How Does Social Security Work

Social security is a system through which government provides financial protection to individuals against some socially recognized and unpredictable future conditions like unemployment, old age, sickness, poverty and disability.

Types of Benefits
Social security can take the form of Social Insurance and Income Maintenance programs. Social security is usually provided through pension schemes, retirement benefits, unemployment insurance and benefit, disability benefit and survivor benefit programs.

Social insurance is an insurance program managed by the government, where people receive benefits out of their contributions to the insurance scheme. It is a government provision for the people against some foreseen conditions like old age, unemployment, sickness and disability. Accordingly, insurance programs can be pension schemes, health insurance, unemployment insurance, disability insurance and survivor benefit programs.

In income maintenance programs, cash payment is made to individuals in case of termination of employment due to disability and retirement. Retirement benefit provides a continuous income, once an employee reaches the retirement age. The amount is based on the average earning throughout the person's employment period.

Disability benefits are provided to those who have not attained the retirement age, but have suffered from physical or mental impairment which prevents them from participating in income earning activities for at least a period of one year. Under survivor benefit programs, the widow and minor unmarried or disabled children of the deceased employee can avail the benefits.

How do Social Security Programs Work?
Social security programs are self-financing in the sense that they generate their own resources. The history of a social security system that would fund itself, dates back to 1935, when President Roosevelt signed the Social Security Act. It was the period of Great Depression, and as a result, a large number of people lost their jobs. So, lots of people needed benefits and support from the government. But, as there was not enough money to pay the huge amount of benefits, the idea of a self-financing social security system came into being.

In a self-financing social security system, contributions are made by the employee, employer and the self-employed, in the form of payroll taxes to the social security programs. Money paid by the present contributors is used to assist those in need of social security. So, when the present workers retire, they depend on contributions from future workers for availing social security benefits.

Social security taxes or contributions to social security schemes depend on the income level of the individuals during their working period. The amount of benefits also depends on the level of income of the beneficiaries. By this logic, people who earn more and pay more to security schemes, would naturally receive more benefits in future.

Social Security Controversies
Social security has been surrounded by controversies from the day of its inception. When the social security act was proposed in USA, it was argued that it would result in loss of jobs. This argument was countered by the conviction that social security would prompt the older workers to retire, and thereby create new employment opportunities for the younger people.

Another point of criticism was the exclusion and inadequate coverage of certain groups of people. For example, the social security schemes of USA excluded women and minorities from the benefits. Certain job categories, like, agricultural labor, domestic service, teaching, social service and nursing jobs were also not covered under the act.

Nowadays, the survival of social security has become a debatable issue. It is believed that with the growing population and increase in life expectancy, the working population will not be able to support the ever-increasing retired population, and the system might collapse.

Experts suggest privatization of the system, as social security reduces individual ownership and involves the redistribution of wealth from workers to retirees. This deviates from the ideal of free market mechanism. Social security is also losing its former appeal, due to the emergence of attractive investment and insurance schemes offered by the private sector, promising higher returns on invested money.

Criticism of social security is also based on the argument against payroll tax. Some experts are of the opinion that payroll tax increases the cost of business, which in turn, reduces the number of employees that a company can hire. It also reduces remuneration of the employees. However, the company can always subtract the payroll tax as a business expense from their income tax, and decrease its liability

Despite the criticism that is casting a shadow on the future of the social security system, there is no doubt that it is the responsibility of the state to provide protection to its citizens through social security programs. These programs not only provide economic security, but also help in maintaining social stability by reducing income inequality. Also, social security provides income through various programs, thereby preventing the fall of income below a certain level during recession. This is definitely of great help in counteracting deflationary tendencies of the economy.