Current operation
Joining and quitting
Obtaining a Social Security number for a child is voluntary. Further, there is no general legal requirement that individuals join the Social Security program unless they want or have to work. Under normal circumstances, FICA taxes or SECA taxes will be collected on all wages. About the only way to avoid paying either FICA or SECA taxes are to join a religion that does not believe in insurance, such as the Amish, Christian Science or a religion whose members have taken a vow of poverty (see IRS publication 517 and 4361Federal workers employed before 1987, various state and local workers including those in some school districts who had their own retirement and disability programs were given the one-time option of joining Social Security. Many employees and retirement and disability systems opted to keep out of the Social Security system because of the cost and the limited benefits. It was often much cheaper to obtain much higher retirement and disability benefits by staying in their original retirement and disability plans. Now only a few of these plans allow new hires to join their existing plans without also joining Social Security. In 2004, the Social Security Administration estimated that 96% of all U.S. workers were covered by the system with the remaining 4% mostly a minority of government employees enrolled in public employee pensions and not subject to Social Security taxes due to historical exemptions.
It is possible for railroad employees to get a "coordinated" retirement and disability benefits. The U.S. Railroad Retirement Board (or "RRB") is an independent agency in the executive branch of the United States government created in 1935 to administer a social insurance program providing retirement benefits to the country's railroad workers. Railroad retirement Tier I payroll taxes are coordinated with social security taxes so that employees and employers pay Tier I taxes at the same rate as social security taxes and have the same benefits. In addition, both workers and employers pay Tier II taxes (about 6.2% in 2005) which are used to finance railroad retirement and disability benefit payments that are over and above social security levels. Tier 2 benefits are a supplemental retirement and disability benefit system which pays 0.875% times years of service times average highest five years of employment salary, in addition to Social Security benefits.
The FICA taxes are imposed on nearly all workers and self-employed persons. Employers are required to report wages for covered employment to Social Security for processing Forms W-2 and W-3. There are some specific wages which are not a part of the Social Security program (discussed below). Internal Revenue Code provisions section 3101imposes payroll taxes on individuals and employer matching taxes. Section 3102[64] mandates that employers deduct these payroll taxes from workers' wages before they are paid. Generally, the payroll tax is imposed on everyone in employment earning "wages" as defined in 3121of the Internal Revenue Code.[66] and also taxes[67] net earnings from self-employment.
Trust fund
Main article: Social Security Trust Fund
Social Security taxes are paid into the Social Security Trust Fund maintained by the U.S. Treasury (technically, the "Federal Old-Age and Survivors Insurance Trust Fund", as established by 42 U.S.C. § 401(a)). Current year expenses are paid from current Social Security tax revenues. When revenues exceed expenditures, as they did between 1983 and 2009, the excess is invested in special series, non-marketable U.S. government bonds. Thus, the Social Security Trust Fund indirectly finances the federal government's general purpose deficit spending. In 2007, the cumulative excess of Social Security taxes and interest received over benefits paid out stood at $2.2 trillion. The Trust Fund is regarded by some as an accounting construct which holds no economic significance. Others argue that it has specific legal significance because the Treasury securities it holds are backed by the "full faith and credit" of the U.S. government, which has an obligation to repay its debt.[citation needed]
The Social Security Administration's authority to make benefit payments as granted by Congress extends only to its current revenues and existing Trust Fund balance, i.e., redemption of its holdings of Treasury securities. Therefore, Social Security's ability to make full payments once annual benefits exceed revenues depends in part on the federal government's ability to make good on the bonds that it has issued to the Social Security trust funds. As with any other federal obligation, the federal government's ability to repay Social Security is based on its power to tax and borrow and the commitment of Congress to meet its obligations.
In 2009 the Office of the Chief Actuary of the Social Security Administration calculated an unfunded obligation of $15.1 trillion for the Social Security program. The unfunded obligation is the difference between the future cost of Social Security (based on several demographic assumptions such as mortality, work force participation, immigration, and age expectancy) and total assets in the Trust Fund given the expected contribution rate through the current scheduled payroll tax. This unfunded obligation is expressed in present value dollars and is a part of the Fund's long-range actuarial estimates, not necessarily a certainty of what will occur in the long run. An Actuarial Note to the calculation says that "The term obligation is used in lieu of the term liability, because liability generally indicates a contractual obligation (as in the case of private pensions and insurance) that cannot be altered by the plan sponsor without the agreement of the plan participants."
Office of Disability Adjudication and Review (ODAR)[edit]
The Office of Disability Adjudication and Review (ODAR), known before 2006 as the Office of Hearings and Appeals (OHA), administers the hearings and appeals program for the Social Security Administration (SSA). Administrative Law Judges (ALJs) conduct hearings and issue decisions. The Appeals Council considers appeals from hearing decisions, and acts as the final level of administrative review for the Social Security Administration.
Social Security Benefit payout comparisons
Some federal, state, local and education government employees pay no Social Security but have their own retirement, disability systems that nearly always pay much better retirement and disability benefits than Social Security. These plans typically requires vesting—working for 5–10 years for the same employer before becoming eligible for retirement. But their retirement typically only depends on the average of the best 3–10 years salaries times some retirement factor (typically 0.875%-3.0%) times years employed. This retirement benefit can be a "reasonably good" (75–85% of salary) retirement at close to the monthly salary they were last employed at. For example, if a person joined the University of California retirement system at age 25 and worked for 35 years they could receive 87.5% (2.5% × 35) of their average highest three year salary with full medical coverage at age 60. Police and firemen who joined at 25 and worked for 30 years could receive 90% (3.0% × 30) of their average salary and full medical coverage at age 55. These retirements have cost of living adjustments (COLA) applied each year but are limited to a maximum average income of $350,000/year or less. Spousal survivor benefits are available at 100–67% of the primary benefits rate for 8.7% to 6.7% reduction in retirement benefits, respectively.UCRP retirement and disability plan benefits are funded by contributions from both members and the university (typically 5% of salary each) and by the compounded investment earnings of the accumulated totals. These contributions and earnings are held in a trust fund that is invested. The retirement benefits are much more generous than Social Security but are believed to be actuarially sound. The main difference between state, local government sponsored retirement systems and Social Security is the state and local retirement systems use compounded investments that are usually heavily weighted in the stock market securities which historically have returned more than 7.0%/year on average despite some years with losses.Short term federal government investments may be "more" secure but pay much lower average percentages. Nearly all other federal, state and local retirement systems work in a similar fashion with different benefit retirement ratios. Some plans are now combined with Social Security and are "piggy backed" on top of Social Security benefits. For example, the current Federal Employees Retirement System, which covers the vast majority of federal civil service employees hired after 1986, combines Social Security, a modest defined-benefit pension (1.1% per year of service) and the defined-contribution Thrift Savings Plan.
The current Social Security formula used in calculating the benefit level (primary insurance amount or PIA) is progressive vis-à-vis lower average salaries. Anyone who worked in OASDI covered employment and other retirement would be entitled to both the alternative non-OASDI pension and an Old Age retirement benefit from Social Security. Because of their limited time working in OASDI covered employment the sum of their covered salaries times inflation factor divided by 420 months yields a low adjusted indexed monthly salary over 35 years, AIME. The progressive nature of the PIA formula would in effect allow these workers to also get a slightly higher Social Security Benefit percentage on this low average salary. Congress passed in 1983 the Windfall Elimination Provision to minimize Social Security benefits for these recipients. The basic provision is that the first salary bracket, $0–791/month (2013) has its normal benefit percentage of 90% reduced to 40–90%—see Social Security for the exact percentage. The reduction is limited to roughly 50% of what you would be eligible for if you had always worked under OASDI taxes. The 90% benefit percentage factor is not reduced if you have 30 or more years of "substantial" earnings.
The average Social Security payment of $1,230/month ($14,760/year) in 2013 is only slightly above the federal poverty level for one—$11,420/yr and below the poverty guideline of $15,500/yr for two.
For this reason, financial advisers often encourage those who have the option to do so to supplement their Social Security contributions with private retirement plans. One "good" supplemental retirement plan option is an employer-sponsored 401(K) (or 403(B)) plan when they are offered by an employer. 58% of American workers have access to such plans.Many of these employers will match a portion of an employee's savings dollar-for-dollar up to a certain percentage of the employee's salary. Even without employer matches, individual retirement accounts (IRAs) are portable, self-directed, tax-deferred retirement accounts that offer the potential to substantially increase retirement savings. Their limitations include: the financial literacy to tell a "good" investment account from a less advantageous one; the savings barrier faced by those who are in low-wage employment or burdened by debt; the requirement of self-discipline to allot from an early age the required percentage of salary into "good" investment account(s); and the self–discipline needed to leave it there to earn compound interest until needed after retirement. Financial advisers often suggest that long-term investment horizons should be used, as historically short-term investment losses "self correct", and most investments continue to deliver good average investment returns. The IRS has tax penalties for withdrawals from IRAs, 401(K)s, etc. before the age of 59½, and requires mandatory withdrawals once the retiree reaches 70; other restrictions may also apply on the amount of tax-deferred income one can put in the account(s). For people who have access to them, self-directed retirement savings plans have the potential to match or even exceed the benefits earned by federal, state and local government retirement plans.
International agreements
People sometimes relocate from one country to another, either permanently or on a limited-time basis. This presents challenges to businesses, governments, and individuals seeking to ensure future benefits or having to deal with taxation authorities in multiple countries. To that end, the Social Security Administration has signed treaties, often referred to as Totalization Agreements, with other social insurance programs in various foreign countries.
Overall, these agreements serve two main purposes. First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings. Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country.
The following countries have signed totalization agreements with the SSA (and the date the agreement became effective):
Italy (November 1, 1978)
Germany (December 1, 1979)
Switzerland (November 1, 1980)
Belgium (July 1, 1984)
Norway (July 1, 1984)
Canada (August 1, 1984)
United Kingdom (January 1, 1985)
Sweden (January 1, 1987)
Spain (April 1, 1988)
France (July 1, 1988)
Portugal (August 1, 1989)
Netherlands (November 1, 1990)
Austria (November 1, 1991)
Finland (November 1, 1992)
Ireland (September 1, 1993)
Luxembourg (November 1, 1993)
Greece (September 1, 1994)
South Korea (April 1, 2001)
Chile (December 1, 2001)
Australia (October 1, 2002)
Japan (October 1, 2005)
Denmark (October 1, 2008)
Czech Republic (January 1, 2009)
Poland (March 1, 2009)
Slovak Republic (May 1, 2014)
Mexico (Signed on June 29, 2004, but not yet in effect)
Obtaining a Social Security number for a child is voluntary. Further, there is no general legal requirement that individuals join the Social Security program unless they want or have to work. Under normal circumstances, FICA taxes or SECA taxes will be collected on all wages. About the only way to avoid paying either FICA or SECA taxes are to join a religion that does not believe in insurance, such as the Amish, Christian Science or a religion whose members have taken a vow of poverty (see IRS publication 517 and 4361Federal workers employed before 1987, various state and local workers including those in some school districts who had their own retirement and disability programs were given the one-time option of joining Social Security. Many employees and retirement and disability systems opted to keep out of the Social Security system because of the cost and the limited benefits. It was often much cheaper to obtain much higher retirement and disability benefits by staying in their original retirement and disability plans. Now only a few of these plans allow new hires to join their existing plans without also joining Social Security. In 2004, the Social Security Administration estimated that 96% of all U.S. workers were covered by the system with the remaining 4% mostly a minority of government employees enrolled in public employee pensions and not subject to Social Security taxes due to historical exemptions.
It is possible for railroad employees to get a "coordinated" retirement and disability benefits. The U.S. Railroad Retirement Board (or "RRB") is an independent agency in the executive branch of the United States government created in 1935 to administer a social insurance program providing retirement benefits to the country's railroad workers. Railroad retirement Tier I payroll taxes are coordinated with social security taxes so that employees and employers pay Tier I taxes at the same rate as social security taxes and have the same benefits. In addition, both workers and employers pay Tier II taxes (about 6.2% in 2005) which are used to finance railroad retirement and disability benefit payments that are over and above social security levels. Tier 2 benefits are a supplemental retirement and disability benefit system which pays 0.875% times years of service times average highest five years of employment salary, in addition to Social Security benefits.
The FICA taxes are imposed on nearly all workers and self-employed persons. Employers are required to report wages for covered employment to Social Security for processing Forms W-2 and W-3. There are some specific wages which are not a part of the Social Security program (discussed below). Internal Revenue Code provisions section 3101imposes payroll taxes on individuals and employer matching taxes. Section 3102[64] mandates that employers deduct these payroll taxes from workers' wages before they are paid. Generally, the payroll tax is imposed on everyone in employment earning "wages" as defined in 3121of the Internal Revenue Code.[66] and also taxes[67] net earnings from self-employment.
Trust fund
Main article: Social Security Trust Fund
Social Security taxes are paid into the Social Security Trust Fund maintained by the U.S. Treasury (technically, the "Federal Old-Age and Survivors Insurance Trust Fund", as established by 42 U.S.C. § 401(a)). Current year expenses are paid from current Social Security tax revenues. When revenues exceed expenditures, as they did between 1983 and 2009, the excess is invested in special series, non-marketable U.S. government bonds. Thus, the Social Security Trust Fund indirectly finances the federal government's general purpose deficit spending. In 2007, the cumulative excess of Social Security taxes and interest received over benefits paid out stood at $2.2 trillion. The Trust Fund is regarded by some as an accounting construct which holds no economic significance. Others argue that it has specific legal significance because the Treasury securities it holds are backed by the "full faith and credit" of the U.S. government, which has an obligation to repay its debt.[citation needed]
The Social Security Administration's authority to make benefit payments as granted by Congress extends only to its current revenues and existing Trust Fund balance, i.e., redemption of its holdings of Treasury securities. Therefore, Social Security's ability to make full payments once annual benefits exceed revenues depends in part on the federal government's ability to make good on the bonds that it has issued to the Social Security trust funds. As with any other federal obligation, the federal government's ability to repay Social Security is based on its power to tax and borrow and the commitment of Congress to meet its obligations.
In 2009 the Office of the Chief Actuary of the Social Security Administration calculated an unfunded obligation of $15.1 trillion for the Social Security program. The unfunded obligation is the difference between the future cost of Social Security (based on several demographic assumptions such as mortality, work force participation, immigration, and age expectancy) and total assets in the Trust Fund given the expected contribution rate through the current scheduled payroll tax. This unfunded obligation is expressed in present value dollars and is a part of the Fund's long-range actuarial estimates, not necessarily a certainty of what will occur in the long run. An Actuarial Note to the calculation says that "The term obligation is used in lieu of the term liability, because liability generally indicates a contractual obligation (as in the case of private pensions and insurance) that cannot be altered by the plan sponsor without the agreement of the plan participants."
Office of Disability Adjudication and Review (ODAR)[edit]
The Office of Disability Adjudication and Review (ODAR), known before 2006 as the Office of Hearings and Appeals (OHA), administers the hearings and appeals program for the Social Security Administration (SSA). Administrative Law Judges (ALJs) conduct hearings and issue decisions. The Appeals Council considers appeals from hearing decisions, and acts as the final level of administrative review for the Social Security Administration.
Social Security Benefit payout comparisons
Some federal, state, local and education government employees pay no Social Security but have their own retirement, disability systems that nearly always pay much better retirement and disability benefits than Social Security. These plans typically requires vesting—working for 5–10 years for the same employer before becoming eligible for retirement. But their retirement typically only depends on the average of the best 3–10 years salaries times some retirement factor (typically 0.875%-3.0%) times years employed. This retirement benefit can be a "reasonably good" (75–85% of salary) retirement at close to the monthly salary they were last employed at. For example, if a person joined the University of California retirement system at age 25 and worked for 35 years they could receive 87.5% (2.5% × 35) of their average highest three year salary with full medical coverage at age 60. Police and firemen who joined at 25 and worked for 30 years could receive 90% (3.0% × 30) of their average salary and full medical coverage at age 55. These retirements have cost of living adjustments (COLA) applied each year but are limited to a maximum average income of $350,000/year or less. Spousal survivor benefits are available at 100–67% of the primary benefits rate for 8.7% to 6.7% reduction in retirement benefits, respectively.UCRP retirement and disability plan benefits are funded by contributions from both members and the university (typically 5% of salary each) and by the compounded investment earnings of the accumulated totals. These contributions and earnings are held in a trust fund that is invested. The retirement benefits are much more generous than Social Security but are believed to be actuarially sound. The main difference between state, local government sponsored retirement systems and Social Security is the state and local retirement systems use compounded investments that are usually heavily weighted in the stock market securities which historically have returned more than 7.0%/year on average despite some years with losses.Short term federal government investments may be "more" secure but pay much lower average percentages. Nearly all other federal, state and local retirement systems work in a similar fashion with different benefit retirement ratios. Some plans are now combined with Social Security and are "piggy backed" on top of Social Security benefits. For example, the current Federal Employees Retirement System, which covers the vast majority of federal civil service employees hired after 1986, combines Social Security, a modest defined-benefit pension (1.1% per year of service) and the defined-contribution Thrift Savings Plan.
The current Social Security formula used in calculating the benefit level (primary insurance amount or PIA) is progressive vis-à-vis lower average salaries. Anyone who worked in OASDI covered employment and other retirement would be entitled to both the alternative non-OASDI pension and an Old Age retirement benefit from Social Security. Because of their limited time working in OASDI covered employment the sum of their covered salaries times inflation factor divided by 420 months yields a low adjusted indexed monthly salary over 35 years, AIME. The progressive nature of the PIA formula would in effect allow these workers to also get a slightly higher Social Security Benefit percentage on this low average salary. Congress passed in 1983 the Windfall Elimination Provision to minimize Social Security benefits for these recipients. The basic provision is that the first salary bracket, $0–791/month (2013) has its normal benefit percentage of 90% reduced to 40–90%—see Social Security for the exact percentage. The reduction is limited to roughly 50% of what you would be eligible for if you had always worked under OASDI taxes. The 90% benefit percentage factor is not reduced if you have 30 or more years of "substantial" earnings.
The average Social Security payment of $1,230/month ($14,760/year) in 2013 is only slightly above the federal poverty level for one—$11,420/yr and below the poverty guideline of $15,500/yr for two.
For this reason, financial advisers often encourage those who have the option to do so to supplement their Social Security contributions with private retirement plans. One "good" supplemental retirement plan option is an employer-sponsored 401(K) (or 403(B)) plan when they are offered by an employer. 58% of American workers have access to such plans.Many of these employers will match a portion of an employee's savings dollar-for-dollar up to a certain percentage of the employee's salary. Even without employer matches, individual retirement accounts (IRAs) are portable, self-directed, tax-deferred retirement accounts that offer the potential to substantially increase retirement savings. Their limitations include: the financial literacy to tell a "good" investment account from a less advantageous one; the savings barrier faced by those who are in low-wage employment or burdened by debt; the requirement of self-discipline to allot from an early age the required percentage of salary into "good" investment account(s); and the self–discipline needed to leave it there to earn compound interest until needed after retirement. Financial advisers often suggest that long-term investment horizons should be used, as historically short-term investment losses "self correct", and most investments continue to deliver good average investment returns. The IRS has tax penalties for withdrawals from IRAs, 401(K)s, etc. before the age of 59½, and requires mandatory withdrawals once the retiree reaches 70; other restrictions may also apply on the amount of tax-deferred income one can put in the account(s). For people who have access to them, self-directed retirement savings plans have the potential to match or even exceed the benefits earned by federal, state and local government retirement plans.
International agreements
People sometimes relocate from one country to another, either permanently or on a limited-time basis. This presents challenges to businesses, governments, and individuals seeking to ensure future benefits or having to deal with taxation authorities in multiple countries. To that end, the Social Security Administration has signed treaties, often referred to as Totalization Agreements, with other social insurance programs in various foreign countries.
Overall, these agreements serve two main purposes. First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings. Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country.
The following countries have signed totalization agreements with the SSA (and the date the agreement became effective):
Italy (November 1, 1978)
Germany (December 1, 1979)
Switzerland (November 1, 1980)
Belgium (July 1, 1984)
Norway (July 1, 1984)
Canada (August 1, 1984)
United Kingdom (January 1, 1985)
Sweden (January 1, 1987)
Spain (April 1, 1988)
France (July 1, 1988)
Portugal (August 1, 1989)
Netherlands (November 1, 1990)
Austria (November 1, 1991)
Finland (November 1, 1992)
Ireland (September 1, 1993)
Luxembourg (November 1, 1993)
Greece (September 1, 1994)
South Korea (April 1, 2001)
Chile (December 1, 2001)
Australia (October 1, 2002)
Japan (October 1, 2005)
Denmark (October 1, 2008)
Czech Republic (January 1, 2009)
Poland (March 1, 2009)
Slovak Republic (May 1, 2014)
Mexico (Signed on June 29, 2004, but not yet in effect)
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