The Social Security system has been in effect since 1935.
The Social Security tax program was proposed by President Franklin Roosevelt and enacted by Congress in 1935 to provide retirement income and other benefits to retired and disabled individuals. In 1946, the Social Security Administration (SSA) was formed as the agency responsible for administering the act, and in 1953, it became part of the Department of Health, Education and Welfare. The SSA administers the Social Security's Old-Age, Survivor and Disability Insurance (OASDI) program and Medicare's Hospital Insurance (HI) program, which are funded by separate compulsory taxes on employees, employers and the self-employed. According to the OASDI Trustees Report, 50 million people received Social Security benefits in 2007, totaling $585 billion, and $785 billion was collected in taxes. Social Security is primarily looked at as a provider of retirement benefits (68 percent of the Social Security benefits paid in 2007 were retirement income), but there are also other benefits that provide income security to the disabled and to the survivors of deceased persons.
At the onset of the program and up through 1950, employees and employers were each taxed 1 percent of wages up to a maximum of $3,000. Starting in 1951, the Social Security tax rate and the wage base subject to tax increased. At this same time, self-employed persons also became subject to the tax, and they have been required to pay the full share of the employer and employee tax since 1984. According to the SSA, the 2008 Social Security tax rate paid by both employers and employees was 6.2 percent, up to a maximum wage base of $102,000. For 2009, the tax rate remains at 6.2 percent, but the wage base increased to $106,800. (The Medicate tax rate is much lower at 1.45 percent for both employers and employees and is 2.9 percent for self-employed persons.)
The amounts deducted from paychecks for Social Security taxes and the amounts paid by self-employed persons go into trust funds that are used to pay monthly Social Security benefits. Social Security taxes are normally shown as "FICA" on payroll statements. "FICA" stands for Federal Insurance Contribution Act, which is the law that authorized the Social Security payroll tax. The costs of administering Social Security programs are also paid from these trust funds. Funds collected from Social Security taxes that are not currently used for benefits are invested in U.S. Government bonds. Every year the Social Security Administration reports on the financial status of the Social Security System and estimates how far into the future the system will be able to pay out benefits without requiring changes. As of 2007, the OASDI is expected to remain solvent for at least 10 years.
To qualify for benefits, workers earn up to four Social Security credits per year. A credit is based on the amount set each year by the Social Security Administration. For 2009, earnings of $1,090 equal one credit, an increase of $40 from 2008. Most people need a minimum of 40 credits, or 10 years of work, to qualify for retirement benefits. Neither disability nor survivor benefits require a full 40 credits. During a person's working lifetime, it is likely that many more credits than 40 will be earned, but earning more than 40 credits does not increase benefits. However, earning additional income may increase benefits.
At age 62, workers can elect to retire with reduced benefits or continue working until their full-retirement age, which is based on their year of birth. For a person born in 1937 or earlier, the full-retirement age is 65; it is age 67 for those born in 1960 or later. (The retirement age gradually increases from 65 to 67 for workers born between 1937 and 1960.) A person who continues to work after reaching full-retirement age will accrue delayed retirement credits for each additional year worked. For example, someone born after 1943 increases their benefits by 8 percent for each additional year worked. The maximum retirement benefit for 2009 is $2,323 a month, and a married couple can each earn the maximum amount. Earning 40 credits does not qualify someone for the maximum benefit. It is dependent on retirement age and the amount of maximum taxable earnings made every year after age 21. Eligible workers should submit the Retirement Benefit Application online to begin receiving Social Security retirement benefits.
Disability benefits are paid after a five-month waiting period to workers who become severely disabled before retirement age. To qualify, the employee must have enough Social Security credits and the disability must either prevent the person from doing substantial work for at least one year or be expected to result in death. Receiving disability benefits requires submitting an application that is reviewed and approved by a state agency. The application can be submitted online at Social Security Online.
Survivors of a person who dies that was covered by Social Security may also be eligible for benefits based on their ages and other factors. The amount of the benefit is dependent on the average amount that was earned during the deceased person's lifetime. Normally, survivors are paid Social Security benefits if the deceased worker earned at least six credits during the three-year period prior to death. A surviving spouse, minor children and dependent parents are eligible for benefits. Surviving spouses with dependent children begin receiving benefits immediately; otherwise, reduced benefits begin at age 60. Disabled spouses begin receiving benefits as early as age 50, and disabled children continue receiving benefits past age 19. Application for Social Security survivor benefits is done in person at a Social Security Office or by phone.