Introduction and the Basic System: Social security is designed as safety net national insurance system to protect individuals from financial distress caused by unforeseen catastrophes. In the United States, the Social Security Program was created in 1935 (42 U.S.C. 301 et seq.) to provide old age, survivors, and disability insurance benefits to workers and their families. Unlike welfare, social security benefits are paid to an individual or his or her family at least in part on the basis of that person’s employment record and prior contributions to the system. The program is administered by the Social Security Administration (SSA) and since 1965 it has included health insurance benefits under the Medicare program. While social security benefits under the act are most often associated with old age, survivors, and disability insurance, in its broadest sense, they also includes federally funded welfare programs and unemployment compensation.

The Federal Old Age, Survivors, and Disability Insurance (OASDI) pays out monthly benefits to retired people, to families whose wage earner has died, and to workers unemployed due to sickness or accident. Workers qualify for its protection by having been employed for a minimum amount of time and by having made contributions to the program. Once an individual has qualified for protection, certain other family members are also eligible. Financial need is not a requirement.

While the Social Security Act (federal law) governs an applicant’s right to benefits, state law governs some of the family relationship issues that may affect a person’s rights of entitlement under the act. The program is administered by the Social Security Administration (SSA), an independent federal agency. Unlike welfare, which is financial assistance given to persons who qualify on the basis of need, Social Security benefits are paid to individuals on the basis of their employment record and the amount they contributed to Social Security during their employment careers. In 1965 Social Security was expanded to include health insurance benefits under the Medicare program. 42 U.S.C.A. sections 1395 et seq.

Two funds have been created to be held in trust to pay benefits under OASDI:

  1. the Old Age and Survivors’ Trust Fund (OASTF) and
  2. the Disability Insurance Trust Fund (DITF).

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 OASTF provides benefits to retired workers, their spouses, their children, and other survivors of deceased workers, such as parents and divorced spouses. The DITF provides benefits to disabled workers, their spouses, and their dependent children. DITF also pays for rehabilitation services provided to the disabled.

The OASDI program is funded by payroll taxes levied on employees, employers, and the self-employed. The tax is imposed upon the employee’s taxable income, up to a maximum amount, with the employer contributing an equal amount. Self-employed workers contribute twice the amount levied on employees. However, to put self-employed individuals in approximately the same position as employees, self-employed individuals can deduct half of these taxes for both Social Security and income tax purposes.

The above programs, together, constitute the basic social safety net for most Americans. It is important to realize that while some aspects of the plan are predicated on the circumstances of the recipient (disability or death of a spouse) the basic social security benefit for old age are paid regardless of income or need to every person contributing to the system.

This article will examine the benefits in more detail and discuss how social security payments should be factored into the financial and estate planning of all Americans.


Old Age and Retirement Benefits:

There are three requirements for an individual to be eligible to receive old age Social Security benefits.

First, the individual must have attained the age of 62.

Second, the individual must file an application for old age benefits.

Third, the application must demonstrate that the individual is “fully insured.”

The extent to which an individual is insured depends on the number of quarters of coverage credited to his or her Social Security earnings record. 20 CFR section 404.101(a). A quarter is a three-month period ending March 31, June 30, September 30, or December 31. A worker becomes “fully insured” when the individual has been credited with working the requisite number of quarters. 42 U.S.C.A. section 414(a). The Social Security Administration’s regulations contain a table specifying by birth date the quarters of coverage required to obtain fully insured status. 20 CFR § 404.115. But irrespective of birth date, any worker who has 40 quarters (i.e., 10 years) of coverage is fully insured.

Workers born before 1950 can retire at age 65 with full benefits based on their average income during their working years. For workers born between 1950 and 1960, the retirement age for full benefits has increased to age 66. Workers born in 1960 or later will not receive full retirement benefits until age 67. However, any worker, regardless of birth date, 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 fifty percent of the amount paid to the worker.

Workers who continue to work past retirement age may lose some benefits depending on the amount they earn after retirement because Social Security is designed to replace lost earnings. If earnings from employment do not exceed the specified amount exempted by law, persons working past the age of retirement will receive full benefits. If earnings are greater than the exempt amount, one dollar of benefit is withheld for every two dollars in wages earned above that amount. Once a worker reaches age seventy, however, he or she no longer has to report earnings to SSA, and thus his or her Social Security benefits will cease to be reduced.

Since 1975 Social Security benefits have increased annually to offset inflation. Known as cost of living adjustments (COLAs), these increases are based on the annual increase in consumer prices as reflected by the consumer price index (CPI). Allowing benefits to increase automatically eliminated the need for Congress to pass special acts each year to address the issue. Some fiscal conservatives argue that COLAs are responsible for unnecessarily driving up the costs of Social Security. They contend that the CPI overestimates current rates of inflation, and, as a result, Social Security benefits are over adjusted upward. Most recipients would disagree strongly.

The amounts payable to the retired person depend on the amount contributed and one receives notice of eligibility and requirements annually from the Social Security Administration. Said information is also available on line.


Survivors and Disability Insurance

Federal Old Age, Survivors’, and Disability Insurance (OSADI) benefits are monthly payments made to retired workers, to families whose wage earner has died, and to workers who are unemployed because of sickness, injury, or disability. Workers qualify for these benefits 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 that must be satisfied. Once a worker qualifies for OSADI benefits, his family is entitled to those benefits as well. The entire program is geared toward helping families as a matter of social policy.

As stated above, two funds are held in trust to pay benefits under OASDI: the Old Age and Survivors’ Trust Fund (OASTF) and the Disability Insurance Trust Fund (DITF). 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 OASTF provides benefits to retired workers, their spouses, their children, and other survivors of deceased workers, such as parents and divorced spouses. The DITF provides benefits to disabled workers, their spouses, and their dependent children. DITF also pays for rehabilitation services provided to the disabled.

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. Surviving spouses of deceased wage earners are the primary class of beneficiaries entitled to survivors’ benefits under the Social Security Act. Although sometimes referred to as “widow’s” or “widower’s” benefits, beneficiaries also include surviving divorced spouses who have minor or disabled children in their care.

Note that neither a surviving spouse nor a surviving divorced spouse may collect survivors’ benefits if they have remarried following the death of the wage earner. Surviving spouses and surviving divorced spouses can begin collecting survivors’ benefits at age sixty, unless the surviving spouse or surviving divorced spouse is disabled, then he or she can begin collecting survivors’ benefits at age fifty. In addition to monthly checks, a worker’s widow or widower may receive a lump-sum payment that is dependent upon current rates (but is not large) upon the worker’s death.

Survivors’ benefits are also payable to unmarried, dependent children under age 18 and to unmarried children of any age who are disabled prior to age 22. Thus, if a disabled, unmarried, dependent child of a worker became disabled prior to age 22, he or she will be entitled to receive survivors’ benefits for the duration of the disability. However, if the disabled surviving child remarries, his or her survivors’ benefits will be terminated, unless the disabled child marries another Social Security recipient.

Disability Benefits

The original Social Security Act of 1935 only included programs for needy elderly persons and blind persons. In 1950 a program for needy disabled persons was created under the act. Known as the “adult categories,” these three programs were first administered by state and local governments with partial federal funding. By the 1960s, studies showed that the programs were being unevenly administered by more than 1,300 state and local agencies, resulting in a gross disparity of benefit payments to beneficiaries in different jurisdictions. These disparities were addressed in 1972, when Congress federalized the Supplemental Security Income (SSI). 42 USCA sections 1381 et seq.

SSI is payable to workers who become “disabled,” which the law defines as a worker unable to engage in substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve months. 42 USCA section 1382c.

Courts have said that “substantial gainful activity” means more than the ability to find a job and physically perform it. It also requires the ability to hold the job for a significant period of time. Andler v. Chater, 100 F.3d 1389 (8th Cir. 1996). Examples of disabilities that meet the criteria set forth in the Social Security law include brain damage, heart disease, kidney failure, cancer, severe arthritis, and mental illness.

In cases where the gravity of a disability is less clear, the SSA uses a sequential evaluation process to decide whether a person’s disability is serious enough to justify awarding SSI benefits. If the impairment is so severe that it significantly affects a “basic work activity,” the worker’s medical records are compared with a set of guidelines known as the Listing of Impairments. 42 USCA APP., 20 CFR § 404.1529. A claimant found to suffer from a condition on this listing is entitled to receive SSI benefits. If the condition is less severe, the SSA will make a determination as to whether the impairment prevents the worker from doing his or her former work. If not, the application will be denied. If found to be incapable of doing his or her former work, the SSA proceeds to the final step, in which it determines whether the impairment prevents the applicant from doing other work available in the economy.

In making this determination, the SSA relies on a series of medical-vocational guidelines that consider the applicant’s residual functional capacity as well as the applicant’s age, education, and experience. The guidelines utilize three types of work, “sedentary work,” “light work,” and “medium work.” Sedentary work involves lifting no more than 10 pounds at a time and occasionally lifting or carrying articles such as files, ledgers, and small tools. Light work involves lifting no more than 20 pounds at a time with frequent lifting or carrying of objects weighing up to 10 pounds. Medium work involves lifting no more than 50 pounds at a time with frequent lifting or carrying of objects weighing up to 25 pounds. 42 USCA APP., 20 CFR § 404.1567.

If the SSA finds that an applicant can perform work that falls into one of these three categories, benefits will be denied. A claimant may appeal this decision to an administrative law judge, who will then hear evidence presented by both the claimant and the SSA. If the judge denies the claim for benefits, the claimant may appeal to the SSA’s Appeals Council. Claimants who lose this appeal may file a civil action in federal district court seeking review of the appeal’s council decision. 42 U.S.C. section 405(g).

Workers who meet the disability eligibility requirements may receive three types of benefits, monthly cash payments, vocational rehabilitation, and/or medical insurance. Monthly cash payments begin with the sixth month of disability. The amount of a monthly benefit payment depends upon the amount of earnings on which the worker has paid Social Security taxes and the number of the worker’s eligible dependents. The maximum payment for a family is roughly equal to the amount that the disabled worker is entitled to receive as an individual, plus allowances for dependents.

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

Medical insurance is available through the Medicare program (a federally sponsored program that provides hospital and medical insurance). A recipient of disability benefits may begin to participate in Medicare twenty-five months after the onset of a disability. The Medicare program is discussed in more detail in the next section.

Disabled workers are eligible for disability benefits even though they have not reached the age of retirement, so long as they have worked enough years under Social Security prior to the onset of the disability. The number of work years required to qualify for SSI depends on the worker’s age at the time of the disability. For workers under 24 years of age, the number of work years can be as few as one and a half years of work in the three years before the onset of the disability. However, the number of work years required for SSI eligibility can never exceed ten for any worker, regardless of his or her age.

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. But no more than twelve months of back payments may be collected. Even if a worker recovers from a disability that lasted more than twelve months, the worker can apply for back benefits within fourteenth months from the date of recovery. If a worker dies after a long period of disability without having applied for SSI, his or her family may apply for disability benefits within three months from the date of the worker’s death. Family members are also eligible for survivors’ benefits.

Note that in 1996 disability benefits altered significantly. The Contract with America Advancement Act of 1996 changed the basic philosophy underlying the disability program. Pub.L. No. 104-121, March 29, 1996, 110 Stat 847. The act provides that new applicants for Social Security or SSI disability benefits will no longer be eligible for SSI benefits if drug addiction or alcoholism is a material factor in their disability. Unless new applicants can qualify on some other medical basis, they will not receive Social Security disability benefits. Individuals who were receiving Social Security disability benefits prior to the act’s passage had their benefits terminated as of January 1, 1997.

Congress also narrowed the class of beneficiaries eligible for SSI payments when it passed the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. Pub.L. No., 104-193, August 22, 1996, 110 Stat 2105. The law terminated SSI eligibility for most non-citizens, including most non-citizens who were receiving SSI payments at the time the law was passed. Before its enactment, nearly all aliens lawfully admitted to the United States could receive SSI if they met certain other requirements.

The Future and Reliance on Social Security:

Almost eighty million Americans born between 1946 and 1964 are expected to retire in the next twenty seven years. In 2001 thirty nine million Americans were enrolled in Medicare, and that number is expected to swell to nearly eighty million by 2030. In 2001 thirty five million Americans were eligible to collect Social Security, while in 2030 more than seventy million will be eligible. The ratio between employed workers and Social Security recipients is expected to drop from 3.4 in 2001 to 2.1 in 2030.

These figures have alarmed both politicians and experts, who have demanded that something be done to “save” Social Security from a possible future of bankruptcy and elimination of benefits. Proposals to “fix” the system have varied from conservative efforts aimed at “privatizing” Social Security by allowing workers to invest their payroll deductions in the securities market to more liberal efforts aimed at placing Social Security funds in a “lock box” to keep them safe from tampering and theft by other federal programs.

Others claim that the future is far from dire and that the influx of new migrant workers and immigration will increase the percentage of those working to those retired and that the goal of those claiming a potential crisis is to eliminate social security for political or ideological reasons.

Efforts to make radical reform of Social Security have been unsuccessful regardless of the party in power, with most Americans fearing a reduction in their possible benefits. The sad fact is that especially after the downturn of 2008, most Americans depend on Social Security in their own planning for retirement. Millions of Americans would be unable to live a middle class lifestyle without Social Security benefits and some avoid hunger based on these benefits. It is noteworthy that if President Bush’s plan to privatize Social Security had been enacted, the collapse in the stock market of 2008 would have greatly increased the desperate circumstances of most persons dependent on Social Security. Put simply, most citizens are not capable of the type of careful and balanced economic planning that retirement investment requires.

On the other side, unlike one’s own control of one’s own portfolio, keeping the funds in the full control of the Federal government exposes the trust fund to “borrowing” from other programs and is subject to the vagaries of political agenda and demagogues.

That said, Social Security has lasted since the mid 1930’s, is a mainstay of American society, and will exist in one form or another for the foreseeable future minus truly catastrophic alterations in the American economy. That is not to say the benefits will not alter appreciably.

For those who have the ability, it is vital not to rely on Social Security benefits continuing unaltered in the future. Either via pension plan, 401K plans, or just saving, it is vital to build as much of a nest egg as possible to supplement whatever Social Security may provide in the future. It should be viewed as a safety net but not the center of one’s retirement plan for the family.

Keep in mind that Social Security retirement benefits, as of 2011, can approximate thirty thousand dollars a year. To achieve that from investments, at five percent, would require a portfolio of $600.000.00 (before taxes, closer to $800,000.00 with taxes.) To put aside that much money in savings, even with a 401K, is extremely difficult for most people and with housing collapsing, impossible for the majority of Americans.

Which means that Social Security is a central part of the retirement and family financial planning of most Americans and will likely remain so for many more decades.