Social Security is a federal program in the United States that provides retirement, disability, and survivor benefits to eligible individuals, funded through payroll taxes collected under the Federal Insurance Contributions Act (FICA). It aims to provide financial security for retirees, disabled individuals, and families of deceased workers.
How Social Security works
Social Security is a federal program administered by the Social Security Administration (SSA) that provides financial and health care benefits to Americans, including retirees, disabled individuals, and survivors of deceased workers. Funded through payroll taxes collected under the Federal Insurance Contributions Act (FICA), Social Security aims to ensure economic security for millions of people across America.
The program operates through two main trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. These trust funds are managed by the Commissioner of Social Security, who oversees the collection (primarily through payroll taxes) and distribution of funds.
Each year, the Trustees of the Social Security trust funds release a Trustees Report, which provides an assessment of the program's financial health. This report helps guide policy decisions and ensures transparency regarding the sustainability of Social Security.
In addition to providing retirement and disability benefits, Social Security also plays a crucial role in Medicare, the United States government’s health insurance program for people aged 65 and older and certain younger individuals with disabilities. Medicare is partially funded by a portion of the payroll taxes collected for Social Security.
The history of Social Security
The Social Security program, formally known as Old-Age, Survivors, and Disability Insurance (OASDI), was established in 1935 as part of President Franklin D. Roosevelt's New Deal. The program was designed to provide financial support to retirees, the disabled, and survivors of deceased workers. Over the years, Social Security has evolved, expanding its coverage and benefits to better serve the American population.
Initially, Social Security focused on providing retirement benefits to workers aged 65 and older. In 1939, the program was expanded to include benefits for the spouses and minor children of retired workers, as well as survivors of deceased workers. The Disability Insurance (DI) component was added in 1956, providing benefits to workers who become disabled before reaching retirement age.
The Social Security program has undergone numerous amendments and adjustments to address changing demographics and economic conditions. Key milestones include the introduction of cost-of-living adjustments (COLAs) in 1972 to help benefits keep pace with inflation and the gradual increase in the full retirement age to 67 for those born in 1960 or later.
The future of Social Security
The future of Social Security is a topic of ongoing debate and concern. As the American population ages and the ratio of workers to beneficiaries decreases, the program faces financial challenges. According to the annual Trustees Report, the Social Security trust funds are projected to be depleted by 2034, at which point incoming tax revenue would cover only about 78% of scheduled benefits.
To ensure the solvency of Social Security, Congress will need to take action. Potential solutions include increasing payroll taxes, raising the wage base limit, adjusting benefit formulas, or changing the full retirement age. Each of these options has implications for beneficiaries and taxpayers.
Despite these challenges, Social Security remains a cornerstone of financial security for millions of Americans. Ensuring its sustainability for future generations will require careful consideration and bipartisan cooperation.
Social Security cards
A Social Security number (SSN) is a unique nine-digit identification number issued by the Social Security Administration (SSA) to US citizens, permanent residents, and temporary (working) residents. This number is used to track individuals for Social Security purposes and is essential for various financial and legal transactions throughout a person's life.
A Social Security card is a physical document that displays an individual's Social Security number and name. It serves as proof of the SSN and is required for numerous purposes, including:
- Employment: Employers need your SSN to report your earnings to the IRS and to the SSA for Social Security benefits.
- Tax returns: Your SSN is used when filing federal and state tax returns.
- Opening a bank account: Financial institutions require your SSN to open accounts and apply for loans.
- Applying for credit: Lenders use your SSN to check your credit history and process credit applications.
- Government benefits: Your SSN is needed to apply for various federal and state benefits, including Social Security, Medicare, and unemployment benefits.
- Getting a driver’s license or passport: Many states require an SSN to issue a driver’s license, and it's needed when applying for a US passport.
- Healthcare: Your SSN is often required for health insurance and medical records.
How to apply for a Social Security number
To apply for a Social Security number and card, follow these steps:
- Gather the required documents: You'll need to provide proof of identity, age, and US citizenship or lawful immigration status. Acceptable documents include a US birth certificate, US passport, or immigration documents (e.g., Form I-551, I-94).
- Fill out an application: Fill out Form SS-5, Application for a Social Security Card. This form is available on the SSA's website at ssa.gov.
- Submit your application: Submit your completed application and original documents to your local Social Security office. You can find your nearest office using the SSA's office locator on their website.
Social Security benefits
Social Security benefits are financial payments provided to eligible individuals and their families. Eligibility for Social Security benefits depends on the type of benefit and the individual's work history, age, and disability status.
Types of Social Security benefits
Social Security benefits are designed to offer financial security to retirees, disabled workers, and survivors of deceased workers, providing them with necessary support in various life circumstances. These benefits play a crucial role in the economic well-being of millions of Americans.
Social Security provides several types of benefits, each catering to different needs and circumstances. The primary types of Social Security payments include:
Retirement benefits
Retirement benefits are the most well-known type of Social Security payments. These benefits provide retirement income to individuals who have reached the eligible age for retirement and have paid into the Social Security system through payroll taxes.
Retirement benefits are calculated based on an individual's lifetime earnings and the age at which they choose to begin receiving benefits. The SSA offers various retirement plans, allowing individuals to decide when to start receiving benefits, with options for early retirement starting at age 62 and the full retirement age varying based on birth year.
Social Security Disability Insurance (SSDI)
Social Security Disability Insurance (SSDI) provides disability benefits to individuals who are unable to work due to a severe medical condition expected to last at least one year or result in death.
To qualify for SSDI, individuals must have earned enough work credits by paying Social Security taxes and must meet the SSA's definition of disability. SSDI offers crucial financial support to those who can no longer sustain employment due to disability.
Supplemental Security Income (SSI)
Supplemental Security Income (SSI) is a needs-based program that provides financial assistance to individuals who are aged, blind, or disabled and have limited income and resources. Unlike SSDI, SSI benefits are not based on work history but on financial need. The program aims to ensure a minimum level of income for those who are most vulnerable.
Benefits for spouses and other survivors of a family member who has died
Social Security provides benefits to spouses, children, and other survivors of a family member who has died. These benefits offer financial support to surviving family members, helping them cope with the loss of income due to the death of a loved one. Social security beneficiaries in this category may include:
- Spouses: Eligible widows and widowers can receive benefits based on the deceased worker's earnings record.
- Children: Dependent children of a deceased worker may receive benefits until they reach a certain age or meet other criteria.
- Other survivors: In some cases, other family members, such as dependent parents, may qualify for survivor benefits.
Social Security taxes
Social Security taxes are a critical component of the funding mechanism for the Social Security program. These taxes are collected from both employers and employees through payroll deductions under the Federal Insurance Contributions Act (FICA). The funds collected through Social Security taxes are used to pay for retirement, disability, and survivor benefits for eligible Americans.
Both employees and employers share the responsibility of paying Social Security taxes. Here’s how it works:
- Employees: Social Security taxes are automatically deducted from an employee's paycheck. The current tax rate for employees is 6.2% of their gross wages, up to a certain wage base limit.
- Employers: Employers are required to match the Social Security tax contributions made by their employees. This means employers also pay 6.2% of the employee’s gross wages, up to the same wage base limit.
- Self-employed individuals: Self-employed individuals pay Social Security taxes through the Self-Employment Contributions Act (SECA). They are responsible for the full 12.4% tax rate (6.2% for the employer portion and 6.2% for the employee portion) on their net earnings, up to the wage base limit.
How are Social Security taxes collected?
Social Security taxes are collected through payroll deductions for employees and through estimated tax payments or annual tax returns for self-employed individuals.
- Employees’ share: Employers withhold Social Security taxes from employees' paychecks each pay period. These deductions are reported and paid to the IRS, typically on a monthly or quarterly basis, depending on the size of the employer.
- Employers’ share: Employers match the Social Security tax contributions deducted from their employees' paychecks and remit both the employee and employer portions to the IRS.
- Self-employed individuals: Self-employed individuals calculate their Social Security tax liability as part of their annual tax return using Schedule SE (Self-Employment Tax). They may also make estimated tax payments throughout the year to cover their Social Security tax obligations.
Wage base limits
Social Security taxes are subject to a wage base limit, which is the maximum amount of earnings subject to the Social Security tax for a given year. For 2024, the wage base limit is $160,200. This means that earnings above this amount are not subject to the 6.2% Social Security tax rate. The wage base limit is adjusted annually based on changes in the national average wage index.
Frequently asked questions about Social Security
Still have questions about Social Security? Check out the FAQ below to learn more.
How do employers report Social Security taxes?
Employers report Social Security taxes using Form 941, the Employer's Quarterly Federal Tax Return. This form includes details about wages paid, Social Security, and Medicare taxes withheld, and the employer's matching contributions. Annually, employers also submit Form W-2, which summarizes an employee’s earnings and tax withholdings for the year.
Are Social Security taxes the same for all employees?
Social Security taxes are generally the same for all employees, with both the employer and employee each contributing 6.2% of the employee's gross wages, up to the annual wage base limit. For 2024, the wage base limit is $160,200. Wages above this limit are not subject to Social Security taxes.
How do you verify an employee’s Social Security number?
Employers can verify an employee's Social Security number using the Social Security Number Verification Service (SSNVS) provided by the SSA. This online service helps ensure that employee names and SSNs match SSA records, which is crucial for accurate wage reporting and avoiding penalties.
What is the full retirement age for Social Security?
The full retirement age (FRA) for Social Security depends on the employee's birth year, ranging from 66 to 67. Understanding FRA is important for employers managing retirement plans and advising employees on retirement benefits. Employees who retire at FRA receive their full Social Security benefits, while early retirement results in reduced benefits.
How can employers assist employees in understanding their Social Security benefits?
Employers can provide resources and information about Social Security benefits through HR departments or benefits coordinators. Offering educational seminars, distributing informational brochures, and directing employees to the SSA’s website (ssa.gov) can help employees understand their benefits and retirement planning.
Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.