Social Security and Medicare

Chapter 1How the Social Security System Operates

Learning objectives

• Recall that the Federal Insurance Contributions Act (FICA) tax applies to the funding of Social Security retirement, disability benefits, and Medicare benefits.
• Recognize how the additional Medicare tax operates.
• Identify instances in which there is no requirement for FICA taxation.

Overview

On August 14, 1935, the Social Security Act established a delivery system to provide old-age benefits for eligible workers, assistance for victims of industrial accidents, unemployment insurance benefits, and aid for dependent mothers and children, the blind, and the physically handicapped.

In 2016, the Social Security Administration (SSA) paid more than $1 trillion to more than 62 million recipients; 75% were retired workers and their dependents, 16% were disabled workers and their dependents, and 9% were survivors of deceased workers.

The Social Security Act authorized the Social Security Board, which now operates as the Social Security Administration, to register citizens for benefits, administer the contributions received by the federal government, and send payments to recipients. U.S. Social Security “insurance” is supported from “contributions” in the form of taxes on individuals’ wages and employers’ payrolls rather than directly from government funds. Tax revenue generated from the income tax on Social Security benefits received by the IRS from individuals’ personal income tax returns is also a source of funds ...