the federal government had no power to enact such a program.


 * Helvering v. Davis, 301 U.S. 619 (1937), decided on the same day as Steward, upheld the program because "The proceeds of both [employee and employer] taxes are to be paid into the Treasury like internal-revenue taxes generally, and are not earmarked in any way". That is, the Social Security Tax was constitutional as a mere exercise of Congress's general taxation powers.

Implementation
Payroll taxes were first collected in 1937, also the year in which the first benefits were paid, namely the lump-sum death benefit paid to 53,236 beneficiaries.

The first monthly payment was issued on 31 January 1940 to Ida May Fuller of Brattleboro, Vermont.

Expansion
The original 1935 statute paid retirement benefits only to the primary worker. Many types of people were excluded, mainly farm workers, the self-employed, and anyone employed by an employer of fewer than ten people. These limitations, intended to exclude those from whom it would be difficult to monitor compliance, covered approximately half of the civilian labor force in the United States.

The 1935 Act also contained the first national unemployment-compensation program, aid to the states for various health and welfare programs, and the Aid to Dependent Children program. The initial tax rate was 2.0% of the first $3,000 of the employee's earnings, shared equally between the employee and the employer. The tax rate has been raised several times over the years, beginning in 1950, when it was raised to 3.0%.

In 1939, the 1937 Federal Insurance Contributions Act (FICA) tax was amended in three important ways:
 * The widowed, nonworking spouse of a someone entitled to an old-age benefit also became entitled to an old-age benefit.
 * Survivors (widows and orphans) became eligible for a benefit.
 * Retirees who had never paid any FICA taxes became eligible for old-age benefits. This feature was very popular among the millions of elderly Americans hard hit by the Great Depression, and fatefully decoupled benefits eligibility from work history.

In 1956, the tax rate was raised to 4.0% (2.0% for the employer, 2.0% for the employee) and disability benefits were added. Also in 1956, women were allowed to retire at age 62 with reduced benefits (70%). In 1961, retirement at age 62 was extended to men, and the tax rate was increased to 6.0%.

Medicare was added in 1965 by the Social Security Act of 1965, part of President Lyndon B. Johnson's "Great Society" program. (See List of Social Security legislation (United States).) Social Security was changed to withdraw funds from the independent "Trust" and put it into the General fund for additional congressional revenue.

Automatic annual cost-of-living adjustments (COLAs), not requiring legislation, began in 1975.

During the Carter administration, immigrants who had never paid into the system became eligible for SSI (Supplemental Security Income) benefits when they reached age 65. SSI is not a Social Security benefit, but welfare, because the poor elderly are entitled to SSI regardless of work history. Likewise, SSI is not an entitlement, because there is no right to SSI payments.

The 1983 amendments to the SSA, resulting from the 1982 report of the Greenspan Commission empaneled to investigate the long-run solvency of Social Security, taxed Social Security benefits for the first time: benefits in excess of a household income threshold, generally $25,000 for singles and $32,000 for couples (the precise formula computes and compares three different measures) became taxable. The amendments also gradually increased the age of eligibility for full old-age benefits, from 65 to 67 for those born after 1959.

In 1940, benefits paid totaled $35 million. These rose to $961 million in 1950, $11.2 billion in 1960, $31.9 billion in 1970, $120.5 billion in 1980, and $247.8 billion in 1990 (all figures in current dollars, not adjusted for inflation). In 2004, $492 billion of benefits were paid to 47.5 million beneficiaries.

The 1970s and the New Negative Financial Outlook of Social Security
Throughout the 50s and 60s during the phase-in period of Social Security, Congress was able to grant generous benefit increases because the system had perpetual short-run surpluses. Congressional amendments to Social Security took place in even numbered years (election years) because the bills were politically popular, but by the late 1970s, this era was over. For the next three decades, projections of Social Security's finances would show large, long run deficits, and in the early 1980s, the program flirted with immediate insolvency. From this point on, amendments to Social Security would take place in odd numbered years (not election years) because Social Security reform now meant tax increases and benefit cuts. Social Security became known as the "Third Rail of American Politics." Touching it meant political death.

Several effects came together in the 1970s to rapidly change the outlook on Social Security's long term financial picture from positive to problematic. By the 1970s, the phase-in period, where workers were paying taxes but few were collecting benefits, was largely over, and the ratio of elderly population to the working population was increasing. The long run financial structure of a pay as you go program was simply not attractive.

These underlying negative trends were exacerbated by a colossal mathematical error made in the 1972 amendments. In these amendments, Congress hiked benefits 20 percent and attempted to index benefits to inflation so that benefits would rise automatically. If inflation was 5 percent, the goal was to automatically increase benefits by 5 percent so that the real value didn't decline. However, the implementation Congress chose double indexed benefits to inflation. If inflation was 5 percent, benefits went up by 10 percent. If inflation was was 8 percent, benefits went up by 16 percent. Unfortunately the 1970s was a period of incredibly high inflation which led to benefit increases that were nowhere near financially sustainable.

The high inflation, double indexing, and lower than expected wage growth was financial disaster for Social Security. To combat the declining financial outlook, in 1977 Congress passed and Carter signed legislation fixing the double indexing mistake. Quoting Carter, "Now this legislation will guarantee that from 1980 to the year 2030, the social Security funds will be sound." This turned out to be not the case. The financial picture declined almost immediately and by the early 1980s, the system was again in crisis.

1983 amendments create first sizable trust fund
After the 1977 amendments, the economic assumptions surrounding Social Security projections continued to be overly optimistic as the program moved toward a crisis. In 1982, projections indicated that the Social Security Trust Fund would run out of money by 1983, and there was talk of the system being unable to pay benefits. A commission chaired by Alan Greenspan was created to address the crisis.

Also of concern was the long-term prospect for Social Security because of demographic considerations. Of particular concern was the issue of what would happen when people born during the post-World War II baby boom retired. The commission chaired by Alan Greenspan made several recommendations for addressing the issue. Under the 1983 Amendments to Social Security, signed into law by President Ronald Reagan, a previously enacted increase in the payroll tax rate was accelerated, additional employees were added to the system, the full benefit retirement age was slowly increased, and up to one-half of the value of the Social Security benefit was made potentially taxable income.

As a result of these changes, particularly the tax increases, the Social Security system began to generate a large (short run) surplus of funds, intended to cover the added retirement costs of the "boomers." Congress invested these surpluses into special series, non-marketable U.S. government bonds held by the Social Security trust fund. Under the law, the government bonds held by Social Security are backed by the full faith and credit of the U.S. government. Because the government had adopted the unified budgeting since the Johnson administration, this surplus off-sets the total fiscal debt, making it look much smaller. There has been significant disagreement over whether the Social Security trust fund has been saved, or has been used to finance other government programs and other tax cuts. (See the Social Security trust fund article for a more in depth discussion.)

The special series, non-marketable bonds currently held in Social Security Trust Fund are off-balance sheet and are excluded from the U.S. national debt calculation. Unlike traditional bonds, the bonds held in the Fund cannot be sold on the open market. Due to these unique features, some have argued that the bonds held in the trust fund are only "IOUs" that the government has written to itself. The Social Security and Medicare Trustees note:

"Since neither the interest paid on the Treasury bonds held in the HI [Hospital Insurance] and OASDI Trust Funds, nor their redemption, provides any net new income to the Treasury, the full amount of the required Treasury payments to these trust funds must be financed by some combination of increased taxation, increased Federal borrowing and debt, or a reduction in other government expenditures. (Status of Social Security and Medicare Programs: A summary of the 2005 annual reports)"

This means that these bonds represent a promise to pay the trust fund later, whether by increasing taxes, by cutting benefits, or by borrowing more money. While this is true of all bonds, bonds are normally funded by an immediate income from a private source, when the bond is purchased. The bonds placed in the trust fund are placed printed and in the trust, with no external source of money. The Federal government "buys" the bonds from itself.

Because the Social Security has legal authority to pay benefits out of its current FICA contributions or accumulated trust fund, the existence of the trust fund would provide legal authority for the federal government to continue to pay benefits when current benefits exceed current FICA taxes until the trust fund completely depletes. The issue of funding or financing — because OSADHI (including Medicare) is so massive — is difficult to segregate from discussion of the rest of the federal budget. The size of the budget may mean that the United States has no other government spending, has massive tax hikes, or makes cuts in benefits. Massive government borrowing would not work unless the borrowed funds come from abroad; the net fiscal stimulus of extra domestic borrowing is offset dollar for dollar by less private domestic spending.

Retirement 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. In approximately a decade (2018), payroll tax revenue is projected to be insufficient to cover Social Security benefits and the system will begin to withdraw money from the Social Security Trust Fund. 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 have been loaned back to the federal government to pay for other expenses (hence it is said that the fund consists of nothing but "IOUs").

The Supreme Court decided, in Flemming v. Nestor (1960), that "entitlement to Social Security benefits is not a contractual right". In that case, Ephram Nestor, a Bulgarian immigrant to the United States who made contributions for covered wages for the statutorily required "quarters of coverage" was nonetheless denied benefits after being deported in 1956 for being a member of the Communist party. In simple terms, the decision means that Congress can cut benefits at any time.

Primary insurance amount
While the worker's retirement income benefit is based on his PIA (primary insurance amount), the PIA is also used to calculate the other benefits for disability, widows, and survivors monthly income. The PIA is based on 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 ($97,500 in 2007). If the worker has fewer than 35 years of covered earnings, zeros are substituted for each year in the difference between 35 and the actual number of years of covered earnings. Years of covered work more than 2 years before the calculation year 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 most recent value of the AWI (which is two years ago). One-twelfth of this 35-year average is the average indexed monthly earnings (AIME). The PIA then is 90% of the AIME up to the first (low) bendpoint, and 32% of the excess of AIME over the first bendpoint but not in excess of the second (high) bendpoint, plus 15% of the AIME in excess of the second bendpoint.

Normal retirement age
The earliest age at which (reduced) benefits are payable is 62. Full retirement benefits depend on a retiree's year of birth. 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 the 1943 year of birth, when it stays at age 66 years until the year of birth 1955. Thereafter the normal retirement age increases again by two months for each year ending in the 1960 year of birth, when normal retirement age stops at age 67 for all born thereafter.

The normal retirement age for spousal retirement benefits shifts the year-of-birth schedule upward by two years, so that those spouses born before 1940 have age 65 as their normal retirement age.

A worker under 70 and eligible for retirement can delay receiving benefits past full retirement age, and thereby increase the worker's eventual retirement benefit and the surviving spouse's benefit. (delayed retirement credit) Spousal and children's benefits are not affected.

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. (State marriages of same sex couples are not recognized by OASDI for spousal benefits because the federal DOMA law excluded them for federal recognition for federal rights.±) 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 gross up 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. In this case, when the worker reaches age 88, the non-working spouse would be at least age 70.

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. ''' (CITATION NEEDED...Even some Social Security Administration personnel are not yet aware of this change.)

Disability
A worker who has worked long enough (based on "quarters of coverage" within the recent past) and recently enough to be covered can receive benefits five months after the date that the worker became disabled, regardless of his or her age. The eligibility formula requires a certain number of credits (based on earnings) to have been earned overall, and a certain number within the ten years immediately preceding the disability, but with more-lenient provisions for younger workers who become disabled before having had a chance to compile a long earnings history.

The worker must be unable to continue in his or her previous job and unable to adjust to other work, with age, education, and work experience taken into account; furthermore, the disability must be long-term, lasting 12 months, expected to last 12 months, resulting in death, or expected to result in death. As with the retirement benefit, the amount of the disability benefit payable depends on the worker's age and record of covered earnings.

Supplemental Security Income (SSI) uses the same disability criteria as the insured social security disability program, but SSI is not based upon insurance coverage. Instead, a system of means-testing is used to determine whether the claimants' income and net worth fall below certain income and asset thresholds after the claimants establish disability.

Severely disabled children may qualify for SSI. Standards for child disability are different from those for adults. In addition, nondisabled minor children of disabled or deceased workers may receive dependent or survivor's benefits. A program called Disabled Adult Child Insurance Benefits (DACIB) provides benefits for the disabled adult children of disabled or deceased workers.

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. Such hearings sometimes involve participation of a vocational expert (VE) or medical expert (ME), both independent, unbiased witnesses, as called upon by the ALJ.

Reconsideration involves a re-examination of the evidence, and the opportunity for a hearing before a (non-Attorney at law) 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 Partially Favorable and Unfavorable 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 appellate circuit court, and an unfavorable appellate court decision can be appealed to the United States Supreme Court.

Survivors' benefits
If a worker covered by Social Security dies, a surviving spouse or children can receive survivors' benefits. In some instances, survivors' benefits are available even to a divorced spouse. Survivor's benefits to nondisabled children end at age 18, but they can be extended up to one extra year if the child is still in high school. 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, survivor's normal retirement age. If the worker dies when the survivor is younger, there is an actuarial reduction.

Contrast with private pensions
Although Social Security is sometimes compared to private pensions, this is an incorrect comparison since Social Security is social insurance and not a retirement plan. The payment of disability benefits also distinguishes Social Security from most private pensions. In other ways the two systems are fundamentally different as well. 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 argue that debt issued by Fannie Mae 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 operates as a pipeline, through which current tax receipts from workers are used to pay current benefits to retirees, survivors, and the disabled. 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 specfic account with funds put into that account (by the employer or the participant, or both), and the ultimate benefit is based on the amount in that account at the time of retirement. Some have proposed that the Social Security system be modified to provide for the option of individual accounts (in effect, to make the system, at least in part, more like a defined contribution pension plan). Specifically, on February 2 2005, President George W. Bush made Social Security a prominent theme of his State of the Union Address. He described the Social Security system as "headed for bankruptcy", and outlined, in general terms, a proposal based on partial privatization. Critics responded that privatization would worsen the program's solvency outlook and would require huge new borrowing. See Social Security debate (United States).

Private pensions are governed by the Employee Retirement Income Security Act, which requires minimum levels of funding. 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, Social Security would be analogous to an underfunded 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).

For solvency, Social Security relies on its tax revenues and broad base of public support. Since millions of retirees have paid into the system during their working lives, it would be politically difficult for Congress to allow it to fail.

Social security 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 withholding Social Security tax equal to 6.20% of the gross wage amount, up to but not exceeding the Social Security Wage Base ($90,000 for the year 2005; $94,200 for 2006; and $97,500 for 2007). The same 6.20% tax is imposed on employers. 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.

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, through, is 12.4% of "net earnings from self-employment."

If an employee has excess taxes withheld from his pay (due to multiple jobs having been held by the employee during a single calendar year), the employee can apply for a refund of the excess on Form 1040. The excess taxes paid by employers, however, are not refundable to the employers.

A separate payroll tax of 1.45% of an employee's income paid directly by the employer, and an additional 1.45% deducted from the employee's paycheck, yielding an effective rate of 2.9%, funds the Medicare program. This program is primarily responsible for providing health benefits to retirees.

The combined tax rate of these two federal programs is 15.3%.

Social Security 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. 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. At the end of 2004, the cumulative excess of Social Security taxes and interest received over benefits paid out stood at $1.7 trillion. The Trust Fund is regarded by some as an accounting trick which holds no economic significance, although 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 Treasuries. Therefore, Social Security's ability to make payments after the 2016 date 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. The federal government's ability to repay Social Security, in turn, is contingent on fiscal policies taken today (which have tended to increase deficits and the percent of the budget spent on interest and principal payments) and in the future.

== Social Security number ==

A side effect of the Social Security program in the United States has been the near-universal adaptation of the program's identification number, the Social Security number, as the national identification number in the United States. The social security number, or SSN, is issued pursuant to section 205(c)(2) of the Social Security Act, codified as. 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, as well as private agencies such as banks, 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 a SSN simply for the purpose of having one.

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.

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.

Opting out of Social Security
There is no legal requirement for individuals to join or participate in the Social Security program. However, the FICA taxes imposed are mandatory on covered workers and the self-employed who are covered. Employers are required to report wages to Social Security for processing Forms W-2 and W-3. There are some specific groups which are not required to pay into the Social Security program (discussed below). Internal Revenue Code Provisions section 3101 imposes payroll taxes on individuals and employer matching taxes. Section 3102 mandates that employers deduct these payroll taxes from workers' wages, at the worker's request (form W-4), before they are paid. Generally, the payroll tax is mandatory on everyone in employment earning "wages" as defined in 3121 of the Internal Revenue Code, and also taxes net earnings from self-employment. Importantly, most parents apply for Social Security numbers for their dependent children in order to include them on their income tax returns as a dependent. Everyone filing a tax return, as taxpayer or spouse, must have a Social Security Number or Taxpayer Identification Number (TIN) since the IRS is unable to process returns or post payments for anyone without an SSN or TIN. Moreover, the Internal Revenue Service will not issue a TIN to anyone who qualifies for, but is not denied a Social Security number.

Groups not covered by Social Security
There are a number of groups of workers who are exempted from having to pay Social Security taxes:


 * Federal employees hired before 1984 who elected to continue to participate in the federal retirement program instead of receiving part of their retirement under Social Security coverage.
 * State or local government workers (police officers, firefighters, and teachers) hired before March 31 1986 and participating in their employers' alternative retirement system.
 * Ministers may choose whether or not they will participate in the Social Security program.
 * Self-employed workers with annual net earnings below $400.
 * Election workers earning $1,000 or less a year.
 * Household workers earning less than $1,500 per year.
 * Minor children with earnings from household work but for whom household work is not their principal occupation.
 * 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.
 * Individuals who are members of certain religious groups such as the Amish and Mennonites.

Before the 1983 changes, three counties in Texas (Galveston, Brazoria, and Matagorda) opted out of the system and now use an Alternate Plan, a private pension plan created and administered by First Financial Benefits, Inc.

In 1983, the U.S. Congress closed a loophole in the original Social Security Act that allowed municipal governments to opt out of the Social Security system, and also brought all civilian federal employees whose employment began in 1984 or later under the system.

Double dipping
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 forty to thirty five 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 which 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
In today's global environment people often relocate from one country to another, either permanently or on a limited time basis. This presents challenges to businesses, governments and individuals seeking to ensure future benefits or having to deal with taxation authorities in multiple countries. To that end, the Social Security Administration has signed treaties, often referred to as Totalization Agreements with other social insurance programs in various foreign countries.

Overall, these agreements serve two main purposes. First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings. Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country.

The following countries have signed totalization agreements with the SSA (and the date the agreement became effective):
 * United States (December 19 1991)
 * 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)

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, ___ F.3d ___ (4th Cir. 2005) (text at Findlaw ). (Cert. denied US Supreme Court, May 30 2006).

OHA and 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." 

In 2006, OHA was renamed to ODAR. On April 3 2006, Commissioner Jo Anne B. Barnhart distributed the following message throughout the SSA "I am pleased to announce the establishment of the new Office of Disability Adjudication and Review. The current Office of Hearings and Appeals will move from the Office of Disability and Income Security Programs to form the nucleus of this new organization."

Demographic and revenue projections
In each year since 1982, OASDI tax receipts, interest payments and other income have exceeded benefit payments and other expenditures, most recently (in 2004) by more than $150 billion. As the "baby boomers" move out of the work force and into retirement, however, it is anticipated that expenses will come to exceed Social Security tax revenues if there are no changes in current law concerning taxes, benefits, and the retirement age.

According to most projections, the Social Security trust fund will begin drawing on its Treasury Notes toward the end of the next decade (around 2018 or 2019), at which time the repayment of these notes will have to be financed from the general fund. At some time thereafter, variously estimated as 2041 (by the Social Security Administration ) or 2052 (by the  Congressional Budget Office ), the Social Security Trust Fund will have exhausted the claim on general revenues that had been built up during the years of surplus. At that point, current Social Security tax receipts would be sufficient to fund 74 or 78% of the promised benefits, according to the two respective projections.

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" ) 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 actuary David Langer) assumptions which resulted in the projected exhaustion date being pushed back (from 2028 to 2042) with each successive Trustee's report. 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, all predictions must be taken with a grain of salt. The actual situation might be much better or much worse than predicted.

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.

Court interpretation of the Act to provide benefits
The United States Court of Appeals for the Seventh Circuit has indicated that the Social Security Act has a moral purpose and should be liberally interpreted in favor of claimants when deciding what counted as covered wages for purposes of meeting the quarters of coverage requirement to make a worker eligible for benefits. That court has also stated: ". . . [T]he regulations should be liberally applied in favor of beneficiaries" when deciding a case in favor of a felon who had his disability payments retroactively terminated upon incarceration. According to the court, that the Social Security Act "should be liberally construed in favor of those seeking its benefits can not be doubted." “The hope behind this statute is to save men and women from the rigors of the poor house as well as from the haunting fear that such a lot awaits them when journey's end is near.”

Constitutionality of Social Security
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. Today, no plausible court challenge exists or is on the horizon. Although a small minority, several libertarians, such as University of Chicago law professor Richard Epstein and commentators like Robert Nozick, have argued that Social Security should be unconstitutional.

In the 1937 U.S. Supreme Court case of Helvering v. Davis, the Court examined the constitutionality of Social Security when George Davis of the Edison Electric Illuminating Company of Boston sued in connection with the Social Security tax. The U.S. District Court for the District of Massachusetts first upheld the tax. The District Court judgment was reversed by the Circuit Court of Appeals. Commissioner Guy Helvering of the Bureau of Internal Revenue (now the Internal Revenue Service) took the case to the Supreme Court, and the Court upheld the validity of the tax.

During the 1930s President Franklin Delano Roosevelt was in the midst of promoting the passage of a large number of social welfare programs under the New Deal and the High Court struck down many of those programs (such as the Civilian Conservation Corps and the National Recovery Act) as unconstitutional. After having a significant portion of his enactments struck down by the Supreme Court, Roosevelt proposed legislation that would have expanded the Supreme Court to fifteen members. This would have allowed him to nominate six additional members (under certain conditions) which would be more likely to uphold his enactments with his members in place. Having had its autonomy and independence significantly threatened by FDR's ploy, the Supreme Court's tone seemed to change significantly. The Court allowed many New Deal programs very similar to ones they had previously struck down to go through, including Social Security. (see also The switch in time that saved nine)

When Helvering v. Davis was argued before the Court, the larger issue of whether or not the old-age insurance portion of Social Security is constitutional was not decided. The case was limited to whether or not the payroll tax was a suitable use of Congress's taxing power. Despite this, no serious challenges regarding the system's constitutionality are now being litigated, and Congress's spending power may be more coextensive, as shown in cases like South Dakota v. Dole during the Reagan Administration.

Social security number fraud
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.” See Press Release.

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.

Articles

 * Community of Minds : Working Together - The $44 Trillion Abyss - 2003 Fortune Magazine
 * Social Security Suicide - AlterNet
 * "The Fake Crisis" - Rolling Stone
 * "What Does Price Indexing Mean for Social Security Benefits?" - from Center for Retirement Research, January, 2005 (explanation of wage indexing versus price indexing)
 * Getting a grip on Social Security: The flaw in the system
 * Center for American Progress: Social Security by the Numbers (reference guide with stats)
 * "An ownership society evolves: who says individualized accounts are a better way to solve social problems? The laws of nature" by William Tucker (relates self-organization theory to Social Security)