Signed into law by President Roosevelt in 1935, the Social Security Act remains one of the largest and most commonly misunderstood social insurance programs in the United States. In this two-part series, I will be talking about Social Security, starting from what it is and how it's funded, and then moving on to issues surrounding retirement, the long-term projections of the trust fund reserves, and legislative actions we need to sustain our Social Security system.
In this section, Social Security Basics: What's It All About?, we'll discuss:
- The History of Social Security Programs
- What Is Social Security, Really?
- Old Age and Survivors Insurance (OASI) and Disability Insurance (DI) Funds Explained: What are these two trust funds, how are these trusts funded, who receives benefits from each fund, and how much are beneficiaries of these funds really receiving?
In our second article, Social Security: The Long-Term Financial Outlook and Retirement Benefits for All Americans, we'll take a further look at:
- Long-term projections provided by the 2017 Trustees Report
- Legislative actions required by 2028 to fund Disability Insurance (DI)
- Retirement benefits for all Americans
- Policy actions you can take regarding Social Security
It may surprise some people to know that Social Security isn't a new concept or program. From the English Poor Relief Act of 1601 that was brought to the shores of America by the early colonists, to the pension programs set-up following the Civil War to support widowed mothers and newly disabled military men, the belief among Americans that it is important to provide benefits to the old, the poor, and the disabled has seldom wavered. Then in 1935, following the Great Depression, came the passing of the Social Security Act. While the original purpose was specifically to provide federal assistance to those unable to work, following various alterations, the Social Security System was born: A system that remains in place today to "provide protection against economic risks Americans face across the life course." [i]
Social Security pays monthly benefits that replace part of the earnings that are lost when a worker who has paid into the program becomes disabled, retired, or dies. Despite commonly held misconceptions that 'social security is a retirement program', or 'social security supports people with disabilities', in reality the social security system is much more expansive, directly benefitting just over 61 million Americans, about one in five people, as of January 2017[ii] [iii]. Beneficiaries included 41.4 million retired workers, 4.1 million widows and widowers, and 2.5 million spouses. About 3.2 million children under age 18 receive benefits as dependents and about 8.8 million disabled workers receive benefits through the Social Security program [iv]. Social Security protects against economic risks and it is the diversity of situations in which the Social Security program provides a foundation of economic security to any eligible man, woman, or child, which makes the program so essential for all Americans.
Social Security is one system, made up of two funds: the Disability Insurance (DI) Trust Fund and the Old Age and Survivors Insurance (OASI) Trust Fund. DI protects workers against loss of earnings due to a significant, work-limiting impairment while OASI protects against the loss of family earnings due to old age or the loss of the family's primary income earner. Financial contributions to both trust funds are made through the Social Security payroll tax, known as the Federal Insurance Contributions Act (FICA) tax. Have you ever noticed a line on your paycheck that deducts 6.2 percent of your earnings for FICA? That's your payment into the Social Security system. Under the FICA tax, workers and their employers each pay 6.2 percent of earnings up to an annual cap- currently the cap is set at $127,200. So, if you make more than $127,200 a year, only the first $127,200 is taxed for Social Security.
While funded by a single FICA tax, the two funds are separate entities that cannot borrow from each other by law. However, the allocation of contributions to Social Security is periodically rebalanced between its OASI and DI funds. This has been done 12 times since 1968, with the most recent change in allocation of contributions occurring in 2015 as a result of the Bipartisan Budget Act of 2015 when Congress rebalanced contributions from the OASI fund toward the DI fund to extend the solvency of the latter [v]. Right now, in the year 2017, of the 6.2 percent of earnings that workers and employers each pay into Social Security, 5.015 percent goes to the OASI fund, and 1.185 percent goes to the DI fund. After 2018, though, the percentage of fund contributions will revert to the previous allocations of 5.3 percent to the OASI fund and 0.9 percent to the DI fund.
Important to note, all Social Security benefits are paid out of these two funds, the OASI and DI funds, which are separate from the rest of the federal budget. Said another way, Social Security can in no way affect the national debt level of the United States. Whatever payments go into the trust funds can be distributed among the eligible Social Security beneficiaries. If, however, there wasn't enough money in the two funds to provide benefits to all eligible recipients, benefits would be reduced, or more drastically, eliminated. There is no way for the two funds to borrow money from the federal government, and therefore, unlike other insurance programs it is truly up to the working American people to sustain the Social Security system.
OASI protects against the loss of family earnings due to old age or the loss of the primary income earner. Workers earn this insurance protection for themselves and their families by having worked and contributed to Social Security for 10 years. Spouses and young children of family breadwinners can claim survivors benefits when the breadwinner dies. As well, Social Security provides a disabled widow(er) benefit and a Disabled Adult Child (DAC) benefit. Disabled widow(er) benefits are paid from the OASI fund[vi]; DAC benefits are paid from the OASI fund to the adult child of a retired or deceased worker, or from the DI fund to the adult child of a disabled worker [vii]. "About 41 million retired workers receive benefits from OASI along with 3 million of their children and spouses. In addition, 6 million children and widow(er)s of deceased workers receive benefits from OASI" [viii].
DI protects a worker against loss of earnings due to a significant, work-limiting impairment. The disability standard is extremely strict: only individuals who have a medically determinable mental or physical impairment that precludes substantial work activity and is expected to last at least a year or result in death are eligible for benefits. Further, applicants are only eligible if they are "not only unable to do their prior work at a substantial level, but are also unable—considering their age, education, and work experience—to engage in any other substantial gainful activity (SGA) that exists in the national economy" [ix]. The Social Security Administration considers someone to be engaged in SGA if the person earns more than $1,170 a month, or $1,950 if they have a visual impairment.
Workers earn DI benefits by having worked and contributed to Social Security. The number of years worked depends on the age at which the disability affected the person's ability to work. Simply stated, younger workers need fewer credits to qualify for benefits than older workers and thus may qualify with a less extensive work history. About 8.9 million workers currently receive DI benefits, and contrary to what recent media coverage might lead you to believe, this number has been steadily decreasing since 2010 as both the number of applications and the number of beneficiaries receiving payments have decreased [x]. Further, the notion that fraud is a significant problem in the DI program is simply untrue. The Social Security Administration has a zero-tolerance policy towards fraud, and the agency works continuously to maintain program integrity. Through a combination of a rigorous application process for DI benefits and periodic evaluations of the disabilities status of beneficiaries when their condition is expected to improve, the SSA closely monitors all DI beneficiaries. "Of note, after all reconsiderations and appeals, fewer than 4 in 10 DI applications are allowed. And after beneficiaries begin receiving benefits, they are subject to Continuing Disability Reviews (CDRs), which SSA regularly conducts to evaluate ongoing disability status" [xi].
Social Security is one system, consisting of two funds: the Disability Insurance Trust Fund, and the Old Age and Survivors Insurance Trust Fund. Currently 61 million Americans are benefitting from the Social Security system and it is important that the two funds continue to grow as the number of American citizens requiring support and financial protections grow.
In part two, we'll look at Social Security as it relates to retirement, long-term projections of the financial security of the two trust funds supporting the social security program, and legislative actions required before 2028 to ensure continued funding to the DI fund.
Social Security is a complicated puzzle, and there are lots of pieces that may not have been addressed in this article due to space and length constraints. Therefore, if you have any comments or questions you think should be addressed, please, let us know!
[i] Schreur, E., & Veghte, B. W. (2016). Social Security: One system, two funds, three insurance protections. Washington, D.C.: National Academy of Social Insurance.
[ii] Social Security Administration. (2017). Beneficiary data: Number of Social Security recipients at the end of Jan. 2017. Baltimore, MD: Social Security Administration, Office of the Chief Actuary. Retrieved from: www.ssa.gov/OACT/ProgData/effectiveRates.html
[iv] Social Security Administration. (2017). Beneficiary data: Number of Social Security recipients at the end of Jan. 2017. Baltimore, MD: Social Security Administration, Office of the Chief Actuary. Retrieved from: www.ssa.gov/OACT/ProgData/effectiveRates.html
[v] Schreur, E., & Veghte, B. W. (2016). Social Security: One system, two funds, three insurance protections. Washington, D.C.: National Academy of Social Insurance.
[vi] Social Security Administration. (2016). Disability planner: Benefits for disabled widows or widowers. Retrieved from: https://www.ssa.gov/planners/disability/dqualify9.html
[vii] Social Security Administration. (2016). Disability planner: Benefits for a disabled child. Retrieved from: https://www.ssa.gov/planners/disability/dqualify9.html
[ix] Schreur, E., & Veghte, B. W. (2016). Social Security: One system, two funds, three insurance protections. Washington, D.C.: National Academy of Social Insurance.
[xi] Schreur, E., & Veghte, B. W. (2016). Social Security: One system, two funds, three insurance protections. Washington, D.C.: National Academy of Social Insurance.