The term 'Social Security' is included in the Laws & Regulations edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
Social Security in the United States refers to the federal government’s OASDI Old Age, Survivors, and Disability Insurance program. President Franklin Roosevelt created the first such program and signed the Social Security Act legislation in 1935. The present day law has been amended to include other social insurance and social welfare schemes.
The Social Security program is mostly bankrolled using payroll taxes which are referred to as the FICA Federal Insurance Contributions Act tax. The other legislation on it pertains to self employed people. SECA Self Employed Contributions Act Tax collects their contributions. The Internal Revenue Service collects all of these tax deposits and delivers them to the two Social Security Trust Funds. These are the Federal Disability Insurance Trust Fund and the Federal Old Age and Survivors Insurance Trust Fund. All income paid by salaries to a maximum amount set by law contributes to the payroll tax for these programs. Income that people earn above this limit does not incur additional taxes for the programs. This maximum level of taxable earnings in 2016 amounted to $118,500.
The program provides a basis for economic security for 59 million Americans who are retired, disabled, or the family members of those who are deceased or disabled workers. This number amounts to about one in six Americans who receive money from the program. Of this amount approximately 39 million beneficiaries are retired while the rest are survivors of deceased or disabled workers or disabled people themselves. Around 163 million individual Americans pay these taxes so that the others can receive their monthly benefits. This amounts to around a quarter of families collecting income from the programs.
Social Security proves to be a program based on a pay as you go system. Today’s workers contribute taxes into the program so that money can go directly out in the form of monthly income to the recipients. This makes it different from prefunded company pension plans. Prefunded programs collect money in advance of retirement benefits being paid. This way it can be distributed to the workers of today when they retire.
Both workers and employers make contributions to the program. Workers give 6.2 percent of income up to the cap. Employers similarly pay an amount that is matching to arrive at the joint contribution of 12.4 percent of all earnings. Those persons who are self employed must pay for both employer and employee share.
Social Security’s finances have a bleak outlook. The Office of the Chief Actuary of Social Security comes up with a “best estimate” on when the fund will run out of money to pay benefits. If Congress makes no changes to the law, then in 2020 the benefits spending will actually surpass the revenues for payroll taxes along with the interest on the funds’ securities.
At this point, the fund will start cashing in its Treasury securities it obtained as IOU’s for loaning money to other branches of the Federal government. In order for the government to pay these IOU’s, they will have to obtain money from one or more of a few different sources. Other spending will have to decrease, taxes will have to rise, or the Treasury will have to borrow additional money by selling more securities. This last choice would increase the already high Federal debt.
By 2034, all the assets of the trust fund would have been completely exhausted. This means that all Treasuries the fund has would have been redeemed. By this point, the combined workers and employers taxes would be enough to cover 79 percent of currently promised benefits to recipients. The last year of the 75 years projection shows that by 2089, the payroll taxes would be sufficient to cover around 74 percent of currently promised benefits.