SOCIAL SECURITY ADMINISTRATION

Social Security Administration

Social Security Administration

Introduction

One of the country's largest and most successful social welfare programmes, Social Security covers about 96% of the workforce. In July 2004, the programme paid over 47 million beneficiaries a total of $40 billion in monthly benefits (Modigliani, 2004). This included almost 30 million retired workers receiving an average monthly benefit of $926, almost 5 million widows and widowers receiving survivor benefits averaging $878 per month, and more than 6 million disabled workers receiving an average monthly benefit of $866. (The other beneficiaries included spouses and children of retired and disabled workers.) (Brown, Liebman, and Wise, 2009)

Context of Social Security

Social Security constitutes the largest single source of income for most elderly Americans (McSteen, 1985). Indeed, it accounts for more than half of all income for two out of three elderly beneficiaries. When Social Security was originally enacted in 1935, 50% of the elderly lived in poverty, and the poorhouse was a reality for many older Americans near the end of their lives. Today, in contrast, only about 12% of the elderly are subject to poverty, thanks in large part to Social Security.

Social Security is a contributory system; that is, it is funded by contributions or payroll taxes imposed on employers and employees. The Federal Insurance Contributions Act (FICA) requires that employers and employees each contribute 6.2% of wages, up to a maximum taxable wage base (equal to $87,900 in 2004) that is indexed for inflation, to fund old age, survivor, and disability benefits (Modigliani, 2004). The contributions are mandatory; employers and employees cannot opt out of the system.

In Germany and in UK, the compulsory character of the Social Security programme serves a number of purposes. First, it permits the programme to redistribute protection from the higher paid to the lower paid. Second, it prevents the problem of adverse selection that would occur if individuals could decide whether, and to what extent, they wanted to participate in Social Security (Schieber and Shoven, 1999). Finally, the system's mandatory nature reduces the need for public assistance by requiring the improvident to pay their share of their future retirement needs. (Schottland, 1963)

Social Security benefits are typically paid in the form of a life annuity; that is, beneficiaries receive a monthly benefit for life. Unlike most private pensions, Social Security benefits are adjusted each year for inflation. The amount of benefits is calculated through the use of a complex benefit formula. The old age benefit formula bases benefits on workers' average earnings over a 35-year period (McSteen, 1985). The disability benefit formula is similar but may base benefits on fewer than 35 years of earnings.

The benefit formula is progressive in that it replaces a higher percentage of income for lower-wage workers than for higher-wage workers. Thus, in absolute dollar terms, higher-wage earners receive more benefits (larger benefit checks) than do lower-wage workers, but the benefits of higher-wage workers replace a smaller percentage of their average earnings than do the benefits of lower-wage ...