Since Social Security and various retirement and disability programs are at least, in part, funded through employee payroll deductions, I thought it might be helpful if this month’s column provided a brief history of the programs and some simple explanations as to how they work.
The Social Security Act was passed in 1935 and was even more controversial than “Obama Care” is today. In fact, many pay envelopes during the 1936 presidential election included a flyer that read in part “that you have been sentenced to a weekly pay reduction for all of your working life. You’ll have to serve the sentence unless you reverse it on November 3.” Of course Franklin Roosevelt, the principal sponsor of the bill, won the election anyway and in 1937 Justice Cardozo wrote the Supreme Court decision finding the Social Security Act of 1935 to be constitutional.
The present Social Security system consists of five basic parts: a retirement system, a life insurance system, a disability system, a medical insurance system, and the welfare system called SSI. Employers and employees support the system by contributing 6.2% of the employee’s salary. Self-employed workers pay the whole amount themselves. This tax is applied to the first $114,000 of an employees wage. The deduction appears as “FICA” on the employee’s paycheck.
The money funds the five programs.
An employee is eligible to receive the retirement benefit of Social Security when he or she is old enough and has 40 quarters of credit (10 years) in the system. “Old Enough” in this context is at least 62 years of age. Full retirement benefits don’t accrue until, and unless, a person retires at the age of 66. If an eligible employee postpones their retirement, they receive an additional 8% per year up until age 70. By 2027 the age of full retirement will be at least 67 years of age.
Disability benefits are a second part of the current Social Security system and are paid to employees who are unable to work because of a significant health impairment, and who have accumulated enough quarters of credit to be eligible for the benefit. This program covers long-term disability and takes into account the age, education, and work experience of the employee, but is primarily concerned with the severity of the impairment. Some people qualify for this benefit not on their own but because their parent is covered by Social Security.
Social Security also provides a life insurance benefit for dependents of a deceased worker if the worker was eligible for, or receiving retirement or disability benefits at the time of, the workers death. They also may be eligible if the worker was fully insured at the time of death, even if the worker was not receiving the benefit at the time of death. In some cases, even if the deceased worker was not fully eligible for a benefit, a dependent child may still qualify. Of course the child must have been dependent upon the worker at the time of death. Most people don’t require the help of an attorney to apply for any of these benefits, but simply have to go to their nearest Social Security office and apply. If, however, their application is denied and they wish to appeal the decision, obtaining the services of an attorney can be very helpful.
There are, of course, private retirement accounts; most of which are covered under a federal statue. The Employee Retirement Income Security Act, (ERISA), was passed in 1974 and regulates private pension funds and employer benefit programs. Examples of some of these plans include Individual Retirement Accounts (IRA’s), 401k’s, and “Keogh” plans for self-employed workers. The term “defined benefits plan” refers to employer pensions and provide the retired worker with a percentage of their preretirement income. The term “defined contribution plan” refers to the above described IRA’s etc. and are differentiated from the pensions in that they are in the individual’s name and have a pool of money available to the employee upon retirement. The ERISA statute makes it unlawful for an employer to terminate an employee in order to deprive the employee of the benefit of any of these programs.
Of course, all of these programs involve employee rights and the laws that govern them can sometimes be confusing. If you need clarification or explanations it’s often advisable to seek the advise of an experienced employment attorney.