A Brief History of Social Security

When first adopted, social security covered about 60 percent of the work force. Over the years, it has expanded coverage to include the self-employed, many state and local government employees, federal workers, and employees of nonprofit organizations. Today, approximately 95 percent of all workers are covered by social security.

The program was designed to be a self-supporting federal program, financed with payroll taxes and providing not just retirement income, but a host of other insurance programs as well. There are four distinct types of benefits provided:

• Retirement benefits, which you can elect to receive at any time after age 62, are based on the number of years that you have worked and the amount of money you have earned. Your spouse and, in some cases, your children may also be eligible for benefits based on your earnings records. Coverage has also been extended to ex-spouses if the marriage lasted at least 10 years and the ex-spouse has not remarried.
• Survivor's benefits are a form of life insurance, providing payments to your spouse and dependent children after your death.
• Disability insurance ensures you a monthly income if you are unable to work because of an illness or disability, regardless of age.
• Medicare provides both hospital insurance (Part A) and voluntary medical insurance (Part B) for men and women over age 65 and disabled younger people. An HMO type plan is dubbed Part C and Part D is the relatively new prescription drug plan which works through private insurance similar to Part B, but nowhere near as comprehensive - yet.

These benefits are financed by payroll taxes. There are two components of "social security" taxes: Old Age, Survivor and Disability Insurance (OASDI) and Medicare Hospital Insurance (HI). These components are called the Federal Insurance Contribution Act (FICA) tax, and generally, half is paid by the employee and half by the employer. The OASDI employee portion is 6.2% of the employee's wages, while the employer's portion is also 6.2%, for a total OASDI tax of 12.4% on up to $113,700 (in 2013) of covered wages. The "regular" HI tax is 1.45% for both the employee and the employer, with no wage cap. These tax rates, on both the employee and the employer portions, add up to a total combined initial tax rate of 15.3 percent (12.4% OASDI plus 2.9% HI tax). For tax years beginning after December 31, 2012, an additional 0.9% HI tax, called the Additional Medicare Tax, is imposed on wages exceeding a threshold amount ($250,000 for joint return, $125,000 for separate, and $200,000 in any other case). This 0.9% Additional Medicare Tax is imposed only on the employee portion and there is no wage cap.

For self-employed people, the tax is called the Self-Employed Contribution Act (SECA) tax, and "both halves" (employer & employee) are paid by the self-employed individual. The SECA tax rate for OASDI is 12.4% on up to $113,700 (in 2013) and the "regular" HI rate is 2.9%. These tax rates add up to a total combined initial tax rate of 15.3 percent (12.4% OASDI plus 2.9% HI tax), and a 7.65 percent deduction is allowed (i.e., one-half of the (12.4% OASDI rate plus 2.9% HI rate). For tax years beginning after 2012, the 0.9% Additional Medicare Tax also applies to self-employment income exceeding a threshold amount ($250,000 for joint return, $125,000 for separate, and $200,000 in any other case). There is no deduction with respect to the 0.9% Additional Medicare Tax, but it is coordinated with the FICA tax in determining the threshold amounts.

Under certain circumstances, social security benefits may be subject to income tax. In the 1980's, in order to increase the stability of the system, the "normal" or "full" retirement age was increased in the normal or full retirement age from 65 to 67. While the increase is gradual and relatively small, it represents a major change in social security philosophy. The age-65 retirement limit for full benefits had not been changed since the adoption of the Social Security Act in 1935, even though life expectancy for a 65-year- old then was only another 2 years. Today the life expectancy of a 65-year-old is another 16 years for men and 19 years for women. In 1935, when social security was enacted, most people never reached age 65.