Social Security Act: Meaning, Overview, and History

What Is the Social Security Act?

The Social Security Act established benefits for old-age retirees and the jobless, as well as aid for dependent mothers and children, victims of work-related accidents, people who are blind, and those who have physical disabilities when it was signed into law in 1935. It was created during the administration of and signed by President Franklin D. Roosevelt. These benefits were not provided at all by the federal government before this time, aside from pensions for veterans.

The U.S. government started collecting the Social Security tax from workers in 1937 under the Act. It began making payments in 1940. The Social Security Act laid the groundwork for many aspects of U.S. labor law.

Understanding the Social Security Act

A key feature of the Social Security Act and Social Security as a program is how it's funded. Social Security tax is collected in the form of a payroll tax that's mandated by the Federal Insurance Contributions Act (FICA), or a self-employment tax that's mandated by the Self-Employed Contributions Act (SECA). The tax is levied on both employers and employees.

Social Security and Medicare Taxes

The Social Security tax pays for the retirement, disability, and survivor benefits that millions of Americans receive each year under the Old-Age, Survivors, and Disability Insurance (OASDI) Program, the official name for Social Security in the U.S. The U.S. Social Security system is projected to cost $1.38 billion in 2023.

The Social Security tax rate is 6.2% and the Medicare tax rate is 1.45% as of 2023 and 2024. The total payroll tax of 7.65% is deducted from the employee's paycheck. The employer must then make a matching contribution of an additional 7.65% on the employee's behalf.

Social Security tax is also taken from the earnings of the self-employed. The Social Security tax rate is 12.4% for the self-employed as of 2023 and 2024, and these individuals also pay the entire 2.9% Medicare tax.

History of the Social Security Act

The social distress experienced during the Great Depression provided the impetus for the Social Security Act. It was among Roosevelt's New Deal initiatives to help the United States manage the rapid social and economic changes brought on by industrialization and urbanization. Many elderly Americans would slip into poverty in old age before Social Security was created and enforced.

The Social Security Act has undergone many amendments and court challenges. Amendments created the Supplemental Security Income (SSI) program in 1972. SSI is a needs-based benefits program that provides people who are disabled, blind, or at least 65 years old and have a limited income to meet their basic needs for food, clothing, and shelter. These benefits are financed by general funds from the U.S. Treasury, not from Social Security taxes.

The act included the following key sections out of 21 subchapters in its initial form:

• Subchapter I provides federal money to be given to states for old-age benefits.
• Subchapter III provides unemployment benefits via grants to states.
• Subchapter IV provides aid to families with dependent children.
• Subchapter V provides maternal and child welfare via a block grant.
• Subchapter X provides benefits for people who are blind.
  

The Bottom Line

Many scholars consider Social Security to be one of the most successful social programs in U.S. history, although it does receive some criticism for the complexity of its disability program component. Social Security has grown exponentially over the decades, in tandem with the U.S. population and the economy. About 222,000 people received some form of Social Security benefits in 1940. That number was 71.38 million as of September 2023.