Have you ever wondered how Social Security works? It’s actually a somewhat complex system established by the 1935 Social Security Act due in part to the Great Depression. President Franklin D. Roosevelt wanted the Federal Government to assist the elderly during their retirement years and establish aid for the disabled and survivors benefits for spouses and children of deceased workers. Before Social Security, care and monetary funding for these individuals was up to the states, local communities and family members.
When the Great Depression hit, it was literally impossible for many families and local outreach programs to continue to render assistance as the economic crisis penetrated all areas of life and work for over a decade. Thus, FDR set up by executive order, a commission to investigate the social impact on Americans by the Depression and it was the findings that lead the President to ask Congress to create a program to help the elderly, disabled and survivors of deceased workers.
Social Security is a program not based upon the needs of the participants but rather how much and how long the participants pay into the system. Eligibility for benefits upon retirement includes a few factors:
- Age – individuals must be 62 years old or older to receive retirement benefits
- Length of employment – individuals must have worked for at least 40 quarters (over the life of their work experience) and paid into Social Security through payroll deductions (or on their own if self-employed)
- There is no requirement to be a US citizen
- Disability benefits eligibility is based upon a determination by the Social Security system along with the above listed qualifications (except for disability applicants under the age of 18).
Social Security is funded through specific payroll taxes deducted from the employees’ paycheck. The Employer matches the amount paid by the employee. If you look at your pay-stub, you will find under deductions something called “FICA” (Federal Insurance Contributions Act) that is actually a combined payroll tax amount for both Social Security and Medicare. The premise of this funding is that the current work force is paying the current retirement group. The breakdown or distribution of the payroll tax that goes into Social Security is as follows:
- Retirement and Survivors Tax – 10.6% (5.3% from employee & 5.3% from employer). This amount goes into the Old-Age and Survivor’s Trust fund
- Disability Tax – 1.8% (0.9% from employee & 0.9% from employer). This amount goes into the Disability Insurance Trust Fund
The remaining payroll tax collected, approximately 2.9% total from both employee and employer, is allocated to Medicare; a separate program from Social Security.
As a retiree, an individual may earn up to $25,000.00 without having to pay income tax on their Social Security. If the person makes from $25,000 to $34,000 and files their tax status as ‘individual’, they will pay income tax on 50% of their Social Security benefits. Should they make over $34,000 in a tax year, the individual filer will pay income tax on 85% of their Social Security retirement income.
And there you have it, a brief overview of the Social Security program. The need for a safe and stable monetary support for the elderly, the disabled and survivors of deceased workers came about during a horrific economic crisis and continues to help millions of Americans every year. It’s estimated that even with the Social Security program, 10 out of every 100 retiree’s live in poverty so make sure that you start saving for your retirement as soon as possible by opening up an IRA account now.