Social Security: How It Works (1 of 3)

1st In A Three-Part Series 

NOVEMBER 2010 VOICE: In the first of a three-part series that examines the issues surrounding Social Security, we will begin by exploring the basic Social Security program itself. Part II will explain the WEP/GPO, while Part III will look at the various proposals for reforming the program.

As we have reported in recent editions of the Voice, an increasing number of economists and federal budget watchdogs are calling for the Obama Administration and Congress to tackle a comprehensive reform of Social Security in 2011. And, while the president and congressional leaders are now focused on the mid-term elections, the report of the Federal Debt Commission, due in early December, could spurn renewed calls for reform into action early next year.

Of the utmost interest to many Association members is what impact such a reform effort will have on efforts to repeal the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). By all accounts, Congress now seems inclined to take-up the WEP/GPO as part of the overall issue of Social Security reform.

With unemployment hovering close to 10% for two years, the Social Security Trust Fund is now taking in less money than it is spending for retiree benefits. While the system is not in danger of insolvency anytime soon, this phenomenon greatly impacts the long-term health of the system.

Fast Facts:

  • Created in 1935 under the New Deal as a means of ending poverty amongst the elderly.
  • Spousal benefits added to program in 1939.
  • 56.7 million Americans received Social Security benefits in 2009.
  • In Massachusetts, just over 1.1 million people are receiving Social Security benefits.
  • $840 billion in total Social Security contributions collected in 2009.
  • Nationally $686 billion in Social Security benefits paid in 2009.
  • Average annual benefit is approximately $14,000.
  • Maximum annual Social Security benefit is $26,700.
  • $154 billion surplus used to buy US Treasury notes (bonds).
  • $2.6 trillion owed to fund in US Treasury notes.

Contributions: Under the current system, participating employees contribute 6.2% of their income (on income up to $106,800 for a maximum tax of $6,621), with a matching contribution of 6.2% coming from the employer in the form of the federal Payroll Tax (FICA). The remaining component of FICA, the Medicare contribution, is 1.45% with no wage cap.

Other Important Facts

Trust Fund: Payroll taxes are deposited into the Social Security Trust Fund, which in turn pays monthly benefits to eligible enrollees. Any remaining surplus in revenues is reverted to US Treasury notes, with the funds being deposited into the US General Fund. The Social Security Trust Fund does not retain or invest excess contributions beyond the Treasury notes, which are now valued at over $2.6 Trillion.

Eligibility: Those eligible for Social Security can begin collecting a retirement check at age 62, but with reduced benefits. Eligibility for full benefits depends upon your year of birth, with those born before 1938 having a normal retirement age of 65. The full-retirement age increases by two months for each year you are born after 1938 to a maximum "normal" retirement age of 67. A worker, who delays starting retirement benefits past normal retirement age, earns delayed retirement credits that increase their benefit until they reach age 70.

Social Security Offsets: Due to the fact that Massachusetts public employees do not participate in Social Security as a public employee, they may lose a portion, or in some cases, all of their Social Security benefit. While the WEP and GPO affect some 5 million retirees and employees across the country in all fifty states, just seven states are the primary victims (CA, CO, IL, LA, MA, OH and TX).

Part II appearing in the January 2011 Edition of the Voice: WEP/GPO Explained.