What is Social Security?

Social security is a federal program that provides income and health insurance to retired persons, the disabled, the poor, and other groups. The program started in 1935 with the signing of the Social Security Act, which was an effort to provide a safety net for the millions of people who had suffered through the Great Depression.

How Does Social Security Work?

The primary programs offered through the U.S. Social Security Administration are:

Retirement benefits. The age at which a person qualifies for benefits depends on the year of birth, but generally a person can receive full benefits at around age 66. In many cases, beneficiaries can opt to begin receiving benefits at age 62, but at a reduced rate. The Social Security Administration generally increases the amount of benefits by 8% for every year that a beneficiary delays receiving benefits (up to age 70). In general, people need to work for at least 10 years in order to qualify for these benefits. Payments are based on earnings (thus, higher earnings mean higher benefits) and the age at which the beneficiary retires. Approximately 38.9 million people received an average monthly benefit of $1,229 in 2011. As a result, the Congressional Budget Office expects the Social Security program to become insolvent by the year 2033.

Disability benefits. People who have become disabled for at least five full months and may continue as long as the person’s medical condition has not improved and the person cannot work. Approximately 10.6 million people received an average monthly benefit under this program of $1,111 in 2011. People who receive disability benefits for 24 months are typically eligible for Medicare. Because applications increased dramatically during the Great Recession, the Congressional Budget Office estimates that this fund will become insolvent by 2017.

Survivors benefits. This program provides monthly payments to children and widows or widowers of Social Security beneficiaries. In 2011, 6.3 million people received an average of $1,185 per month under this program. Typically, survivors receive 75% to 100% of the beneficiary’s basic Social Security benefit. The limit that can be paid to a family as a whole equals 150% to 180% of the deceased’s benefits, generally.

Supplemental Security Income (SSI). This program provides monthly payments to people at least 65 years old who are blind or disabled and have few financial resources (typically no more than $2,000, but this excludes the person’s personal residence, life insurance, car, burial plots, and $1,500 in burial funds).

Medicare. Medicare is a national insurance program for people age 65 and older, as well as people who have disabilities, permanent kidney failure, or Lou Gehrig’s disease. Medicare is not the same as Medicaid. Medicare covered approximately 49 million Americans in 2011, and the program accounts for approximately 15% -20% of all federal spending. The program made $551.3 billion in benefit payments in 2011. The Patient Protection and Affordable Care Act of 2010 (PPACA) increases the benefits available to Medicare recipients, reduces reimbursement rates to health care providers, increases premiums for some beneficiaries, and raises payroll taxes (which fund the program). The Congressional Budget Office expects the portion of the program that pays for hospital expenses to be exhausted by 2020.

Why Does Social Security Matter?

Social Security and Medicare expenses constituted about 50% of the federal government’s outlays in 2011. The programs receive a substantial portion of their revenues through the collection of payroll taxes from workers and employers, and the business model has come under considerable scrutiny in recent decades because the baby boomer generation has entered retirement and begun applying for benefits that cannot be sustained with payroll taxes from the younger, smaller generations remaining in the workforce.