Social Security (United States)

Social Security in the United States is a social insurance program funded through a dedicated payroll tax. It is formally known as the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund program (OASDI), in reference to its three components (OA for retirement, S for widows and survivors income, D for disability income). When initially signed into law by FDR in 1935, the term Social Security covered unemployment insurance as well, but now the term is used in America to mean only the three benefits for retirement, disability and death which are the three main benefits provided by traditional private sector pension plans that still exist. References to SSI are now generally regarded as erroneous. In the calendar year 2004, it paid out almost $500 billion in benefits. By dollars paid the U.S. Social Security program is the largest government program in the world. The Social Security Administration is headquartered in Baltimore, Maryland.

In 2005, the possibility of changing the Social Security system became a major political issue; see Social Security debate (United States).

Retirement benefits

The largest component of OASDI is the payment of retirement benefits. Throughout a worker's career, the Social Security Administration keeps track of his or her earnings. 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. The legal authority to make the payment rests on the accounting solvency of the system, its current cash inflows from FICA and interest plus accumulated surplus. While the great majority of its assets in the surplus are special Treasury bonds, so that they are IOUs that the federal government owes itself, it is their presence on the books of the Social Security Administration that gives them the legal authority to pay when annual FICA contributions and interest falls below benefits.

Primary Insurance Amount

While the worker's retirement income benefit is based on his PIA (primary insurance amount), the PIA is also used to calculate the other benefits for disability, widows and survivors monthly income. The PIA is based on the average of the highest 35 years of covered earnings of the worker. If the worker has fewer than 35 years of covered earnings they are added in as zeros for those years. Years of covered work more than 2 years before the calculation year are indexed upward to reflect the increase in the national wage via the average wage index (AWI) from the time the earnings were covered in the past to the most recent value of the AWI (which is two years ago). This 35 year average is the average indexed monthly earnings (AIME). The PIA then is 90% of the AIME up to the first (low) bendpoint and 32% of the excess of AIME over the first bendpoint but not in excess of the second (high) bendpoint plus 15% of the AIME in excess of the second bendpoint.

Normal retirement age

The earliest age at which (reduced) benefits are payable is 62. Full retirement benefits are dependent on a retiree's year of birth. Those born before 1938 have a normal retirement age of 65. Normal retirement age increases two months for each ensuing year of birth until the 1943 year of birth when it stays at age 66 years and zero months until the 1954 year of birth. Resuming with birth year, the normal retirement age increases again by two months for each year ending in the 1960 year of birth when normal retirement age stops at age 67 for all born thereafter.

The normal retirement age for spousal retirement benefits shifts the year of birth schedule upward by two years so that those spouses born before 1940 have age 65 as their normal retirement age.

Other programs

Spouse's benefit

Any current spouse is eligible and divorced or former spouses are eligible generally if the marriage lasts for at least 10 years. While it is arithmetically possible for one worker to generate spousal benefits for up to five of his/her spouses that he/she may have, each must be in succession after a proper divorce for each after a marriage of at least ten years. Because age 70 is the latest retirement age and because no state recognizes marriage before teenage years, there are at most 5 successive spousal benefits in ten year intervals. This spousal retirement benefit is half the PIA of the worker; this is different from the spousal survivor benefit which is the full PIA. The benefit is the product of the PIA times one half times the early retirement factor if the spouse is younger than normal retirement age. There is no gross up for starting spousal benefits after normal retirement age. This can occur if there is a married couple where the younger person (say man) is the only worker and is more than 5 years younger. Only after the worker applies for retirement benefits may the non-working spouse apply for spousal retirement benefits. In this case, when the worker attains age 65, the non working spouse would be at least age 70.

Disability

A worker who has worked long enough (based on quarters of coverage within the recent past) and recently enough to be covered can receive benefits upon becoming totally disabled, regardless of his or her age. The eligibility formula requires a certain number of credits (based on earnings) to have been earned overall, and a certain number within the ten years preceding the disability, but with more lenient provisions for younger workers who become disabled before having had a chance to compile a long earnings history.

The worker must be unable to continue in his or her previous job and unable to adjust to other work, taking into account the worker's age, education and work experience; furthermore, the disability must be long term lasting 12 months, expected to last 12 months, resulting in death, or expected to result in death. As with the retirement benefit, the amount of the disability benefit payable depends on the worker's age and record of covered earnings.

Supplemental Security Income (SSI) uses the same disability criteria as the insured social security disability program, but SSI is not based upon insurance coverage. Instead, a system of means-testing is used to determine if the claimants' income and net worth fall below certain income and asset thresholds after the claimants establish disability.

Severely disabled children may qualify for SSI. Standards for child disability are different from those for adults. In addition, nondisabled minor children of disabled or deceased workers may receive dependent or survivor'sbenefits. A program called Disabled Adult Child Insurance Benefits (DACIB) provides benefits for the disabled adult children of disabled or deceased workers.

Disability determination at the Social Security Administration has created the largest system of administrative courts in the United States. Depending on the state of residence, a claimant whose initial application for benefits is denied can request reconsideration or a hearing before an Administrative Law Judge. Such hearings sometimes involve participation of a vocational expert (VE) or medical expert (ME), both independent unbiased witnesses as called upon by the ALJ.

Reconsideration involves a re-examination of the evidence and the opportunity for a hearing before a (nonattorney) disability hearing officer. The hearing officer then issues a decision in writing, providing justification for his/her finding. If the claimant is denied at the reconsideration stage, s/he may request a hearing before an Administrative Law Judge. In some states, SSA has implemented a pilot program that eliminates the reconsideration step and allows claimants to appeal an initial denial directly to an Administrative Law Judge.

Because the number of applications for Social Security is very large (approximately 650,000 applications per year), the number of hearings requested by claimants often exceeds the capacity of Administrative Law Judges. The number of hearings requested and availability of Administrative Law Judges varies geographically across the United States. In some areas of the country, it is possible for a claimant to have a hearing with an Administrative Law Judge within 90 days of his/her request. In other areas, waiting times of 18 months are not uncommon.

After the hearing, the Administrative Law Judge (ALJ) issues a decision in writing. The decision can be Fully Favorable (meaning the ALJ has found the claimant to be disabled as of the date s/he alleged in the application through the present), Partially Favorable (meaning the ALJ has found the claimant to be disabled at some point, but not as of the date alleged in the application OR the ALJ has found that the claimant was disabled, but has improved), or Unfavorable (meaning the ALJ has not found that the claimant was disabled at all). Claimants can appeal Partially Favorable and Unfavorable decisions to Social Security's Appeals Council, which is located in Virginia. The Appeals Council does not hold hearings; it accepts written briefs. Response time from the Appeals Council can range from 12 weeks to more than 3 years.

If the claimant disagrees with the Appeals Council's decision, s/he can appeal the case in the federal district court for his/her judicial district. As in most federal court cases, an unfavorable district court decision can be appealed to the appropriate appellate circuit court, and an unfavorable appellate court decision can be appealed to the United States Supreme Court.

Survivors' benefits

If a worker covered by Social Security dies, a surviving spouse or children can receive survivors' benefits. In some instances, survivors' benefits are available even to a divorced spouse. Survivor's benefits to nondisabled children end at age 18, or when the child graduates from high school, whichever is later. The earliest age for a nondisabled widow(er)'s benefit is age 60. The benefit is equal to the worker's full retirement benefit for spouses who are at or older than survivor's normal retirement age. If the worker dies when the survivor is younger, there is an actuarial reduction.

History

A limited form of the Social Security program began as a measure to implement "social insurance" during the Great Depression of the 1930s, when poverty rates among senior citizens exceeded 50% .

Social Security was controversial when enacted and remains so today. Several provisions were introduced to sway public opinion for the passage of the law. President Franklin Delano Roosevelt promised that participation in the program would be completely voluntary and that participants would only have to pay 1% of the first $1,400 of their annual incomes into the Program. That is, the money the participants elected to put into the Program would be deductible from their income for tax purposes each year. The money the participants put into the independent "Trust Fund" rather than into the General operating fund were to be used to fund the Social Security Retirement Program and no other Government program. The annuity payments to the retirees were never to be taxed as income.

Creation: The Social Security Act

File:RooseveltSSAsigning.jpg

President Roosevelt signs Social Security Act, August 14 1935. Standing with Roosevelt are: Rep. Robert L. Doughton (D-NC); Sen. Robert F. Wagner (D-NY); Rep. John D. Dingell, Sr. (D-MI) (the father of the current As of 2005 rep. Dingell); Unknown man in bowtie; Secretary of Labor, Frances Perkins; Senator Pat Harrison (D-MS); Congressman David L. Lewis (D-MD)

The Social Security Act was drafted by President Roosevelt's committee on economic security under Edwin E. Witte, and passed by Congress in 1935 as part of the New Deal.

The Act may be formally cited as the Social Security Act, ch. 531, 49 Stat. 620 (14 August 1935), now codified as Chapter 7 of title 42 of the United States Code, 42 U.S.C. § 301 through 42 U.S.C. § 1397jj. The Act is also known as the Old Age Pension Act. This Act provided benefits to retirees and the unemployed, and a lump sum benefit at death. Payments to current retirees were (and continue to be) financed by a payroll tax on current workers' wages, half directly as a payroll tax and half paid by the employer.

Payroll taxes were first collected in 1937, also the year in which the first benefits were paid, namely the lump sum death benefit paid to 53,236 beneficiaries.

In the 1930s the Supreme Court struck down many pieces of Roosevelt's New Deal legislation. In the spring of 1935 Justice Roberts joined with the conservatives to invalidate the Railroad Retirement Act. In May, the Court threw out a centerpiece of the New Deal, the National Industrial Recovery Act. In January 1936 a passionately split Court ruled the Agricultural Adjustment Act unconstitutional. In another case from 1936 the Court ruled New York state's minimum wage law unconstitutional. President Roosevelt responded with an attempt to Pack the Court. On February 5 1937 he sent a special message to Congress proposing legislation granting the President new powers to add additional judges to all federal courts whenever there were sitting judges age 70 or older who refused to retire. The practical effect of this proposal was that the President would get to appoint six new Justices to the Supreme Court (and 44 judges to lower federal courts) thus instantly tipping the political balance on the Court dramatically in his favor. The debate on this proposal was heated, widespread and over in six months. The Court got the message and suddenly shifted its course. Beginning with a set of decisions in March, April and May 1937 (including the Social Security Act cases) the Court would sustain a series of New Deal legislation.

Two Supreme Court rulings affirmed the constitutionality of the Social Security Act.

• Steward Machine Company vs. Davis, 301 U.S, 548(1937) held in a 5–4 decision that given the exigencies of the Great Depression: "[i]t is too late today for the argument to be heard with tolerance that in a crisis so extreme the use of the moneys of the nation to relieve the unemployed and their dependents is a use for any purpose narrower than the promotion of the general welfare..." The arguments opposed to the social security act (articulated by justices Butler, McReynolds, and Sutherland in their opinions) were that the social security act went beyond the powers that were granted to the federal government in the constitution. They argued that by imposing a tax on employers that could be avoided only by contributing to a state unemployment compensation fund, that the federal government was essentially forcing each state to establish an unemployment compensation fund that would meet its criteria, and that the federal government had no power to enact such a program.

• Helvering vs. Davis, 301 U.S. 619., decided on the same day, upheld the program because "The proceeds of both [employee and employer] taxes are to be paid into the Treasury like internal-revenue taxes generally, and are not earmarked in any way." That is, the Social Security Tax is constitutional as a mere exercise of Congress's general taxation powers.

Expansion

The original 1935 law only paid retirement benefits to the primary worker. Many types of people were excluded, primarily farm workers, the self-employed, and anyone employed by an employer of less than ten people. These exclusions, intended to exclude those from whom it would be difficult to monitor compliance, covered approximately half of the civilian labor force in the United States.

The 1935 Act also contained the first national unemployment compensation program, aid to the states for various health and welfare programs, and the Aid to Dependent Children program. The initial tax rate was 2.0% of the first $3,000 of the employee's earnings, shared equally between the employee and the employer. The tax rate has been raised in several steps over the years, beginning in 1950, when it was raised to 3.0%.

A poster for the expansion of the Social Security Act

In 1939, the 1937 Federal Insurance Contributions Act (see FICA tax) was amended in three important ways:

• The widowed, nonworking spouse of a someone entitled to an old age benefit also became entitled to an old age benefit;
• Survivors' (widows and orphans) became eligible for a benefit;
• Retirees who had never paid any FICA taxes became eligible for old age benefits. This feature was very popular with the millions of elderly Americans hard hit by the Great Depression, and fatefully decoupled eligibility for benefits from work history.

In 1956 the tax rate was raised to 4.0% (2.0% for the employer, 2.0% for the employee) and disability benefits were added. Also in 1956, women were allowed to retire at age 62 with reduced benefits (70%). In 1961, retirement at age 62 was extended to men, and the tax rate was increased to 6.0%.

Medicare was added in 1965 by the Social Security Act of 1965, part of President Lyndon B. Johnson's "Great Society" program. See List of Social Security legislation (United States). Social Security was changed to withdraw funds from the independent "Trust" and put it into the General fund for additional congressional revenue.

Automatic annual cost of living adjustments (COLAs), not requiring legislation, began in 1975 (table of past COLAs).

During the Jimmy Carter administration, immigrants who had never paid into the system became eligible for SSI (Supplemental Security Income) benefits when they reached age 65. SSI is not a Social Security benefit but welfare, because the poor elderly are entitled to SSI regardless of work history. Likewise, SSI is not an entitlement because there is no right to SSI payments.

The 1983 amendments to the SSA, resulting from the 1982 report of the Greenspan Commission empaneled to investigate the long run solvency of Social Security, taxed Social Security benefits for the first time: benefits in excess of a household income threshold, generally $25,000 for singles and $32,000 for couples (the precise formula computes and compares three different measures) became taxable. The amendments also gradually increased the age of eligibility for full old age benefits, from 65 to 67 for those born after 1959.

In 1940, benefits paid totaled $35 million. These rose to $961 million in 1950, $11.2 billion in 1960, $31.9 billion in 1970, $120.5 billion in 1980, and $247.8 billion in 1990 (all figures in current dollars, not adjusted for inflation). In 2004, $492 billion of benefits were paid to 47.5 million beneficiaries.

Changes in 1983 for fiscal stability

In the early 1980s, there was concern about the long-term prospects for Social Security because of demographic considerations, particularly what would happen when people born during the post-World War II baby boom retired. A commission chaired by Alan Greenspan made several recommendations for addressing the issue. Under the 1983 Amendments to Social Security, signed into law by President Ronald Reagan, a previously enacted increase in the payroll tax rate was accelerated, additional employees were added to the system, the full benefit retirement age was slowly increased, and up to one-half of the value of the Social Security benefit was made potentially taxable income.

As a result of these changes, the Social Security system began to generate a large surplus of funds, intended to cover the added retirement costs of the "boomers." Congress invested these surpluses into special series, non-marketable U.S. Government bonds which are held by the Social Security trust fund. Under the law, the Government bonds held by Social Security are backed by the full faith and credit of the U.S. government. Because the government had adopted the unified budgeting since the Johnson admistration, this surplus off-sets the total fiscal debt making it look much smaller.

The special series, non-marketable bonds currently held in Social Security trust fund are off-balance sheet and are excluded from the U.S. National Debt calculation. They also cannot be sold on the open market unlike traditional bonds. Due to these unique features, some have raised the specter that the bonds held in the trust fund are only "IOUs" that the government has written to itself. However, it is true that, as the Social Security and Medicare Trustees note,

Since neither the interest paid on the Treasury bonds held in the HI [Hospital Insurance] and OASDI Trust Funds, nor their redemption, provides any net new income to the Treasury, the full amount of the required Treasury payments to these trust funds must be financed by some combination of increased taxation, increased Federal borrowing and debt, or a reduction in other government expenditures. (Status of Social Security and Medicare Programs: A summary of the 2005 annual reports)

This means that, indeed, these "bonds" simply represent a promise to pay the trust fund later, whether by increasing taxes, cutting benefits, or simply borrowing more money.

While this is actually true of all bonds, normally bonds are at least funded by an immediate income from a private source, when the bond is purchased. In the case of the bonds placed in the trust fund, they are simply placed printed and arbitrarily in the trust, with no external source of money. The Federal government "buys" them from itself.

However, since the Social Security only has legal authority to pay benefits out of its current FICA contributions or accumulated trust fund, the existence of the trust fund would provide legal authority for the federal government to continue to pay benefits when current benefits exceed current FICA taxes -- until of course the trust fund completely depletes. The issue of funding or financing -- because OSADHI (including Medicare) is so massive -- cannot be segregated from the rest of the federal budget because its sheer size means that we either have no other government spending, have massive tax hikes or benefit cuts. Massive government borrowing would not work unless it comes from abroad because the net fiscal stimulus of extra domestic borrowing is offset dollar for dollar by less private domestic spending.

Current operation

Contrast with private pensions

Although Social Security is sometimes compared to private pensions, the payment of disability benefits distinguishes Social Security from most private pensions. In other ways the two systems are fundamentally different as well. A private pension fund accumulates the money paid into it, eventually using those reserves to pay pensions to the workers who contributed to the fund; and a private system is not universal. Social Security, on the other hand, is fundamentally a wealth transfer system. A private system can pre-fund because it does not try to cover everybody, so there can be net savers and net borrowers; on the other hand, any truly universal system by definition cannot save because in the aggregate, all agents' financial wealth sums to zero because every loan nets out every debt. As a universal system, Social Security operates as a pipeline, through which current tax receipts from workers are used to pay current benefits to retirees, survivors, and the disabled. Although there is a Social Security Trust Fund that holds the cumulative excess of taxes withheld over benefits paid. Unlike a private pension plan, the Social Security Trust Fund does not hold any substantial marketable assets to secure workers' paid-in contributions. Instead, it holds non-negotiable United States Treasury bonds and U.S. securities.

Two broad categories of private pension plans are "defined benefit pension plans" and "defined contribution pension plans." Of these two, Social Security is more similar to a defined benefit pension plan. In a defined benefit pension plan, the benefits ultimately received are based on some sort of pre-determined formula (such as one based on years worked and highest salary earned). Defined benefit pension plans generally do not include separate accounts for each participant. By contrast, in a defined contribution pension plan each participant has a specfic account with funds put into that account (by the employer or the participant, or both), and the ultimate benefit is based on the amount in that account at the time of retirement. Some have proposed that the Social Security system be modified to provide for the option of individual accounts (in effect, to make the system, at least in part, more like a defined contribution pension plan). Specifically, on February 2 2005, President George W. Bush made Social Security a prominent theme of his State of the Union Address. He described the Social Security system as "headed for bankruptcy", and outlined, in general terms, a proposal based on partial privatization. Critics responded that privatization would worsen the program's solvency outlook and would require huge new borrowing. See Social Security debate (United States).

Private pensions are governed by the Employee Retirement Income Security Act, which requires minimum levels of funding. The purpose is to protect the workers from corporate mismanagement and outright bankruptcy. In terms of financial structure, Social Security would be analogous to an underfunded pension ("underfunded" meaning not that it is in trouble, but that its "savings" are not enough to pay future benefits without collecting future tax revenues).

For solvency, Social Security relies on its tax revenues and broad base of public support. Since millions of retirees have paid into the system during their working lives, it would be politically difficult for Congress to allow it to fail.

Social Security tax on wages and self-employment income

Benefits are funded by taxes imposed on wages of employees and self-employed persons. As explained below, in the case of employment, the employer and employee are each responsible for one half of the Social Security tax, with the employee's half being withheld from the employee's pay check. In the case of self-employed persons (i.e., independent contractors), the self-employed person is responsible for the entire amount of Social Security tax.

The Federal Insurance Contributions Act (FICA) (codified in the Internal Revenue Code) imposes a withholding Social Security tax equal to 6.20% of the gross wage amount, up to but not exceeding the Social Security Wage Base ($94,200 for the year 2006). For the year 2005, the SSWB was exactly $90,000. The same 6.20% tax is imposed on employers. For calendar each year for which the worker is assessed the FICA contribution, the SSA credits those wages as that year's covered wages. The income cutoff is adjusted yearly for inflation and other factors.

For self-employed workers (who technically are not employees and are deemed not to be earning "wages" for Federal tax purposes), the self employment tax, imposed by the Self-Employment Contributions Act of 1954, codified as Chapter 2 of Subtitle A of the Internal Revenue Code, 26 U.S.C. § 1401 through 26 U.S.C. § 1403, is 12.4% of "net earnings from self-employment" (see 26 U.S.C. § 1402).

If an employee has excess taxes withheld from his pay (due to multiple jobs having been held by the employee during a single calendar year), the employee can apply for a refund of the excess on Form 1040. The excess taxes paid by employers, however, are not refundable to the employers.

A separate payroll tax of 1.45% of an employee's income paid directly by the employer, and an additional 1.45% deducted from the employee's paycheck, yielding an effective rate of 2.9%, funds the Medicare program. This program is primarily responsible for providing health benefits to retirees.

The combined tax rate of these two federal programs is 15.3%.

Social Security Trust Fund

Social Security taxes are paid into the Social Security Trust Fund maintained by the U.S. Treasury. Current year expenses are paid from current Social Security tax revenues. When revenues exceed expenditures, as they have in most years, the excess is invested in special series, non-marketable U.S. Government bonds, thus the Social Security Trust fund indirectly finances the federal government's general purpose deficit spending. At the end of 2004, the cumulative excess of Social Security taxes and interest received over benefits paid out stood at $1.7 trillion.

Social Security number

A side effect of the Social Security program in the United States has been the near-universal adaptation of the program's identification number, the Social Security number, as the national identification number in the United States. The social security number, or SSN, is issued pursuant to section 205(c)(2) of the Social Security Act, codified as 42 U.S.C. § 405(c)(2). A multitude of U.S. entities use the Social Security number as a personal identifier. These include government agencies such as the Internal Revenue Service, as well as private agencies such as banks, creditors, health insurance companies, and employers.

The Privacy Act of 1974 was in part intended to limit usage of the Social Security number as a means of identification. Paragraph (1) of subsection (a) of section 7 of the Privacy Act, an uncodified provision, states in part:

(1) It shall be unlawful for any Federal, State or local government agency to deny to any individual any right, benefit, or privilege provided by law because of such individual's refusal to disclose his social security account number.

However, paragraph (2) of subsection (a) of section 7 of the Privacy Act provides in part:

(2) the provisions of paragraph (1) of this subsection shall not apply with respect to -

(A) any disclosure which is required by Federal statute, or

(B) the disclosure of a social security number to any Federal, State, or local agency maintaining a system of records in existence and operating before January 1 1975, if such disclosure was required under statute or regulation adopted prior to such date to verify the identity of an individual.

Privacy Act of 1974, Pub. L. No. 93-579, 88 Stat. 1897 (31 December 1974), sec. 7(a) (emphasis added).

The exceptions under section 7 of the Privacy Act include the Internal Revenue Code requirement that social security numbers be used as taxpayer identification numbers for individuals.

Opting out of Social Security

There is no legal requirement for individuals to join the Social Security program, however, once joined there is no general provision for individuals to opt out of or quit the program. There are some specific groups which are not required to pay into the Social Security program (discussed below). Internal Revenue Code Provisions section 3101 imposes payroll taxes on individuals and employer matching taxes. Section 3102 mandates that employers deduct these payroll taxes from workers' wages before they are paid. Generally, the payroll tax is mandatory on everyone in employment earning "wages" as defined in 3121 of the Internal Revenue Code, and also taxes net earnings from self-employment.

Groups not covered by Social Security

There are a number of groups of workers who are exempted from having to pay Social Security taxes:

• Federal employees hired before 1984 who elected to continue to participate in the federal retirement program instead of receiving part of their retirement under Social Security coverage.
• State, or local government workers participating in their employers' alternative retirement system.
• Ministers may choose whether or not they will participate in the Social Security program.
• Self-employed workers with annual net earnings below $400.
• Election workers earning $1,000 or less a year.
• Household workers earning less than $1,500 per year.
• Minor children with earnings from household work but for whom household work is not their principal occupation.
• Most college students working at their school.
• Individuals who are members of certain religious groups such as the Amish and Mennonites.
• Some primary and secondary school educators have their own pension and disability insurance system that predates Social Security. They are allowed to pay in to their own system instead of the government system. Partly because these funds can be invested in securities, teachers' pension plans tend to be fairly generous.

Before the 1983 changes, three counties in Texas (Galveston, Brazoria, and Matagorda) opted out of the system and now use an Alternate Plan, a private pension plan created and administered by First Financial Benefits, Inc.

In 1983, the U.S. Congress also closed a loophole in the original Social Security Act that allowed municipal governments to opt out of the Social Security system, and also brought all civilian federal employees whose employment began in 1984 or later part under the system.

Double dipping

Because the PIA formula is heavily biased in favor of those covered workers with low AIMEs, there is a reduction for employees who have spent much of their earning career outside the system and only enter covered status for the minimum 10 years (or thereabouts). This factor grades out at 30 years so that there is no factor. This is to prevent those with abnormally low AIMEs due to few years of covered status from being treated as lifetime (say 44 years) career low wage earners with low AIMEs.

International agreements

In today's global environment people often relocate from one country to another, either permanently or on limited time basis. This presents challenges to businesses, governments and individuals seeking to ensure future benefits or having to deal with taxation authorities in multiple countries. To that end, the Social Security Administration has signed treaties, often referred to as Totalization Agreements with other social insurance programs in various foreign countries.

Overall, these agreements serve two main purposes. First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings. Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country.

The following countries have signed totalization agreements with the SSA (and the date the agreement became effective):

• Italy (November 1 1978)
• Germany (December 1 1979)
• Switzerland (November 1 1980)
• Belgium (July 1 1984)
• Norway (July 1 1984)
• Canada (August 1 1984)
• United Kingdom (January 1 1985)
• Sweden (January 1 1987)
• Spain (April 1 1988)
• France (July 1 1988)
• Portugal (August 1 1989)
• Netherlands (November 1 1990)
• Austria (November 1 1991)
• Finland (November 1 1992)
• Ireland (September 1 1993)
• Luxembourg (November 1 1993)
• Greece (September 1 1994)
• South Korea (April 1 2001)
• Chile (December 1 2001)
• Australia (October 1 2002)
• Japan (October 1 2005)

Restrictions on potentially deceptive communications

Because of the importance of Social Security to millions of Americans, many direct-mail marketers packaged their mailings to resemble official communications from the Social Security Administration, hoping that recipients would be more likely to open them. In response, Congress amended the Social Security Act in 1988 to prohibit the private use of the phrase "Social Security" and several related terms in any way that would convey a false impression of approval from the Social Security Administration. The constitutionality of this law (42 U.S.C. § 1140) was upheld in United Seniors Association, Inc. v. Social Security Administration, ___ F.3d ___ (4th Cir. 2005) (text at Findlaw ). (Cert. denied US Supreme Court, May 30 2006).

OHA and ODAR

"The Office of Hearings and Appeals (OHA) administers the hearings and appeals program for the Social Security Administration (SSA). Administrative Law Judges (ALJs) conduct hearings and issue decisions. The Appeals Council considers appeals from hearing decisions, and acts as the final level of administrative review for the Social Security Administration." [1]

In 2006, OHA was renamed to ODAR. On April 3 2006, Commissioner Jo Anne B. Barnhart distributed the following message throughout the SSA "I am pleased to announce the establishment of the new Office of Disability Adjudication and Review. The current Office of Hearings and Appeals will move from the Office of Disability and Income Security Programs to form the nucleus of this new organization." [2]

Demographic and revenue projections

In each year since 1982, OASDI tax receipts, interest payments and other income have exceeded benefit payments and other expenditures, most recently (in 2004) by more than $150 billion. As the "baby boomers" move out of the work force and into retirement, however, it is anticipated that expenses will come to exceed Social Security tax revenues if there are no changes in current law concerning taxes, benefits, and the retirement age.

According to most projections, the Social Security trust fund will begin drawing on its Treasury Notes toward the end of the next decade (around 2018 or 2019), at which time the repayment of these notes will have to be financed from the general fund. At some time thereafter, variously estimated as 2041 (by the Social Security Administration) or 2052 (by the Congressional Budget Office), the Social Security Trust Fund will have exhausted the claim on general revenues that had been built up during the years of surplus. At that point, current Social Security tax receipts would be sufficient to fund 74 or 78% of the promised benefits, according to the two respective projections.

The Social Security Administration projects that the demographic situation will stabilize. The cash flow deficit in the Social Security system will have levelled off as a share of the economy. This projection has come into question. Some demographers argue that life expectancy will improve more than projected by the Social Security Trustees, a development that would make solvency worse. Some economists believe future productivity growth will be higher than the current projections by the Social Security Trustees. In this case, the Social Security shortfall would be smaller than currently projected.

Tables published by the government's National Center for Health Statistics show that life expectancy at birth was 47.3 years in 1900, rose to 68.2 by 1950 and reached 77.3 in 2002. The latest annual report of the Social Security trustees projects that life expectancy will increase just six years in the next seven decades, to 83 in 2075. A separate set of projections, by the Census Bureau, shows more rapid growth.

("Social Security Underestimates Future Life Spans, Critics Say") The Census Bureau projection is that the longer life spans projected for 2075 by the Social Security Administration will be reached in 2050. Other experts, however, think that the past gains in life expectancy cannot be repeated, and add that the adverse effect on the system's finances may be partly offset if health improvements induce people to stay in the workforce longer.

Actuarial science, of the kind used to project the future solvency of social security, is by nature inexact. The SSA actually makes three predictions: optimistic, midline, and pessimistic. The social security crisis that was developing prior to the 1983 reforms resulted from midline projections that turned out to be too optimistic. During the heavy-boom years of the '90s, the midline projections were too pessimistic. Obviously, projecting out 75 years is a significant challenge and, as such, all predictions must be taken with a grain of salt. The actual situation might be much better or much worse than predicted.

Increased spending for Social Security will occur at the same time as increases in Medicare, as a result of the aging of the baby boomers. One projection illustrates the relationship between the two programs:

From 2004 to 2030, the combined spending on Social Security and Medicare is expected to rise from 7% of national income (gross domestic product) to 13%. Two-thirds of the increase occurs in Medicare.

Fraud

Social security number fraud

Because Social Security Numbers have become useful in identity theft and other forms of crime, various schemes have been perpetrated to acquire valid Social Security Numbers and related idenity information.

In February 2006, the Social Security Administration received several reports of an email message being circulated addressed to “Dear Social Security Number And Card owner” and purporting to be from the Social Security Administration. The message informs the reader “that someone illegally is using your Social Security number and assuming your identity” and directs the reader to a website designed to look like Social Security’s Internet website.

“I am outraged that someone would target an unsuspecting public in this manner,” said Commissioner Jo Anne B. Barnhart. “I have asked the Inspector General to use all the resources at his command to find and prosecute whoever is perpetrating this fraud.” See Press Release.

Once directed to the phony website, the individual is reportedly asked to confirm his or her identity with “Social Security and bank information.” Specific information about the individual’s credit card number, expiration date and PIN is then requested. “Whether on our online website or by phone, Social Security will never ask you for your credit card information or your PIN” Commissioner Jo Anne B. Barnhart reported.

Social Security Administration Inspector General O’Carroll recommended people always take precautions when giving out personal information. “You should never provide your Social Security number or other personal information over the Internet or by telephone unless you are extremely confident of the source to whom you are providing the information,” O’Carroll said. See Press Release.

Fraud in the acquisition and use of benefits

Given the vast size of the program, fraud occurs. The Social Security Administration has its own investigatory group, Continuing Disability Investigations (CDI). In addition, the Social Security Administration may request investigatory assistance from other federal law enforcement agencies including the Office of the Inspector General and the FBI.

See also

• 401k
• Government operations
• Health savings account
• Individual retirement account
• Ownership society
• Social Security Administration
• Jo Anne B. Barnhart Commissioner Social Security Administration
• NOSSCR National Organization of Social Security Claimants' Representatives
• Social security disability

Articles

• Community of Minds : Working Together - The $44 Trillion Abyss - 2003 Fortune Magazine
• Social Security Suicide - AlterNet
• "The Fake Crisis"- Rolling Stone
• "What Does Price Indexing Mean for Social Security Benefits?"- from Center for Retirement Research, January, 2005 (explanation of wage indexing versus price indexing)
• Getting a grip on Social Security: The flaw in the system
• Center for American Progress: Social Security by the Numbers (reference guide with stats)
• "An ownership society evolves: who says individualized accounts are a better way to solve social problems? The laws of nature"by William Tucker (relates self-organization theory to Social Security)

Speeches

• President George W. Bush - State of the Union Address - February 2 2005
  • "Bush's State of the Union: Social Security 'Bankruptcy?'"- FactCheck.org commentary on the speech
• FRB:Testimony, Greenspan--Economic outlook and current fiscal issues--February 25 2004

Further reading

• Social Security Disability Advocate's Handbook, James Publishing, 2005, ISBN 1580120334
• Social Security Handbook, Germania Publishing, 2006.

External links

• Social Security Administration
• US Government Accountability Office, Social Security Reform: Answers to Key Questions
• Congressional Budget Office: Social Security Primer
• Read Congressional Research Service (CRS) Reports regarding Social Security
• Social Security Death Index Information
• More Death Index Information
• Commission to Strengthen Social Security
• Social Security Online - Trust Fund Data - Investment data form - Investment Holdings
• Role of Social Security
• Social Security Information Project
• Social Security benefit calculators
  • Alternative benefit calculator - from Senator Charles Schumer
  • Alternative benefit calculator - from the Cato Institute
• NBER paper, Internal Rate of Return coauthored by Olivia Mitchell, member of President's Commission
• Social Security Advisory Board
• Social Security Disability Advocacy, Debate, and Professional News
• Social Security Disability in North Carolina
• Office of Hearings and Appeals
• Health Hippo: Evaluations of Social Security Disability
• Rate of Return
• More Rate of Return
• Social Security Q & A by economist Doug Orr from Dollars & Sense
• Social Security at Wikia