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Social Security: Legislation and Issues

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  • 0:07 The Social Security Act
  • 2:11 A Unique Solution
  • 3:26 FICA
  • 5:55 Social Security Trust Fund
  • 8:08 Lesson Summary
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Lesson Transcript
Instructor: Ashley Dugger

Ashley is an attorney. She has taught and written various introductory law courses.

Passed as part of the New Deal in 1935, the Social Security Act established benefits for retired and unemployed people. This lesson generally explains the Social Security Act and the Federal Insurance Contributions Act.

The Social Security Act

The Social Security Act was just one of many important pieces of legislation passed as a part of President Roosevelt's New Deal. These legislative pieces were all designed to ease troubles for the working class during the heart of the Great Depression. The Social Security Act was passed in 1935 and attempted to address the various social concerns of poverty, unemployment, dependent widows and fatherless children by providing benefits to retirees and unemployed workers and providing a lump-sum benefit to surviving family members upon the death of a worker.

Originally, the act was fairly limited. It established benefits only for:

  • Old-age workers entering retirement
  • Victims of industrial accidents
  • Unemployed workers searching for new work
  • Dependent mothers and children
  • Blind people and
  • Physically handicapped people

Though times were tough and many people needed the relief these benefits would provide, not everyone was in favor of the act. Some legislators thought the act would discourage jobs and further ruin the economy. Others felt the act was too limited and should provide benefits to more people.

However, the act proved to be one of our country's most adaptable and most successful programs. The program has been modified and expanded many times. Today, nine out of ten people age 65 or older receive Social Security benefits, making it the major source of income for most of our country's elderly. In fact, $816 billion will be doled out to nearly 58 million Social Security recipients in 2013.

A Unique Solution

At the time, the Social Security Act provided a controversial and unique solution for the country's elderly. Before the Great Depression and New Deal legislation, local and state governments handled most social support, if the government handled it at all. Many felt these areas were private matters and no place for the government. But, the Great Depression brought a wider call for more social support for the elderly, as well as other insurance systems.

The Social Security Act was a uniquely American solution that was funded differently than similar European programs. The program wasn't government funded, though it was government administered, or overseen by the federal government.

Instead of using federal taxes, the U.S. program was designed to be a form of insurance supported through payroll contributions. This meant that the program was funded by taking a small portion from a worker's paycheck. That deduction would serve as insurance for that particular worker. When that worker, or that worker's family, needed the benefit, then the benefit would be available for the worker to collect.

FICA

Social Security benefits are funded through the Federal Insurance Contributions Act, or FICA. This is the law governing paycheck deductions that fund the Social Security and Medicare programs. Under FICA, both employees and employers are required to contribute FICA payments. Under the Social Security Act of 1935, benefits were only available to those who worked in commerce and industry.

This meant that many vocations, such as government, medicine, law and agriculture, were all exempt from paying the deductions. But, because these people weren't required to contribute to the program, they couldn't collect Social Security benefits. The 1939 amendments changed this.

In the original 1935 Social Security Act, the paycheck deductions were classified as contributions and listed in the act itself. As a part of the 1939 amendments, the contributions were reclassified as taxes, largely because the deductions aren't optional for some workers. This part of the law was moved out of the act and into the Internal Revenue Code where other tax laws can be found.

It was then renamed the Federal Insurance Contributions Act, though the provision wasn't really new. Additionally, previous restrictions regarding who could participate were lifted at that time. Many categories of workers could still choose not to participate in FICA, but no one was excluded from participating if he or she wanted to contribute.

For those who participate in the Social Security program today, a reduced portion of Social Security benefits can be collected starting at age 62. Distribution of full benefits is determined by an individual's birth year. This gradual step eligibility was a part of the 1983 amendments to the act and was put in place, in part, to help ease any strain felt when baby boomers started collecting benefits. For example, people who were born before 1938 are able to collect full benefits at age 65, but people who were born in 1960 or after must wait until age 67 to collect full benefits.

Social Security Trust Fund

Under FICA, employers must withhold a set percentage of each employee's salary during each pay period. The employer must then match that amount and contribute the money to the Social Security Trust Fund. This is a federal government account that provides retirement income, disability insurance, Medicare and benefits for survivors. The fund was established in 1939 as a part of the 1939 amendments to the Social Security Act. The fund is responsible for collecting FICA taxes, or contributions.

For example, let's say that Betty works for Barry. Barry is required to deduct 2% from each of Betty's paychecks before he pays her. This amount is $4.00. Barry must add his own $4.00 to this amount to total $8.00 and then send that $8.00 to the fund for each of Betty's paychecks. The U.S. Department of the Treasury manages the fund. It does so by investing the FICA taxes in stocks, bonds and other investments supported by the U.S. government. In other words, the government loans the money to itself and then uses the money to finance government-backed projects.

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