Social Security

Social Security is a federal government program that provides a source of income to retirees, individuals who cannot work due to disability, and their families; and the surviving families of deceased workers. The Social Security Administration also administers Supplemental Security Income (SSI), monthly payments to individuals with limited income and resources, who are age 65 and older, blind, or disabled.1

History

In 1934, in response to the Great Depression, President Franklin D. Roosevelt created the Committee on Economic Security (CES) to draft the Economic Security Bill, which was renamed the Social Security Act of 1935.2 On August 14, 1935, President Roosevelt signed the act into law3, establishing benefits for aged people, blind people, and dependent children in need; as well as crippled children, maternal and child health, child welfare, unemployment compensation, and public health sector development.4 In 1936, the Supreme Court took on three cases challenging the constitutionality of the act as the 10th Amendment states that powers not delegated to the federal government are reserved for the states or the people. In 1937, the Supreme Court ruled in favor of the act on all three cases, under the legal precedent of levying taxes for the general welfare.5 The same year, social security numbers (SSNs) were issued, payroll taxes were collected, and the first lump-sum of benefits was distributed.6 The act has garnered multiple amendments that shape the program as it stands today, including a 1965 amendment establishing the Medicare program.

Overview:

In 2019, approximately 64 million people received monthly Social Security benefits and approximately 177 million people paid Social Security taxes. 7
In 2018, the program total cost was $1,000 billion (1 trillion), and total funding was $1,003 billion ($920 billion in non-interest income and $83 billion in interest earnings). 8
Retirement- The majority of Social Security recipients are retirees and their families, accounting for 48 million people, or about 3 of 4 beneficiaries in 2019. 9
Disability- Approximately 15% of Social Security funds support individuals with disabilities and their families. 10
Children- Social Security provides more benefits to children than any other government program. 11
Administration- In 2018, Social Security administrative costs were only 0.7 percent of annual benefits. 12

Eligibility:

Every year that an individual authorized to work in the U.S. works, when they make an annually-determined amount, they pay Social Security taxes and accrue “credits” (up to four a year) toward Social Security benefits (except SSI). Younger people need fewer credits to become eligible for disability or survivors benefits. 13

Family benefits- A Social Security retirement or disability recipient’s family may be eligible to concurrently receive benefits. This benefit is up to 50% of the primary beneficiary’s retirement benefit per qualifying family member (though most famili have a limit of 150% to 180% of their benefit), and does not reduce the primary recipient’s benefits. Eligible family members include: 14
- Current or divorced spouses age 62 or older,
- Spouses taking care of a child under age 16 or with a disability who is on the primary recipient’s record,
- Children up to age 18, or up to 19 if full-time students who haven’t graduated high school, and
- Disabled children regardless of age.
- Children include step-, grand-, step-grand-, and adopted children.

Funding:

Every year that an individual works, they pay Social Security taxes through payroll or self-employment taxes.

Employees pay a 6.2% employer-matched payroll tax.
Self-employed workers pay a 12.4% payroll tax and receive a tax deduction. 15
Social Security taxes are allocated to the Old-Age and Survivors Insurance (OASI), the Disability Insurance (DI), and the Medicare Hospital Insurance (HI) Trust Funds. OASI and DI trust fund securities earned interest. 16
There is a maximum amount of annual earnings subject to Social Security taxes, which is updated annually in relation to increases in the national average annual earnings. 17

Benefit Amount:

Social Security benefits (except SSI) are based on lifetime earnings. Higher earnings result in higher benefits, but the benefit formula provides a higher benefit-to-monthly earning ratio for individuals with lower earnings. 18 The unreduced monthly Social Security retirement or disability benefit, known as the Primary Insurance Amount (PIA), is calculated using the formula:

PIA = (90% of the first $x of AIME) + (32% of the next $y of AIME) + (15% of AIME over $z)

Average indexed monthly earnings (AIME) are calculated based on an individual’s 35 highest-earning years, and the variable earning amounts are adjusted annually.

Inflation- Annually, benefits are subject to a cost-of-living adjustment (COLA) based on the increase in the Bureau of Labor Statistics’ Consumer Price Index (CPI-W). 19
Disability freeze- For a temporary disability or a reduced wage after the onset of blindness, the years of impacted earnings are excluded when computing average lifetime earnings for Social Security retirement or survivors benefits. 20
Special minimum PIA- There is an alternative PIA for long-term low earners based on the number of coverage years rather than average earnings. 21
Approximately 40% of Social Security recipients pay income tax on their benefits. 22

Main Benefits 23

1. Social Security retirement benefits: A percentage of a worker’s pre-retirement income. 24

Eligibility- An individual may begin receiving their own retirement or spousal benefits between the ages of 62 and 70. 25
- A widow(er) can receive reduced spousal benefits at age 60 and later switch to their own full retirement benefits when reaching their FRA. 26
An individual can work while receiving retirement benefits and will not experience a reduction in retirement benefits if they have reached their full retirement age.
- If an individual receives benefits before reaching their full retirement age, for every $2 they earn above the annual earning limit, $1 is deducted from their retirement benefits. 27
Full retirement age- (FRA) A worker’s “full” or “normal” retirement age is the age at which they are entitled to begin collecting full retirement benefits.
- This ranges from age 66 to 67 depending on the year in which an individual is born to adjust for increases in average life expectancy and health improvements. 28
- An individual can receive reduced benefits before FRA starting at age 62. Payments are permanently reduced about 0.5% for each month they began before FRA. 29
- An individual can delay benefits until after FRA up to age 70. Payments are permanently increased a fraction of a percent (dependent on their year of birth) for each month they began after FRA. 30

Age to Receive Full Social Security Benefits 31

Year of Birth Full Retirement Age:

1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and after 67

Increase for Delayed Retirement 32

Year of Birth 12-Month Rate of Increase Monthly Rate of Increase

1933-1934 5.5% 11/24 of 1%
1935-1936 6.0% 1/2 of 1%
1937-1938 6.5% 13/24 of 1%
1939-1940 7.0% 7/12 of 1%
1941-1942 7.5% 5/8 of 1%
1943 and after 8.0% 2/3 of 1%

Amount- If people begin receiving benefits at full retirement age, they are entitled to 75% of their average wage if low earners, 40% if medium earners, and 27% if high earners. 33

2. Social Security Disability Insurance- (SSDI) Payments to people who can’t work due to a physical or mental condition expected to last at least one year or result in death. 34

Eligibility- Individuals must have worked under Social Security for a sufficient duration based on the age at which they became disabled. 35
- An individual’s medical condition must significantly limit their ability to do basic work activities such as sitting, standing, walking, lifting, or remembering, for at least 12 months. 36
- If a medical condition prevents one from performing their past work, their state’s office of Disability Determination Services must determine that they cannot do other work based on age, education, work experience, and skills. 37
- An individual does not qualify to receive disability if they are working and average above a monthly threshold. This threshold is higher for blind individuals 38

If You Become Disabled... 39 Required Work In or before the quarter you turn age 24 Work for 1.5 years during the three-year period ending with the quarter disability began In the quarter after you turn age 24 but before the quarter you turn age 31 Work during half the time for the period beginning with the quarter after turning 21 and ending with the quarter the disability began In the quarter you turn age 31 or later Work during five years during the 10-year period ending with the quarter the disability began:

First Quarter: January 1 through March 31

Second Quarter: April 1 through June 30

Third Quarter: July 1 through September 30

Fourth Quarter: October 1 through December 31

Amount- Disability benefits are based on a recipient’s average lifetime earnings40, and equal the full retirement benefit. 41
Continuing disability reviews- A disability recipient’s medical condition is reviewed to determine continued eligibility for the disability benefit. Review frequency depends on the projected trajectory of the disability. 42
- If a condition is expected to improve it is reviewed every six to 18 months after beginning benefits, if improvement is possible, every three years, and if improvement is not expected, every five to seven years.
Work incentives- SSDI offers services to help recipients work toward financial self-sufficiency including temporary employment-based cash benefits and Medicare or Medicaid; help with disability-based work expenses; and help with education, training, and rehabilitation to enter a new line of work. 43
The Ticket to Work- SSDI offers a voluntary program that allows recipients ages 18 to 64 to work with an employment network or state vocational rehabilitation agency for workforce development support. 44

3. Survivors benefits- Payments for spouses and children of workers who die. 45

Eligible family members include:
- Widows and widowers who are age 60 or older,
- Widows and widowers who are age 50 or older and disabled,
- Widows and widowers who are taking care of a child under age 16 or disabled and on the primary recipient’s record,
- Children up to age 18 or up to 19 if full-time students who have not graduated high school,
- Disabled children regardless of age, and
- Parents who were dependent on the deceased worker for at least half of their support.
- Children include step-, grand-, step-grand-, and adopted children. 46
Amount- Survivors receive 75% to 100% of an individual’s basic Social Security benefit (though a family has a limit of 150% to 180% of an individual’s benefit). 47

4. Supplemental Security Income- (SSI) A monthly payment for people with low income and few resources, and who are age 65 or older, blind, or disabled. Blind or disabled children whose parents have low income and few resources may be eligible. 48 SSI can accompany other Social Security benefits. 49 SSI is not contingent on credits and does have an income and resource limit. 50

Funding- Comes from general revenues from the U.S. Treasury. 51
Eligibility- An individual’s income and resources (the things one owns) must fall below a geographically-dependent amount, regardless of work credits.
- Income includes wages, Social Security benefits, pensions, Department of Veteran Affair benefits, food and shelter (excluding SNAP and shelter from private nonprofits), etc. 52 Income excludes income tax refunds, Earned Income Tax Credit and Child Tax Credit payments, etc. 53
- Resources include real estate, cash, bank accounts, stocks, and bonds. 54
- Individuals living in a public emergency shelter for the homeless may qualify for SSI but people living in public institutions such as a jail, prison, or a halfway house typically do not qualify. 55
Amount- The basic benefit is the same nationwide, and many states add additional funds. 56

Medicare

History:

In old age, as income tends to diminish, health costs simultaneously tend to rise. Before Medicare, there were Federal-State programs to assist the aged with medical expenses, but due to limited funds, they tended to have very restrictive eligibility and coverage. In 1965, President Lyndon B. Johnson signed the Social Security Act Amendments, establishing the Medicare program to ensure health service access for the aged. For individuals aged 65 and older, the amendment established a:

Hospital insurance plan for:
- Social Security retirement beneficiaries, financed by a special earnings tax, and
- Individuals ineligible for Social Security retirement, financed by Federal general revenue.
- The plan covered inpatient hospital services, post-hospital care, outpatient hospital diagnostic services, post-hospital home health services.
Individuals to enroll in a supplementary medical insurance plan for a monthly premium, regardless of Social Security eligibility.
- The plan covered physicians’ services, home health services, etc.
Impact- Before Medicare, just over half of individuals 65 and over had hospital insurance. 57

Present:

Today, Medicare is a four-part federal insurance program for individuals age 65 or older, individuals under 65 with certain disabilities, and individuals with End-Stage Renal Disease (ESRD) 58 who had a kidney transplant or need kidney dialysis. 59 Although the Medicare program was created by a Social Security amendment, it is administered by the federal agency the Centers for Medicare & Medicaid Services (CMS), and funded from a separate account than Social Security benefits. 60

Federal Employee Benefits

Before 1984, federal civilian employees and Members of Congress were covered by the Civil Service Retirement System (CSRS), a federal pension plan. These individuals were not eligible to receive Social Security benefits and did not pay Social Security taxes. Amendments to Social Security in 1983 mandated that federal employees hired in 1984 or later must participate in Social Security. To create a federal employee retirement plan that could be coordinated with Social Security, Congress passed the Federal Employees’ Retirement System Act (FERSA) in 1986.

Members of Congress:

Today, based on the year in which they were first elected, Members of Congress are covered under:

CSRS and Social Security;
The CSRS Offset plan, in which CSRS payments and benefits are reduced by Social Security tax and benefits;
FERS, which includes a federal pension, Social Security, and a tax-deferred savings plan; or
Social Security alone.

Pension:

Under CSRS and FERS, Members of Congress are eligible for a pension at age 62 if they have served for at least 5 years, age 50 if they have served for 20, and at any age if they have served for 25.

Amount- An individual’s pension is determined by the number of years served and the average of their highest three years of salary.61

The Federal Employees Retirement System (FERS):

The Federal Employee Retirement System (FERS) is a retirement and survivors benefits plan for federal civilian employees.

Funding:

FERS provides benefits from:

A Basic Benefit Plan, a federal pension,
- Funded by payroll tax and matched by the employing agency.
Social Security, and
-Funded by payroll tax (at the same rate as non-government employees) 62 and matched by the employing agency. 63
-Provides the same benefits as those afforded to non-government employees. 64
-Can go with an employee if they leave the federal government before retirement.
The Thrift Savings Plan (TSP), a tax-deferred savings plan.
-An individual’s employing agency finances the account with the equivalent of 1% of the employee’s basic pay, and matches an employee's contribution.
-Can go with an employee if they leave the federal government before retirement. 65

Retirement:

Eligibility- An individual may begin receiving their retirement when they reach their minimum retirement age, and satisfy the “Rule of 80,” meaning that their combined age and years of working for the federal government equal 80. 66
Minimum retirement age- (MRA) A federal worker’s minimum retirement age is the age at which they are entitled to begin collecting full retirement benefits, based on how many years they have worked for the federal government.
- This ranges from age 55 to 57 depending on the year in which an individual is born. 67

Year of Birth 68

Minimum Retirement Age

Before 1948 55

1948 55 and 2 months

1949 55 and 4 months

1950 55 and 6 months

1951 55 and 8 months

1952 55 and 10 months

1953 to 1964 56

1965 56 and 2 months

1966 56 and 4 months

1967 56 and 6 months

1968 56 and 8 months

1969 56 and 10 months

After 1969 57

Disability Retirement:

Eligibility- An individual of any age is eligible to receive disability benefits if they have worked for the federal government for at least 18 months.
- An individual must have developed a disability while employed, which is expected to last at least a year.
- An individual must apply for Social Security disability benefits.
Amount- Disability benefits are computed differently depending on the beneficiary’s age and years of work with the federal government.
- If an individual is receiving FERS and Social Security disability benefits concurrently, their FERS benefits are reduced in accordance with their benefit computation.
Continuing disability reviews- A disability recipient’s medical condition may be periodically reviewed to determine continued eligibility for the disability benefit. 69

The Federal Employees Health Benefits (FEHB) Program:

Created in 1959, the Federal Employees Health Benefits (FEHB) Program allows federal employees, retirees, and their families to obtain federally-subsidized, private health insurance. In the program, competing private insurers offer various types of federally-approved individual and family plans, and the federal government splits the premium. Plans must cover basic services such as hospital and physician care, and vary in coverage 70, deductibles 71, coinsurance 72, and copayments. 73

FEHB plans have prescription drug benefits at least equal to those in Medicare Part D.
FEHB beneficiaries can suspend their coverage to enroll in a Medicare Advantage Plan.
Most federal employees at age 65 can receive Medicare Part A for free, which can help reduce FEHB costs. 74
Unlike Medicare and Medicaid beneficiaries, FEHB enrollees can participate in pharmaceutical company co-pay reimbursement programs, which reduce the out-of-pocket costs of select prescription drugs. 75
FEHB covers about 8.2 million individuals each year.
85% of federal employees and 90% of federal retirees participate in FEHB. 76

Railroad Worker Benefits

The Railroad Retirement Program is a federal government program that, like Social Security, provides retirement, disability, and survivor benefits, as well as unemployment, and sickness benefits to railroad workers and their families. 77 This program is administered by the Railroad Retirement Board (RRB), an independent federal agency with field offices throughout the country. 78

In the 1920s, more than 80 percent of railroad workers could utilize an employer pension plan, though benefits were insufficient, unpredictably terminated, and inadequate for disability. To provide retirement and disability benefits to railroad workers during the Great Depression, the Railroad Retirement and Carriers’ Taxing Act was passed in 1935 and revised in 1938. The program was financed by previously private railroad pensions and an employee and employer monthly income tax. The program added unemployment benefits in 1938 and survivor, sickness, and occupational disability benefits in 1946. In 1951, amendments established that the program would provide railroad worker tax revenue to Social Security, and Social Security would provide benefits to the RRB for Railroad beneficiaries. Since 1959, the aforementioned transfers have favored the railroad program due to a decline in railroad workers and, resultantly, tax revenue, as well as the growth of Social Security. The Railroad Retirement Act (RRA) of 1974 split benefits into Tier 1, designed to be equivalent to Social Security benefits, and Tier II, designed to provide additional benefits comparable to private pensions.79

Today, the RRA authorizes retirement, disability, and survivor benefits, which are calculated using the Social Security benefit formula and are designed to be almost identical to Social Security benefits. RRA is financed by Tier I payroll taxes (the same as Social Security payroll tax; accounting for 47% of gross RRA funding in FY2017), financial interchanges from Social Security, and transfers from the National Railroad Retirement Investment Trust (NRRIT). Railroad Retirement Tier I benefits are more generous than Social Security, such as in their provision of the full retirement benefit at age 60 (before the full retirement age) if an individual has done railroad work with coverage for at least 30 years. The Railroad Unemployment Insurance Act (RUIA) authorizes unemployment and sickness benefits, and is financed by railroad employers via Tier II tax. RUIA benefits are determined based on covered railroad work. In 2017, the RRA had $12.7 billion in gross funding. 80

Lifelong railroad workers receive railroad retirement instead of Social Security benefits, and other railroad workers receive benefits from railroad retirement or Social Security, depending on the length of their railroad work. If an individual is insured by both systems, their Railroad Retirement Tier I benefits are reduced by any Social Security benefits they receive to eliminate redundant benefits.81

Endnotes