Feb 2, 2008


In a broad sense, the term Social Security can be used to refer to any of several programs resulting from the Social Security Act of 1935 and its frequent amendments over the years. The act established four programs aimed at providing economic security for the American society:

- Old-age insurance

- Unemployment insurance

- Federal grants for assistance to certain needy groups: the aged, the blind, and children

- Federal grants for maternal and child welfare, public health work, and vocational rehabilitation

The main focus in this post is on the old-age insurance program and the benefits that have been added to that program over the years. These additional benefits include survivors insurance (1939), disability insurance (1956), hospital insurance (1965), and supplementary medical insurance (1965). Taken together, these programs constitute the old-age, survivors, disability, and health insurance (OASDHI) program of the federal government. This program is often separated into two broad parts. The first part is the old-age, survivors and disability insurance (OASDI) program. Over the years, OASDI has become commonly referred to as Social Security. The remainder of the OASDHI program is called Medicare, with hospital insurance being called Part A and supplemental medical insurance being called Part B.

The following discussion of Social Security and Medicare begins with a description of the extent of coverage under the programs and the way the programs are financed. It then focuses on the eligibility requirements and benefits under the various parts of the programs. Because of the many differences between Social Security and Medicare, the discussion largely treats each program separately. This is followed by a discussion of the adequacy of the funding of these programs. Finally, there is a description of the tax implications of Social Security and Medicare benefits and contributions.

Extent of Coverage
More than 90 percent of the workers in the United States are in covered employment under the Social Security program and more than 95 percent under the Medicare program. This means that these workers have wages (if they are employees) or self-employment income (if they are self-employed) on which Social Security and Medicare taxes must be paid. The following are the major categories of workers who are not covered under the programs or who are covered only if they have met specific conditions:

Civilian employees of the federal government who were employed by the government prior to 1984 and who are covered under the Civil Service Retirement System or certain other federal retirement programs. These workers are covered by government plans that provide benefits similar to those available under Social Security. Coverage for new civilian federal employees under the Social Security program was one of the most significant changes resulting from 1983 amendments to the Social Security Act. It should be noted, however, that all federal employees have been covered under Social Security for purposes of Medicare since 1983.

Railroad workers. Under the Railroad Retirement Act, employees of railroads have their own benefit system that is similar to Social Security. However, they are covered under Medicare. In addition, there are certain circumstances under which railroad workers receive benefits from the Social Security program even though their contributions were paid to the railroad program.

Some state and local government employees. Historically, employees covered under state and local government retirement plans have been covered under Social Security and Medicare only if a state entered into a voluntary agreement with the Social Security Administration. Under such an agreement, the state may either require that employees of local governments be covered or allow local governments to decide whether to include their employees. In addition, the state may elect to include all or only certain groups of employees. It is estimated that more than 80 percent of state and local government employees have Social Security and Medicare coverage as a result of such agreements. In addition, coverage under Medicare is compulsory for state and local employees hired after March 1986, and coverage under Social Security is compulsory for employees hired after July 1, 1991, if they do not participate in a public retirement system.

American citizens working abroad for foreign affiliates of U.S. employers, unless the U.S. employer owns at least a 10 percent interest in the foreign affiliate and has made arrangements with the secretary of the treasury for the payment of Social Security and Medicare taxes. However, Americans working abroad are covered under Social Security and Medicare if they are working directly for U.S. employers rather than for their foreign subsidiaries.

Ministers who elect out of coverage because of conscience or religious principles.

Workers in certain jobs, such as student nurses, newspaper carriers under age 18, and students working for the school at which they are regularly enrolled or doing domestic work for a local college club, fraternity, or sorority.

Certain family employment. This includes the employment of a child under age 18 by a parent. This exclusion, however, does not apply if the employment is for a corporation owned by a family member.

Certain workers who must satisfy special earnings requirements. For example, self-employed persons are not covered unless they have net annual earnings of $400 or more. In addition, certain agricultural workers must have annual cash wages of $150 or more, and domestic workers must earn $1,200 or more in cash wages in a calendar year.

Tax Rates and Wage Bases
Part B of Medicare is financed by a combination of monthly premiums paid by persons eligible for benefits and contributions from the federal government. Part A of Medicare and all the benefits of the Social Security program are financed through a system of payroll and self-employment taxes paid by all persons covered under the programs. In addition, employers of covered persons are also taxed. These taxes are often referred to as FICA taxes because they are imposed under the Federal Insurance Contributions Act.

In 2001, an employee and his or her employer each pay a tax of 7.65 percent on the first $80,400 of the employee's wages. Of this tax rate, 6.2 percent is for Social Security; 1.45 percent is for the hospital insurance portion of Medicare. The Medicare tax rate of 1.45 percent is also levied on all wages in excess of $80,400. The tax rates are currently scheduled to remain the same after 2001; however, the wage bases are adjusted annually for changes in the national level of wages. Therefore, if wage levels increase by 4 percent in a particular year, the wage base for the following year will also increase by 4 percent. The tax rate for the self-employed is 15.3 percent on the first $80,400 of self-employment income and 2.9 percent on the balance of any self-employment income. This is equal to the combined employee and employer rates.

Over the years, both the tax rates and wage bases have risen dramatically to finance increased benefit levels under Social Security and Medicare as well as new benefits that have been added to the program...


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