Social Security: Why It was Created & How It Works

Old or young, new to your job or a 20-year veteran, you've heard of heard of Social Security. But do you know why and how it was created and how it works today?

Some History

In August 2010, Social Security turns 75 years old. The original Social Security Act was signed into law by President Franklin D. Roosevelt in 1935. At that time, the US was just beginning to recover from the Great Depression..

Millions of people were still out of work, and there was alarming concern for the elderly and retired Americans who had lost everything. The Social Security program was intended to be -and essentially still is today - a social insurance program. It's a government-run program providing economic security to our citizens.

The 1935 Act provided for "old age" or retirement benefits, aid to dependent children, disability insurance, and unemployment insurance. Payments were made in lump sums until 1940 when a monthly payment system was put into place. And, it was paid for by workers. Workers made contributions to a trust fund ("Fund") from their paychecks to pay for the retirement and other benefits they'd need in the further.

The Social Security Board (SSB) was created when the President signed the Act in 1935. It remained that way until 1946 when it was renamed the Social Security Agency (SSA).

Social Security Today

Over the years, the Act was changed or "amended" in several ways, but the basic principals are still the same. Under today's Social Security Act, the SSA still manages the program, workers still make contributions from their paychecks, and monthly payments are still made to those who are eligible for:

• Retirement benefits . At age 67, workers who contributed to the Fund may apply for payments to help with everyday living and expenses and to offset the loss of income from their jobs. You may retire at age 62, but payments are reduced until you turn 67
• Survivors' and death benefits , which generally pay a lump sum amount to surviving family members of a deceased worker who contributed to the Fund. In addition, in many cases, the worker's spouse and/or dependent children may continue to receive the worker's monthly payments for a certain period of time
• Disability benefits . Generally, these are for workers who paid into the Fund, and certain family members, who have a serious mental or physical disability that interferes with their ability to work

Today, unemployment insurance isn't covered by the Social Security Act. Rather, it's handled by a joint state-federal program.

On the other hand, the Act now provides for Medicare, which provides health care benefits certain people, such as those who are disabled and elderly people with low incomes. Nonetheless, when you say "social security," most people think only about the retirement, disability, and survivors' and death benefits.

The Future

According the most recent report from SSA officials, the costs of running the program will be more than what's paid into the Fund starting in 2016. In addition, the Fund will be able to pay full benefits until the year 2037. After that, benefits will be reduced to 74% unless something is changed to lower costs, increase the money going into the Fund, decrease the amounts being paid from the Fund, or all three.

In 2010, there've been suggestions to raise the retirement age to 70, or perhaps raising the payroll tax. Everyone agrees something needs to be done so that future retirees and others have the social insurance and financial security envisioned by President Roosevelt.

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