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. It was signed into law in 1935 during the administration of President Franklin D. Roosevelt. Previously, such benefits were not provided at all by the federal government, aside from pensions for veterans.

Under the act, the U.S. government started collecting the Social Security tax from workers in 1937 and began making payments in 1940. It laid the groundwork for many aspects of U.S. labor law.

Key Takeaways

  • The Social Security Act was signed into law by President Franklin D. Roosevelt in 1935.
  • It created benefits systems for retired, jobless, and disabled people, as well as dependent mothers and children.
  • Benefits are funded via a payroll tax levied on workers and employers.

Understanding the Social Security Act

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

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 the biggest expenditure in the federal budget and is projected to cost $1.2 trillion in 2021.

The Social Security tax combines with the Medicare tax to form FICA, or the payroll tax. For 2021, the Social Security tax rate is 6.2%, and the Medicare tax rate is 1.45%. The total payroll tax of 7.65% is deducted from the employee's paycheck. The employer must make a matching contribution of an additional 7.65%. Social Security tax is also taken from the earnings of the self-employed. In 2021, the Social Security tax rate is 12.4% for the self-employed, who also pay a 2.9% Medicare tax.

In 2021, workers only pay Social Security taxes on income up to $142,800 (up from $137,700 for 2020). Any amount earned above $142,800 is not subject to the tax. There is no income cap on the Medicare tax.

History of the Social Security Act

The social distress experienced during the Great Depression provided the impetus for the Social Security Act, part of Roosevelt's New Deal initiatives to help the United States manage the rapid social and economic changes brought on by industrialization and urbanization. Before Social Security, many elderly Americans would slip into poverty in old age.

The Social Security Act has undergone many amendments and court challenges over the years. In 1972, for example, amendments created the Supplemental Security Income (SSI) program. 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, with cash to meet basic needs for food, clothing, and shelter. These benefits are financed by general funds from the U.S. Treasury, not Social Security taxes.

In its initial form, the act included the following key sections (out of 21 subchapters):

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

Many scholars consider Social Security one of the more successful social programs in U.S. history, though 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 economy. In 1940, about 222,000 people received Social Security benefits. As of December 2020, that number was nearly 70 million.