What is Social Security?

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Definition:

Social Security provides qualifying elders and people with disabilities monthly payments (funded by payroll taxes) to help cover basic living costs.

🤔 Understanding Social Security

Social Security, also known as Old-Age, Survivors, and Disability Insurance (OASDI), was signed into law by Franklin D. Roosevelt in 1935. At first, Social Security only provided payments for the elderly. It was later expanded to help people with disabilities under certain circumstances. Social Security helps people cover basic living costs by providing them with monthly payments. In some cases, widows, widowers, and children may collect payments after the death of a Social Security beneficiary. The program is funded by the Federal Insurance Contributions Act (FICA, aka payroll taxes). The amount an individual contributes to the Social Security program generally decides their benefits. Currently, monthly payments are capped at $3,790 per individual, although many people receive less.

Example

Suppose your grandparents turn 70 and retire from their jobs. During their careers, grandpa invested in a pension plan while grandma put some money into a 401(k) retirement plan. Still, both know they'll be losing a lot of their income by giving up regular paychecks. Fortunately, since your grandparents have been paying FICA payroll taxes throughout their careers, they can collect Social Security benefits to help make up for some of the money they’ll no longer earn.

Let’s assume that, based on their contributions, your grandparents each receive $15,000 per year from Social Security. If one of your grandparents passes away, the widow or widower will likely be able to collect the deceased's benefits. The idea is to help reduce the financial burden caused by the death.

Takeaway

Social Security is like your childhood allowance…

Just as many kids do chores to get their allowance, adults pay into Social Security throughout their working years. After they retire, the government provides monthly payments to help qualifying individuals cover costs. The government may also provide Social Security payments to people who have disabilities and struggle to work, as well as survivors of recipients who pass away, including dependent children, a widow or widower, and dependent parents.

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What is Social Security?

When people say "Social Security," they're typically referring to payments some people receive from the government after they retire. Payments are doled out by the Social Security Administration (SSA), a federal agency that was established by the Social Security Act of 1935. The official name for Social Security is Old-Age, Survivors, and Disability Insurance (OASDI).

These payments are meant to help cover essential living costs for people not earning a steady income through employment. Social Security is sometimes thought of as a government-funded retirement plan, but it provides assistance to individuals with disabilities, too, not just the elderly.

Social Security is primarily funded through FICA taxes (sometimes called Social Security taxes). As of 2020, many full-time employees contribute 6.2% of their gross pay to Social Security and 1.45% to Medicare, with their employer matching these payments. Self-employed individuals generally pay 15.3% (the employee and employer portion) through the self-employment tax. The collected taxes go into the Social Security Trust Fund, which consists of the Federal Old-Age and Survivors Insurance Trust Fund, and the Federal Disability Insurance Trust Fund.

What is the purpose of Social Security?

Social Security is meant to serve as a financial safety net by providing payments to people who may have trouble earning enough to pay for basic needs. This includes the elderly, their survivors (such as a widow or dependent children), and people with disabilities.

When you retire, your income may decline as you may stop earning wages, bonuses, employer 401K contributions, or other sources of income that may come with a full-time job. You may have a pension or investment portfolio, but it might only provide a portion of your previous wage. Social Security may provide payments once you reach the minimum age (which is currently 62 years and 2 months) and meet certain qualifications. For many people, these payments can offer a stable source of assistance that helps cover essential living costs. Likewise, if you're injured, or if your spouse passes away, your household may earn less overall. You may also qualify for disability or survivor's benefits from the SSA, which will provide monthly payments and help offset lost income.

How does Social Security work?

The Social Security system provides benefits to qualifying individuals who are elderly, survivors of deceased family members, and workers with disabilities. The process works a bit differently depending on the group.

Social Security benefits for the elderly

As of June 2019, more than 44 million retired workers received Social Security benefits, with payments averaging $1,471 per individual. More than 3 million dependents also received benefits. In total, roughly 9 out of 10 individuals 65 or older received Social Security payments. To qualify for Social Security retirement benefits, you need to have at least 40 "Social Security Credits.” You receive one credit for every $1,410 in income per year, and can earn a maximum of four credits per year. This means most workers will have to work for roughly 10 years to qualify.

As of 2020, if you are at least 61 years and 8 months old, you can apply for Social Security benefits. Once you are 62 years old, you can start receiving benefits. However, the full retirement age is currently 66 years and two months. If you begin taking payouts at 62, you'll receive only 70% of your full benefits. If you wait until you're 70 to start receiving benefits, you may receive 132% of your monthly benefit.

Social Security benefits for survivors

If an adult worker passes away, their spouse, dependent parents, or dependent children may be eligible to receive Social Security survivor's benefits. However, the deceased must have worked long enough to receive Social Security benefits. This is determined by the number of Social Security credits the deceased earned and their age. Generally speaking, younger workers need fewer credits. Even if the deceased doesn't have enough credits, benefits may still be available to a spouse caring for the deceased's dependent children, or the children themselves.

A widow or widower at full retirement age will usually receive 100% of the deceased's full benefits. (Between ages 60 and 65, the survivor will receive between 71% and 99%.) A surviving spouse at any age will receive at least 75% of the full benefits if they are caring for a child younger than 16. Dependent children, meanwhile, typically get 75%. Both the widow and children can receive payments at the same time. But the total payments are capped between 150% and 180%. If a parent is 62 years old or older and receives half or more of their income from a deceased worker, they may be entitled to survivor benefits. One dependent parent may receive 82.5% of the deceased’s benefits. If two parents collect survivors benefits, each may receive 75%.

Social Security benefits for the disabled

Roughly 8.5 million disabled individuals received Social Security Disability Income (SSDI) benefits as of June 2019. An additional 1.6 million dependents received payments. SSDI accounted for roughly 14.5% of the total Social Security benefits paid. Generally speaking, workers must have had a disability for at least one year to qualify for SSDI. A disability can include a medical condition that prevents you from working.

Workers need to have a certain number of Social Security credits to qualify for disability benefits. For example, a worker with a disability who is 24 years old or younger needs only 6 credits. By contrast, a worker who is between 31 and 42 years old needs 20 credits, while a 50-year-old worker needs 50 credits.

The Social Security Administration also provides Supplemental Security Income (SSI) — A separate program that provides additional payments to impoverished elders or people with disabilities at any age. SSI is available to people with disabilities who have little or no work experience.

What is the history of Social Security?

The Social Security program has a rich and complicated history. When the program was signed into law in 1935, the program marked a significant turning point for the federal government and its efforts to intervene in the general welfare of US citizens.

The Early Years of Social Security

On October 26th, 1929, "Black Thursday" struck the stock market, marking the start of the Great Depression. Millions of workers lost their jobs as businesses shuttered. The unemployment rate skyrocketed from 3.2% in 1929 to 25% in 1933. With so many Americans facing severe challenges, then New York Governor Franklin D. Roosevelt (FDR) campaigned for presidency in 1932. FDR promised a "New Deal" that would put people back to work, spur economic recovery, and give support to the needy. The idea of paying retirees a monthly stipend gained popularity. Author and physician Francis E. Townsend promoted a plan to fund a monthly pension of $200 to elderly individuals, and soon others joined so-called "Townsend Clubs."

In 1934, FDR set up the Committee on Economic Security, which consisted of cabinet members and other experts, to promote economic security, including payments to the elderly. The committee formulated the basic framework for Social Security. The next year, Congress passed the Social Security Act and FDR signed it into law, establishing the Social Security Board and payments to retirees that would be funded by payroll taxes. The push for Social Security was part of a bigger movement to promote "social insurance" — The notion that governments should provide its citizens with basic economic security.

Social Security Administration Following World War II

In 1946, the Social Security Board was replaced by the Social Security Administration. This was part of President Harry S. Truman’s efforts to reorganize the government and run social programs more efficiently. In 1950, the Social Security program was amended to include Cost-of-Living-Adjustments (COLA) — In which the government automatically increases Social Security payments each year based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

A few years later, in 1954, President Dwight D. Eisenhower signed into law Social Security Amendments that expanded benefits for people with disabilities. First, a "freeze" ensured that periods of disability wouldn't hurt someone's future benefits. If you have a disability, your earnings may drop, but your income during those years won’t be used when calculating your benefits. In 1956, people with disabilities between ages 50 and 64 became eligible for disability benefits. In 1960, coverage expanded to disabled people of any age.

Until the 1970s, state and local governments typically administered Supplemental Security Income (SSI) with partial funding from the federal government. But the variations between states made the programs challenging to administer. In 1972, the federal Social Security Administration took charge of SSI.

How do I find my Social Security benefits?

The easiest way to determine your potential benefits is to sign up for a personal "my Social Security" account on the Social Security Administration's website. Through your online benefits account, you can see your earnings history, future benefit earnings estimates, application status (if relevant), and other details. You can also request a replacement Social Security Card if you need one.

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