Social Security (United States)

Social Security in the United States is a social insurance program funded through a dedicated payroll tax. It is also known as the Old Age, Survivors and Disability Insurance program (OASDI), in reference to its three components. In the calendar year 2004, it paid out almost $500 billion in benefits. http://www.ssa.gov/OACT/STATS/t4a3Outgo.html

Current operation

Contrast with private pensions

Although Social Security is sometimes compared to private pensions, the two systems are fundamentally different. 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. Social Security, on the other hand, is fundamentally a wealth transfer system. It 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, however, a Social Security Trust Fund that holds the cumulative excess of taxes withheld over benefits paid. The inclusion of disability benefits also distinguishes Social Security from most private pensions.

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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. 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).

Related Topics:
Employee Retirement Income Security Act - Bankruptcy

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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.

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Social Security tax

Benefits are funded through the FICA tax on wages and salaries. The Social Security portion of this tax is 6.2% of the first $90,000 (in 2005) of an employee's income paid directly by the employer, and an additional 6.2% of the first $90,000 (in 2005) deducted from the employee's paycheck, yielding an effective rate of 12.4% of an employee's income. Self-employed people are responsible for the entire tax. The income cutoff is adjusted yearly for inflation and other factors.

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If an employee pays excess taxes, due to multiple jobs being held by the employee during a single calendar year, the employee can apply for a refund of the excess taxes withheld from their paychecks on their Form 1040. The excess taxes paid by employers are not returned to the employers.

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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.

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

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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 U.S. Treasury 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. http://www.ssa.gov/OACT/STATS/table4a3.html

Related Topics:
Social Security Trust Fund - U.S. Treasury

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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 a form of unique identification in the U.S. 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, creditors, health insurance companies, and employers.

Related Topics:
Social Security number - Internal Revenue Service

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Opting out of Social Security

While there is no requirement for individuals to join the Social Security program, there is no general provision for individuals to opt out of the program (some specific exemptions are 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 before they are paid. Generally, the payroll tax is mandatory on every worker, including the self-employed.

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Groups not required to pay Social Security

There are a number of groups of workers who are exempted from Social Security taxes:

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• 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 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 $1,100 per year.
• Minor children with earnings from household work but for whom household work is not their principal occupation.
• College students working at their school.
• Individuals who are members of certain religious groups such as the Amish and Mennonites.
• Some primary and secondary school educators have their own pension and disability insurance system that predates Social Security. They are allowed to pay into their own system instead of the government system. Partly because these funds can be invested in securities, teachers' pension plans tend to be fairly generous.

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.

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