Social Security

Social Security: Why It Was Created and How It Works

Updated July 31, 2018

Old or young, new to your job or a 20-year veteran, you've heard of Social Security. But do you know why and how it was created and how it works today? Let's take a look at the past and present of Social Security and then we'll look at this year's projections for the future.

Some History

In 2015, Social Security turned 80 years old. The original Social Security Act was signed into law by President Franklin D. Roosevelt in 1935. At that time, the U.S. was just beginning to recover from the Great Depression.

Millions of people were still out of work, and there was alarming concern for the elderly and retired Americans who had lost everything. The Social Security program was intended to be—and still is today—a social insurance program. It's a government-run program providing economic security to U.S. citizens.

The 1935 Act provided for "old age," or retirement, benefits, aid to dependent children, disability insurance, and unemployment insurance. Payments were made in lump sums until 1940 when a monthly payment system was put into place. And, it was paid for by workers. Workers made contributions to a "trust fund" from their paychecks to pay for the retirement and other benefits they'd need in the future.

The Social Security Board (SSB) was created when the President signed the Act in 1935. It remained that way until 1946 when it was renamed the Social Security Administration (SSA).

Social Security Today

Over the years, the Act was changed or "amended" in several ways, but the basic principals are still the same. Under today's Social Security Act, the SSA still manages the program, workers still make contributions from their paychecks, and monthly payments are still made to those who are eligible for the following benefits.

  • Retirement benefits. At age 66 or 67, workers who contributed to the trust fund may apply for payments to help with everyday living and expenses and to offset the loss of income from their jobs. You may retire at age 62, but payments are reduced if you collect benefits before age 67. The more money you make, the higher your retirement benefits will be.
  • Survivors and death benefits. A worker's spouse and/or dependent children may receive monthly payments in certain circumstances. The SSA also pays a small lump-sum death benefit to surviving family members to help pay for funeral expenses.
  • Disability benefits. Disability benefits are for workers who have paid into the trust fund for a certain amount of time, who have a serious mental or physical disability that interferes with their ability to work.

Today, unemployment insurance isn't covered by the Social Security Act. Rather, it's handled by a joint state-federal program.

On the other hand, the Act now provides for Medicare, which provides health care benefits to those over 65 who have paid Medicare taxes for a certain number of years.

The Future of Social Security

Each year, the trustees of the Social Security trust funds make projections about how long the trust funds will last. According to the most recent report from SSA officials, starting in 2018, the benefits paid out by the Social Security retirement program will be more than what's paid into the trust fund (and the interest created by the trust fund). The shortfall will be covered by money in the Old-Age and Survivors Insurance (OASI) Trust Fund for the first time, and this is expected to continue until the year 2034, when the trust fund is expected to run out. After that, retirement benefits will be reduced to 77% of what's paid now, unless something is changed to increase the money going into the trust fund or to decrease the amounts being paid from the trust fund.

The health of the Disability Insurance (DI) trust fund has improved in the last two years, due to legislation Congress passed in 2015 and a decrease in the number of disability applications over the past several years. The benefits paid out by the Social Security retirement program are not expected to be more than what's paid into the trust fund (and the interest created by the trust fund) until the year 2019. The shortfall is expected to be covered by the trust fund until the year 2032, at which point tax income is expected to cover only 96% of scheduled disability benefits.

While there have been suggestions to raise the retirement age to 70 or raise the payroll tax limit, it may take years before anything is done to shore up the trust funds. (Currently, the percentage of income taken out for Social Security, 6.2% from the employee and 6.2% from the employer, is levied on income only up to $128,400.)

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