Social Security

USA

Introduction Social Security is a social insurance program that is primarily funded through dedicated payroll taxes called Federal Insurance Contributions Act tax (FICA). Tax deposits are formally entrusted to the Federal Old-Age and Survivors Insurance Trust Fund. the Federal Hospital Insurance Trust Fund. or the Federal Supplementary Medical Insurance Trust Fund . the Federal Disability Insurance Trust Fund.

and a lump-sum benefit at death. 1935. poverty. and the burdens of widows and fatherless children •By signing this act on August 14.Background of Social Security in US •The Social Security Act was enacted August 14. including old age. Payments to current retirees are financed by a payroll tax on current workers' wages. unemployment. President Roosevelt became the first president to advocate federal assistance for the elderly •The Act provided benefits to retirees and the unemployed. half directly as a payroll tax and half paid by the employer . The Act was drafted during Roosevelt's first term by the President's Committee on Economic Security •The act was an attempt to limit what were seen as dangers in the modern American life. 1935.

proponents argued that there was in fact an advantage: it would encourage older workers to retire. hospital employees. thereby creating opportunities for younger people to find jobs. These jobs were dominated by women and minorities .Initial Opposition •Social Security was controversial when originally proposed. and many teachers. which would lower the unemployment rate •Most women and minorities were excluded from the benefits of unemployment insurance and old age pensions •Job categories that were not covered by the act included workers in agricultural labor. government employees. librarians. domestic service. with one point of opposition being that it would allegedly cause a loss of jobs •However. nurses. and social workers. The act also denied coverage to individuals who worked intermittently.

For the entire history of Social Security. benefits have been paid almost entirely by using revenue from payroll taxes Primary Insurance Amount The PIA is the average of the highest 35 years of the worker's covered earnings (before deduction for FICA). Covered earnings in any year are limited by that year's Social Security Wage Base Spouse's benefit This spousal retirement benefit is half the PIA of the worker. The amount of the monthly benefit to which the worker is entitled depends upon that earnings record and upon the age at which the retiree chooses to begin receiving benefits. . Only after the worker applies for retirement benefits may the nonworking spouse apply for spousal retirement benefits. the Social Security Administration keeps track of his or her earnings.Features & Elements Retirement Benefits Throughout a worker's career. this is different from the spousal survivor benefit. which is the full PIA There is no increase for starting spousal benefits after normal retirement age.

The eligibility formula requires a certain number of credits (based on earnings) to have been earned overall . normal retirement age. regardless of his or her age. or are over the age of 18 and were disabled before the age of 22 Disability These benefits start after five full calendar months of disability.Social Security Widow(er)'s benefits The earliest age for a nondisabled widow(er)'s benefit is age 60. there is an actuarial reduction. If the surviving spouse starts benefits before normal retirement age. or older than. The benefit is equal to the worker's full retirement benefit for spouses who are at. disabled or deceased worker receive benefits as a "dependent" or "survivor" if they are under the age of 16. Children's benefits Children of a retired.

854 Surviving spouse permanently housebound with No dependent children $6.096 One dependent child $10.Veterans Improved Death Pension Surviving spouse with No dependent children $5.450 Surviving spouse in need of regular aid and attendance with No dependent child $9.445 Pension rates for each surviving child $1.44 .688 One dependent child $7.954 One dependent child $8.712 Increase for each additional dependent child $1.

because of this. high earners pay a lower percentage of their total income because of the income caps. Therefore. Workers must pay 12.4 percent. payroll taxes are often viewed as being regressive.Problems in Implementation •Claim that it discriminates against the poor and the middle class Critics say that Social Security redistributes wealth from the poor to the wealthy.2 percent employer contribution. but no tax on income in excess of this amount.100 in 2012). on their wages below the Social Security Wage Base ($110. compared to what is obtained through private retirement accounts . including a 6. •Claim that politicians exempted themselves from the tax Critics of Social Security claim that it gives a low rate of return.

000 of earnings. and the rate was never fixed for all time at 1% Claim that it gives a low rate of return Critics of Social Security claim that it gives a low rate of return. when the number of new contributors dries up.400. compared to what is obtained through private retirement accounts Claim that it is a Ponzi scheme As with Ponzi’s scheme. Those early windfall returns are long gone • • .000. This rate was increased on a regular schedule in four steps so that by 1949 the rate would be 3% each on the first $3. "The tax rate in the original 1935 law was 1% each on the employer and the employee. on the first $3. The figure was never $1. it will become impossible to continue to pay the promised benefits.Problems in Implementation • Claim that the government lied about the maximum tax According to the Social Security website.

even in the absence of other demographic factors the retirement age must be increased to maintain a sustainable system.Suggestions • Increasing retirement age Because the life expectancy has increased and will increase further. • . A benefit of lifting the cap on the taxable income. but not increasing the benefits make some suggest that the revenue from high income earners will lead to solvency of social security.1 years for men and 6 for women yet the retirement age has only been increased by 2 years Raising the maximum taxable earning levels At present the limit is $106. life expectancy has increased by 5. it will be able to tackle the problem of increasing benefits.100 in 2012).800 (it rises to $110. Since payments began in 1940.[But if the cap is lifted and it includes all taxable income. from an increase of revenues.

Another variant of this can be.Suggestions • Changing of the benefit formula At present. the lowest income 30% of the retirees may be given benefits based on wage indexing and all the rest on price indexing or the mix of both indexes • Social Security Solvency: Cost and Benefit Analysis A cost and benefit analysis should be done in order to make the Social Security solvent and maintain the current system . This would increase the payroll tax by 0. if the retirement is increased to 68 then the average for calculation of AIME may be increased to 38 years earnings. now AIME uses the indexing based on average wage growth for 35 years but if it was based on CPI then it will also reduce the benefits. It will help in sustainable solvency because the wages tend to rise more as compared to prices.26 percentage points. In order to help the poor. AIME is calculated on the average of 35 years of earnings. It will decrease the lifetime earnings and it will decrease the benefits.

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