Introduction to Social Security Benefits

1.  Ask:  What do people do for income after they can no longer work or reach an age when they retire?

Students may suggest company retirement programs, 401K, IRA or other savings plans for retirement income.

Ask: What happens when individuals do not plan for retirement or they are not able to provide for themselves?

Explain: By federal law, most workers must contribute to the federal Social Security program – to provide income in the event of retirement or disability. 

2.   Introduce the Social Security Program

Social Security is a social insurance program funded through payroll taxes called the Federal Insurance Contributions Act (FICA). These taxes deposits support four benefit programs, the Federal Old-Age and Survivors Insurance Trust Fund, the Federal Disability Insurance Trust Fund, the Federal Hospital Insurance Trust Fund, and the Federal Supplementary Medical Insurance Trust Fund.

Thw primary part of Social Security is the Old Age, Survivors, and Disability Insurance (OASDI) or Retirement, Survivors, and Disability Insurance (RSDI) program. The term “Social Security” is typically used to refer only to the benefits for retirement, disability, survivorship, and death, which are similar to the benefits provided by traditional private-sector pension plans.  Other benefits, such as Medicare are related to, but not part of Social Security.

The Federal Insurance Contributions Act (FICA) imposes a Social Security withholding tax equal to 6.20% of gross wages amount, up to $106,800 for 2009). Another 6.20% tax is imposed on employers.

For Medicare, a payroll tax of 1.45% of an employee's income is paid directly by the employer, and an additional 1.45% deducted from the employee's paycheck, yielding a total tax rate of 2.90%. There is no maximum limit on this portion of the tax. This portion of the tax is used to fund the Medicare program, which is primarily responsible for providing health benefits to retirees. 

The combined tax rate of the two programs is 15.30% (7.65% paid by the employee and 7.65% paid by the employer).

3.  Students can calculate the amount that will be withheld from a paycheck for Social Security and Medicare.  Multiply the amount of gross income by the percentages indicated above.

Example:          

Gross weekly income: $300.00

FICA withholding:  $18.60

Medicare withholding: $4.35

4.  Review information about Social Security numbers and cards.  http://www.ssa.gov/ssnumber/

5.  Introduce how Social Security benefits are determined using the benefit calculator. 

6.  Go to the Social Security Benefit Calculator, http://www.ssa.gov/planners/calculators.htm

Review the information on the web page.

Use the "Quick Calculator,” http://www.ssa.gov/OACT/quickcalc/index.html, to give an example of how benefits are determined.  Add a retirement date and change the default information if you want.

7.  The Social Security web page included information about planning for retirement for those who will depend on Social Security benefits for income.Go to: http://www.ssa.gov/retire2/

Additional information about retirement planning can be found on the MyMoney.Gov web site, http://205.168.45.52/category/topic1/planning-   retirement/-retiring.html

The American Association of Retired Persons (AARP) provides additional information about Social security and retirement planning on its web site. http://www.aarp.org/work/social-security/

8.  Conclude by briefly mentioning the ongoing controversy over the historical expansion of Social Security benefits (number of people and costs) and the many proposals to “reform” the system – including increasing the tax rate and privatizing the system.

A good discussion starter is: Should people be forced to participate in the Social Security system or should they be able to “opt out” if they are participating in a private plan?

What are the arguments for and against mandatory Social Security participation (the current law) and increasing contributions, especially those of higher income individuals (a proposal to better fund the system)?