Social Security Overview

Social Security Introduction

President Franklin Roosevelt signed the Social Security Act into law on August 14, 1935, considering it to be the cornerstone of his presidency. He believed the program would eliminate the blight of poverty from the lives of elderly Americans. This program, popularly referred to as “Social Security”, is the largest and most important income maintenance program in the United States.

The technical name for the Social Security program is Old-Age, Survivors and Disability Insurance (OASDI). It provides monthly benefits to retired and disabled workers, as well as their survivors and dependents.

The original purpose of the OASDI program was to partially replace income lost due either to retirement in old age or disability that prevented gainful employment. This remains the primary purpose of the program, although for some beneficiaries it is their sole source of income.

Social Security benefits are considered an entitlement earned by individuals based on taxes they paid during their working years. Others may be entitled to benefits because of a relationship to a worker who made contributions on their behalf.

Taxes collected for OASDI are put into trust funds created to receive income and disburse benefits. There are separate funds for OASI (Old-Age and Survivors Insurance) and DI (Disability Insurance). According to the law, funds in these trusts can be used only for the following purposes:

  • Monthly benefits when a worker retires, dies, or becomes disabled
  • Lump-sum death benefits to survivors
  • Vocational rehabilitation services for disabled beneficiaries
  • Administrative expenses

The trust funds are allowed to invest their assets securities issued or guaranteed by the federal government and retain any additional income from these investments. According to the Social Security Administration (SSA), less than 1 percent of every Social Security tax dollar is spent on administrative costs.

Many people thinking that the Social Security taxes they pay are held in interest-bearing accounts earmarked for their own future retirement need. The fact is that Social Security is a pay-as-you-go retirement system - the Social Security taxes paid by today’s workers and their employers are used to pay the benefits for today’s retirees and other beneficiaries.

The main reason for Social Security’s long-range financing problem is demographics. We are living longer and healthier lives than ever before. When the Social Security program was created in 1935, a 65-year-old American had an average life expectancy of about 12 ½ more years; today, it is 18 years and rising.

IN addition, more than 80 million “baby boomers” started retiring in 2008 and in about 30 years, there will be twice as many older Americans as there are today. At the same time, the number of workers paying into Social Security per beneficiary will drop from 3.3 today to about 2.1 in 2034. These demographic changes will severely strain Social Security financing.

Social Security is now taking in more money than it pays out in benefits, and the remaining money goes to the program’s trust funds. There are now large “reserves” in the trust funds, but even this money is small compared to future scheduled benefit payments. In 2017 benefits owed will be more than taxes collected, and Social Security will need to begin tapping the trust funds to pay benefits. The trust funds will be exhausted in 2041. At that time, Social Security will not be able to meet all of its benefit obligations if no changes are made.

Impact of Social Security on the Income of Seniors

Social Security is the major source of income for mos seniors. According to the Social Security Administration:

  • Nine out of ten seniors receive Social Security benefits.
  • Social Security benefits represent an overall average of 37 percent of the income of seniors.
  • About two-thirds of senior beneficiaries receive 50 percent or more of their income from Social Security.
  • Social Security is 90 percent or more of total income for approximately one-third of seniors.

Social Security also raises more than one in every three elderly Americans out of poverty.

Taxation of Social Security Benefits

A portion of Social Security benefits are taxable for individuals whose income exceeds established limits. Taxation occurs in two tiers of 50 and 85 percent.

Representative Payees

A representative payeeis an individual or organization that receives Social Security or SSI payments for an individual who cannot manage or direct someone else to manage his or her money. The representative payee is responsible for using the funds to pay for the current and foreseeable needs of the beneficiary. With certain exceptions, a representative payee is not paid for services. There are two kinds of representative payees:

  • An individual representative payee could be someone that a beneficiary lives with or a family member or friend who does not live with the beneficiary. It could also be a lawyer, a legal guardian, or a volunteer for a government or nonprofit agency.
  • Organizational representative payees would include social service agencies, institutions, or an official of a state or local government agency or a financial organization. Some organizational payees, called fee-for-service payees, are permitted to charge the beneficiary a fee for their services. The payee must file a request and be approved before they can collect a fee.

The information above is reprinted from Working with Seniors: Health, Financial and Social Issues with permission from Society of Certified Senior Advisors® . Copyright © 2009. All rights reserved.