What is the 'Social Security Act'

The Social Security Act is a law enacted in 1935 to create a system of transfer payments in which younger, working people support older, retired people. Passed during the administration of President Franklin D. Roosevelt, the Social Security Act established old-age benefits for workers and benefits for the jobless, as well as aid for dependent mothers and children, victims of work-related accidents, the blind and physically disabled. Previously, such matters were not addressed at all by the federal government aside from pensions provided to veterans. Under the Act, the U.S. government began collecting the Social Security tax from workers in 1937 and began making payments in 1940. It lays the groundwork for many aspects of U.S. labor law.

BREAKING DOWN 'Social Security Act'

The social distress experienced during the Great Depression provided the impetus for the Social Security Act, part of Roosevelt's Second New Deal initiatives to help the United States manage the rapid social and economic changes brought on by industrialization and urbanization. Prior to Social Security many elderly Americans would slip into poverty in old age. 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 and inefficiency of its disability program component. The Social Security Act's rules are outlined in Title 42 of the U.S. Code under Chapter 7.

A key feature of the Social Security Act and Social Security as a social program is how it is funded — via a payroll tax. The Social Security tax combines with the Medicare tax to form what is known as FICA, or the payroll tax. As of 2018, the Social Security tax rate was 6.2% and the Medicare tax rate was 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%. The employee effectively pays the entire tax, as the employer's matching requirement reduces what he is able to pay his employees. Thus, Social Security represents a tax of 12.4% on the employee in addition to Medicare taxes, federal income taxes, state and local income taxes, sales taxes and numerous other less-noticed taxes.

In 1972, amendments to the Social Security Act created the Supplemental Security Income program and the Employment Retirement Income Security Act (ERISA).

Social Security Act: Key Sections

The Social Security Act has undergone many amendments and court challenges over the years. In its initial form, it included the following key sections (out of 21 subchapters):

  • Subchapter I: Old Age — Provides for federal money to be given to states for old-age benefits.
  • Subchapter III: Unemployment — Provides for unemployment benefits via grants to states
  • Subchapter IV: Child Aid — Provides for aid to families with dependent children
  • Subchapter V: Child Welfare — Provides for maternal and child welfare via a block grant
  • Subchapter X: Blindness — Provides for benefits for the blind
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