A University of Alabama Law School Clinical Program funded in part by West Alabama Regional Commission

1. What Social Security is and how it works

What most of us think of as “Social Security” is a social insurance program to which covered workers and their employers contribute over their work-lives. Over 90% of the country’s workers are covered by the system; most of the others are covered by federal, state or civil service systems. Social Security was not intended as a pension or investment program. It is social insurance - designed to provide a basic level of support during old age or disability.

Social Security provides:

Retirement benefits for workers and their spouses as early as age 62
Survivor benefits
Disability benefits for disabled workers and their families
Benefits for certain disabled children of retired or deceased workers
Benefits for divorced spouses if married to a worker for at least ten years

The Federal Insurance Contributions Act (F.I.C.A.), provides the mechanism for collecting employment taxes. An employee and employer are each taxed 6.2% of the employee's taxable wages, a total of 12.4%. The Medicare tax is 1.45% from each, a total of 2.9%. The overall total of employment taxes is 15.3%.

Social Security and Medicare taxes are collected by employers and paid to the Internal Revenue Service, which pays them over to the Social Security Trustees to pay benefits or distribute among the appropriate Social Security Trust Funds. Funds not needed soon to pay benefits are invested in special issue treasury bonds at market rates.

The Social Security Administration has a large web site at www.ssa.gov (it can be accessed through our web site; go to Links). There is a great deal of useful information on the site, but it can be hard to navigate. One helpful approach is to click on the "site map" to start a search on a particular topic. It is now possible to register for benefits, obtain an earnings statement and estimate of benefits on-line. Every local SS office offers numerous free pamphlets explaining different aspects of the program (many can be downloaded from the web site) or you can call Social Security at 1-800-772-1213 and ask for information to be mailed to you. (This takes patience; the lines are often busy.)

Entitlement to Social Security benefits also entitles the beneficiary to Medicare. Benefit payments vary, of course, but the average monthly retiree benefit in 2009 is $1,152. The maximum is $2,323 (unless increased by waiting until age 70 to draw). The average benefit paid to younger disabled retirees is $1,064. There is unlikely to be a cost of living increase in 2010, so benefit payments will probably stay the same. Single retirees with taxable incomes of $25,000 or more and couples with $32,000 or more are subject to federal income tax on part of their SS income.

Each year the Social Security Trustees summarize the year’s events and make projections and recommendations. Click on “Trustee’s Report” on the web site to read current and past Reports.

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