Tuesday, December 2, 2008

The Basic Principles Behind Social Security

The Social Security Administration web page has a very good summary (on its kid's page, no less….) of the basic principles that lie behind Social Security and distinguish it as a contributory Social Security program as distinct from a typical 'welfare program'. (I'd give a hat tip, but I've forgotten where I first saw this page.) Here's the short version, but the whole page is well worth reading:

  1. Social Security Benefits are Paid as a Legal Right and not According to Need
  2. Social Security Benefits are Related to Your Work
  3. Social Security is Financed by Your Payroll Taxes
  4. Social Security Benefits are Weighted

Whether you agree with this as an accurate description of the current program, or whether this is how the system should continue to work in the future, the SSA page is a very good summary of the traditional view of how Social Security should and does work. Read on.

The Basic Principles that Underlie the Program

Underlying the Social Security program are certain basic principles that guide its development and growth. These characteristics are worth noting because they are the key to how the program accomplishes its goal to provide a base of economic security for the American people. Five of these principles are discussed below.

Social Security Benefits are Paid as a Legal Right and not According to Need

The Social Security program is not and was never intended to be a program to provide benefits based on need. Rather, it is a system of social insurance under which workers (and their employers) contribute a part of their earnings in order to provide protection for themselves and their families if certain events occur. Since each worker pays Social Security taxes, each worker earns the right to receive Social Security benefits without regard to need. This is one of the basic principles of the Social Security program and is largely responsible for its widespread public acceptance and support.

The fact that Social Security benefits go to some people who have high incomes has been a source of criticism. However, these persons pay into the program and play an important role in its financial base. Moreover, benefits of higher earners are subject to the income tax as a result of the 1983 Social Security amendments.

Social Security Benefits are Related to Your Work

Social Security taxes and benefit amounts are related to a person's level of earnings during working years. As people earn more money and pay more in Social Security taxes, they are earning a right to higher benefits. There is, however, a limit on the amount of yearly earnings on which Social Security taxes must be paid and on which program benefit payments are figured.

Some have argued that this limit favors high earners, who do not have to pay on as high a proportion of their earnings. However, the limit, which automatically increases as wages increase, is necessary. If all the earnings of higher paid workers were taxed and then credited for benefits, the program would have to pay very high benefits.

Another argument against work-related benefits has been that people who do not work for one reason or another (homemakers, disabled children) may not earn the right to benefits. However, in general, such persons are covered as dependents of workers and may receive retirement, survivors, or disability benefits on the workers' earnings records.

Social Security is Financed by Your Payroll Taxes

The main source of Social Security income is the taxes that employees, employers, and the self-employed pay. This method of financing Social Security—a payroll tax on workers and their employers—remains the primary method of financing the program. The Social Security program has won widespread public acceptance and support largely because it is directly supported by the people who receive benefits from it. Both benefit amounts and Social Security taxes are based on the worker's earnings under the program. This aspect of Social Security helps to avoid any implication that the benefits are a form of government assistance or public charity.

A continuing argument against the payroll tax is that it places a burden on the cost of doing business. It decreases the number of workers a company can afford to hire (and pay matching Social Security taxes) and limits the amount of wages they can afford to pay, the argument goes. However, companies are permitted to deduct the Social Security taxes they pay from their income tax as a business expense. They are also permitted to include Social Security benefits workers expect to receive in the company's pension plans.

Since the Social Security program began, many ideas have been advanced for obtaining additional revenues. However, the Congress and various advisory groups that have studied the program over the years have not endorsed proposals which would alter its basic structure.

Social Security Benefits are Weighted

The method of figuring benefits is weighted in favor of workers with low average lifetime earnings and those with families. This is because the program attempts to achieve social adequacy as well as individual equity. The goal of social adequacy assures that individuals receive a level of benefits that reflects their lesser ability to prepare for the risk. The goal of individual equity means that a person receives a reasonable return on his/her investment in Social Security.

Thus, while it is true that higher earners receive higher benefits, lower-paid workers receive higher benefits in relation to their earnings in employment covered by Social Security than do higher-paid workers. (Earnings replacement rates are about 60 percent for minimum wage earners, 42 percent for average wage earners, and 26 percent for high earners.)

In addition, the eligible members of the family of a retired, disabled, or deceased worker are paid benefits up to a family maximum. As a result, Social Security has made a substantial contribution to raising people's income above the poverty level. It is estimated that if there were no Social Security, there would be almost four aged poor persons for everyone that is now classified as poor. Thus, any additional cost to the program as a result of the weighting of benefits is more than offset by the social gains that result.


William said...

Actually the SSA is wrong. No one has a legal right to Social Security Benefits.

“There has been a temptation throughout the program's history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. That is to say, if a person makes FICA contributions over a number of years, Congress cannot, according to this reasoning, change the rules in such a way that deprives a contributor of a promised future benefit. Under this reasoning, benefits under Social Security could probably only be increased, never decreased, if the Act could be amended at all. Congress clearly had no such limitation in mind when crafting the law. Section 1104 of the 1935 Act, entitled "RESERVATION OF POWER," specifically said: "The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress." Even so, some have thought that this reservation was in some way unconstitutional. This is the issue finally settled by Flemming v. Nestor.” [1]

“Workers and beneficiaries have no legal ownership over their Social Security benefits. Instead, what they have is a political promise that can be changed at any time, by any amount, for any reason. In any retirement system a lack of legal ownership is a source of insecurity. In one that is under-financed in the long run by 25 percent, it is a serious problem.”[2]

As for being related to your wages, they are directly and solely related to wages and nothing else.

What they fail to point out is that the payroll tax has been raised from 2% of wages to 10.6% of wages. That A.J. Altmeyer testified before Congress in 1943 that SS was broke. [3]

From an indoctrination point of view, it is good.

For my point of view and the way we got into this, you can see my power point presentation I give. [4]
[1] Social Security Administration’s Web Site, http://www.ssa.gov/history/nestor.html

[2] President’s Commission to Strengthen Social Security, Interim Report August, 2001, Page 3, http://www.csss.gov/reports/Report-Interim.pdf

[3] A. J. Altmeyer, Chairman of the Social Security Board Before the Senate Committee on Finance on October 14, 1943

[4] What Went Wrong?

Andrew G. Biggs said...


You're sort-of right. Do people have a legal right to Social Security benefits? Sure -- there's a law that says that if you have such-and-such earnings you're entitled to such-and-such benefits. So that's a legal right.

Now, do you have a contractual right or a constitutional right? No. The government can (and has, and surely will again) change the law regarding Social Security benefits. So you always have a legal right, except that the law can change...

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Anonymous said...

The principles of social security are available at the Social Security Administration website at History: 1994-96 Advisory Council. The Nine Guiding Principles are near the end of the webpage. Search for "nine basic principles".

The Nine Guiding Principles of Social Security by Mr. Ball were refined and published by the Century Foundation in 1998. See Oral History Collection Robert M. Ball - Curriculum Vitae. Scroll down to Books.

Since the Century Press article is not readily available, I have posted the text from Mr. Ball's article at The Nine Guiding Principles of Social Security.

Don Nordeen
A Curmudgeon's Notebook