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Social Security - Old Age, Survivors, And Disability Insurance

benefits worker retirement amount

Federal Old Age, Survivors, and Disability Insurance (OASDI) benefits are monthly payments made to retired people, to families whose wage earner has died, and to workers who are unemployed because of sickness or accident. Workers qualify for such protection by having been employed for the mandatory minimum amount of time and by having made contributions to Social Security. There is no financial need requirement to be satisfied. Once a worker qualifies for protection, his family is also entitled to protection. The entire program is geared toward helping families as a matter of social policy.

Two large funds of money are held in trust to pay benefits earned by people under OASDI: the Old Age and Survivors Trust Fund and the Disability Insurance Trust Fund. As workers and employers make payroll contributions to these funds, money is paid out in benefits to people currently qualified to receive monthly checks.

The OASDI program is funded by payroll taxes levied on employees and their employers and on the self-employed. The tax is imposed upon the employee's taxable income, up to a maximum taxable amount, with the employer contributing an equal amount. The self-employed person contributes twice the amount levied on an employee. In 2003 the rate was 6.2 percent, levied on earned income up to a maximum of $87,000.

Old Age Benefits A person becomes eligible for Social Security old age benefits by working a minimum number of calendar quarters. The number of quarters required for full insurance increases with the worker's age. Forty quarters is the maximum requirement. The individual is credited for income up to the maximum amount of money covered by Social Security for those years. This amount is adjusted to reflect the impact of inflation on normal earnings and ensure that a worker who pays increasing Social Security contributions during his or her work life will receive retirement benefits that keep pace with inflation.

Persons born before 1950 can retire at age 65 with full benefits based on their average income during their working years. For those born between 1950 and 1960, the retirement age for full benefits has increased to age 66. Persons born in 1960 or later will not receive full retirement benefits until age 67. Any person, however, may retire at age 62 and receive less than full benefits. At age 65, a worker's spouse who has not contributed to Social Security receives 50 percent of the amount paid to the worker.

The First Payments of Social Security

After the enactment of the Social Security Act of 1935 (42 U.S.C.A. § 301 et seq.) and the creation of the Social Security Administration (SSA), the federal government had a short time to establish the program before beginning to pay benefits. Monthly benefits were to begin in 1940. The period from 1937 to 1940 was to be used both to build up the trust funds and to provide a minimum period for participation for persons to qualify for monthly benefits.

From 1937 until 1940, however, Social Security paid benefits in the form of a single, lump-sum payment. The purpose of these one-time payments was to provide some compensation to people who contributed to the program but would not participate long enough to be vested for monthly benefits.

The first applicant for a lump-sum benefit was Ernest Ackerman, a Cleveland motorman who retired one day after the Social Security Program began. During his one day of participation in the program, five cents was withheld from Ackerman's pay for Social Security, and upon retiring, he received a lump-sum payment of seventeen cents.

Payments of monthly benefits began in January 1940. On January 31, 1940, the first monthly retirement check was issued to Ida May Fuller of Ludlow, Vermont, in the amount of $22.54. Fuller died in January 1975 at the age of one hundred. During her thirty-five years as a beneficiary, she received more than $20,000 in benefits.

Since 1975 Social Security benefits have increased annually to offset the corrosive effects of inflation on fixed incomes. These increases, known as cost of living allowances (COLAs), are based on the annual increase in consumer prices. Allowing benefits to increase automatically ended the need for special acts of Congress, but it has also steadily increased the cost of the Social Security Program.

A person who continues to work past the retirement age may lose some benefits because Social Security is designed to replace lost earnings. If earnings from employment do not exceed the amount specified by law, the person receives the full benefits. If earnings are greater than that amount, one dollar of benefit is withheld for every two dollars in wages earned above the exempt amount. Once a person reaches age 70, however, he does not have to report earnings to the SSA, and the benefit is not reduced.

THE FUTURE OF SOCIAL SECURITY

The payment of OLD-AGE, SURVIVORS, AND DISABILITY INSURANCE (OASDI) benefits has been a cornerstone of U.S. social welfare policy since the establishment of the SOCIAL SECURITY ADMINISTRATION in 1935. At the same time, the long-term financial stability of OASDI has been a constant worry. In the early years of the twenty-first century, concerns about Social Security mounted as policy makers assessed the impact of the retirement of the "Baby Boom" generation. Many younger people raised the issue of "generation equity." They express doubt that Social Security benefits will be available when they retire, and anger that they will be forced to pay, through payroll taxes, for the baby boomers' retirement benefits.

Reform of the Social Security system has always been a political hot potato. Retirees and those approaching retirement form a strong LOBBYING force, and they zealously protect their benefits. Employers and employees are equally vocal in their opposition to higher payroll taxes to fund OASDI. Thus, changes in Social Security required bipartisan support, which materialized in the face of an impending Social Security crisis. The 1982–83 National Commission on Social Security Reform successfully secured from Congress the short-term financing of OASDI. As a result, Congress passed a series of laws meant to accumulate surpluses as a hedge against future burdens. The Social Security surplus is the amount by which revenue from the federal payroll tax exceeds the amount of Social Security benefits paid out.

Shortly after these new laws went into effect, Social Security began running a surplus. Surplus Social Security revenue can be used to fund other government programs and to help retire the national debt. During the favorable economic climate of the late 1990s, Congress began to use the surplus to pay down the federal debt, hoping to better position the government to meet its obligations to future retirees. And, in 2000, the federal government generated enough revenue so that the entire Social Security surplus was available for paying off debt.

The state of Social Security became a major campaign issue in the 2000 elections, with both Republicans and Democrats attempting to appear as though they were guardians of Social Security assets. Candidates from both parties promised to create a "lockbox," meaning that the Social Security surplus would be spent entirely on debt retirement. With the advent of fiscally lean years in the early 2000s, the lockbox approach was largely disregarded by politicians who advanced other ideas about what to do with Social Security surpluses. These ideas included using the surplus to help offset decreases in revenues brought about by tax cuts and using the surplus to fund new or expanded spending initiatives.

Analysts argue that the real issue often is clouded. It is not how to spend the surplus now, but how to maintain the long-term solvency of the Social Security trust fund. Planners estimate that the income from the trust fund will exceed expenses each year until 2020. The trust fund balances will then start to decline as investments are redeemed to meet the increased expenses from a swelling retired workforce. Although it is estimated that 75 percent of the costs would continue to be met from current payroll and income taxes, in the absence of any changes, full benefits could not be paid beginning in 2030.

In its 1996 report, the Social Security Administration's Advisory Council looked at various long-term financing options for OASDI. The council could not reach consensus on a specific long-term plan, but it did suggest several types of financing that represent a marked departure from previous efforts to fund Social Security. The council noted that past efforts have generally featured cutting benefits and raising tax rates on a "pay-as-you-go" basis. The council agreed that this approach must be changed and offered three ways of restoring financial solvency.

One approach, called Maintenance of Benefits (MB), calls for an increase in income taxes on OASDI benefits, a redirection of some revenue from other trust funds, and, most importantly, the adoption of a plan allowing the federal government to invest a portion of the trust fund assets directly in common stocks. Rates of returns on stocks have historically exceeded those on federal government bonds, where all Social Security funds are now invested. If the returns were to continue, the MB plan would maintain Social Security benefits for all income groups of workers and reassure younger workers that they will get their money's worth when they retire.

A second approach, labeled the Individual Accounts (IA) plan, would create individual accounts that would work alongside Social Security. The IA plan would increase the income taxation of benefits, accelerate the scheduled increase in retirement age, reduce the growth of future benefits to middle- and upper-income workers, and increase employees' mandatory contributions to Social Security by 1.6 percent. This increase would be allocated to individual investment accounts held by the government and controlled by the worker, but with a limited set of investment options available. It is estimated that the combined income from both funds would yield essentially the same benefits as promised under the current system for all groups.

A third approach, labeled the Personal Security Accounts (PSA) plan, would create larger, fully funded individual accounts that would replace a portion of Social Security. Under this plan, five percent of an individual's current payroll tax would be invested in his PSA, which he then could use to invest in a range of financial instruments. The rest of his payroll tax would be used to fund a modified OASDI program. It would provide a flat dollar amount (the equivalent of $410 monthly in 1996), in addition to the proceeds of the individual's PSA. This approach would also change the taxation of benefits and move eligibility for early retirement benefits from age 62 to 65. The combination of the flat benefit payment and the income from the PSA would exceed, on average, the benefits promised under the current system.

In 2001, the concept of individual accounts was once again proposed, this time by the GEORGE W. BUSH administration's Commission to Strengthen Social Security (CSSS). The CSSS introduced the idea of Social Security individual accounts, also called Personal Retirement Accounts (PRAs). PRAs would earn a market return over the workers' lives and replace some of the retirement benefits promised by Social Security. These plans are also known as "carve-outs" because they carve out or redirect some portion of a worker's 12.4 percent Social Security payroll tax into a personal retirement account that can be invested in stocks and bonds. The accounts would be owned and presumably managed by individual workers.

Any type of personal retirement account privatizes a portion of Social Security, which means a significant shift in the way Social Security is funded. Proponents claim that they will generate more advance funding for Social Security's long-term obligations. They would also result in a higher level of national saving for retirement. In addition, advocates point to the fact that individuals gain more control over their future because they are allowed to invest as much or as little in Social Security plans and private retirement plans as they choose.

The PRA system, however, raises several concerns:

  • Would the government be permitted to manipulate the STOCK MARKET or make politically motivated investment decisions with PRA funds?
  • Would inexperienced investors make poor investment choices and be left to suffer the consequences?
  • Would a precipitous stock market decline cause workers to lose their retirement funds?

According to the CSSS, the answer to all these questions is "no." Under the current system, retirees receive only a one to two percent return on government bond investments. Even under the worst stock market conditions, an individual historically has been guaranteed a lifetime real return (based on 63 years) of 6.3 percent. The CSSS also promises that all retirees will be paid out a guaranteed minimal "safety net," regardless of stock market performance.

The debate on both sides continues, and will not likely be resolved until legislation is passed by Congress that would allow PRAs. One thing remains clear, however, some type of reform has to be enacted to protect a system that is predicted to evaporate in the coming years.

FURTHER READINGS

Benavie, Arthur. 2003. Social Security Under the Gun: What Every Informed Citizen Needs to Know About Pension Reform. New York: Palgrave Macmillan.

Friedman, Sheldon, and David C. Jacobs, eds. 2001. The Future of the Safety Net: Social Insurance and Employee Benefits. Champaign, Ill.: Industrial Relations Research Association.

President's Commission to Strengthen Social Security. 2001. Strengthening Social Security and Creating Personal Wealth for All Americans: Commission Report. Washington, D.C.: CSSS.

Survivors' Benefits Survivors' benefits are paid to family members when a worker dies. Survivors can receive benefits if the deceased worker was employed and contributed to Social Security long enough for someone his or her age to qualify for Social Security.

Both mothers and fathers earn protection for their families by working and contributing to Social Security. If a wage earner dies, his unmarried children are entitled to receive benefits. If the child of a wage earner becomes permanently disabled before age 22, he or she can continue to receive survivors' benefits at any age unless she becomes self-supporting or marries.

Survivors' benefits can also go to a surviving spouse when the worker dies. A surviving spouse who retires can begin collecting survivors' benefits as early as age 60. If a worker dies leaving a divorced spouse who was married to the worker for at least ten years, the ex-spouse

can receive survivors' benefits at age 60 if she retires. In addition to monthly checks, the worker's widow or widower, or if there is none, another eligible person, may receive a lump-sum payment of $255 on the worker's death.

Disability Benefits In the 1970s, the SSA became responsible for a new program, Supplemental Security Income (SSI). The original 1935 Social Security Act had included programs for needy aged and blind individuals, and in 1950 programs for needy disabled individuals were added. These three programs were known as the "adult categories" and were administered by state and local governments with partial federal funding. Over the years the state programs became more complex and inconsistent until as many as 1,350 administrative agencies were involved and payments varied more than 300 percent from state to state. In 1969 President RICHARD M. NIXON identified a need to reform these and related welfare programs. In 1972 Congress federalized the "adult categories" by creating the SSI program and assigned responsibility for it to the SSA.

A person who becomes unable to work and expects to be disabled for at least 12 months or who will probably die from the condition can receive SSI payments before reaching retirement age. Workers are eligible for disability benefits if they have worked enough years under Social Security prior to the onset of the disability. The amount of work credit needed depends on the worker's age at the time of the disability. That time can be as little as one and one-half years of work in the three years before the onset of the disability for a worker under 24 years of age, but it is never more than a total of ten years.

A waiting period of five months after the onset of the disability is imposed before SSI payments begin. A disabled worker who fails to apply for benefits when eligible can sometimes collect back payments. No more than 12 months of back payments may be collected, however. Even if workers recover from a disability that lasted more than 12 months, they can apply for back benefits within 14 months of recovery. If workers die after a long period of disability without having applied for SSI, their family may apply for disability benefits within three months of the date of the worker's death. The family members are also eligible for survivors' benefits.

A disability is any physical or mental condition that prevents the worker from doing substantial work. Examples of disabilities that meet the Social Security criteria include brain damage, heart disease, kidney failure, severe arthritis, and serious mental illness.

The SSA uses a sequential evaluation process to decide whether a person's disability is serious enough to justify the awarding of benefits. If the impairment is so severe that it significantly affects "basic work activity," the worker's medical data are compared with a set of guidelines known as the Listing of Impairments. A claimant found to suffer from a condition in this listing will receive benefits. If the condition is less severe, the SSA determines whether the impairment prevents the worker from doing his former work. If not, the application will be denied. If so, the SSA proceeds to the final step, determining whether the impairment prevents the applicant from doing other work available in the economy.

At this point, the SSA uses a series of medical-vocational guidelines that consider the applicant's residual functional capacity as well as his age, education, and experience. The guidelines look at three types of work: one type is for persons whose residual physical capacity enables them to perform only "sedentary" work on a sustained basis, another for those able to do "light" work, and a third for those able to do "medium" work.

If the SSA determines that an applicant can perform one of these types of work, benefits will be denied. A claimant may appeal this decision and ask for a hearing in which to present further evidence, including personal testimony. If the recommendation of the ADMINISTRATIVE LAW judge conducting the hearing is adverse, the claimant may appeal to the SSA Appeals Council. If the claimant loses his appeal, he may file a civil action in federal district court seeking review of the agency's adverse determination.

Persons who meet the OASDI disability eligibility requirements may receive three types of benefits: monthly cash payments, vocational rehabilitation, and medical insurance. Provided proper application has been made, cash payments begin with the sixth month of disability. The amount of the monthly payment depends upon the amount of earnings on which the worker has paid Social Security taxes and the number of his eligible dependents. The maximum for a family is usually roughly equal to the amount to which the disabled worker is entitled as an individual plus allowances for two dependents.

Vocational rehabilitation services are provided through a joint federal-state program. A person receiving cash payments for disability may continue to receive them for a limited time after beginning to work at or near the end of a program of vocational rehabilitation. Called the "trial work period," this period may last as long as nine months.

Medical services are available through the Medicare Program (a federally sponsored program of hospital and medical insurance). A recipient of OASDI disability benefits begins to participate in Medicare 25 months after the onset of disability.

In 1980 Congress made many changes in the disability program. Most of these changes focused on various work incentive provisions for both Social Security and SSI disability benefits. The SSA was directed to review current disability beneficiaries periodically to certify their continuing eligibility. This produced a massive workload for the SSA and one that was highly controversial, as persons with apparently legitimate disabilities were removed from SSI. By 1983 the reviews had been halted.

The Contract with America Advancement Act of 1996 (Pub. L. No. 104-121) changed the basic philosophy of the disability program. New applicants for Social Security or SSI disability benefits are no longer eligible for benefits if drug addiction or alcoholism is a material factor in their disability. Unless they can qualify on some other medical basis, they cannot receive disability benefits. Individuals in this category already receiving benefits had their benefits terminated as of January 1, 1997.

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (Pub. L. No. 104-193), which concerns welfare reform, terminated SSI eligibility for most noncitizens. Previously, lawfully admitted ALIENS could receive SSI if they met the other requirements. All existing noncitizen beneficiaries were to be removed from the rolls unless they met one of the exceptions in the law.

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