October 19, 1998

Social Security
by Al Levit (alanl@ix.netcom.com)

Part 1: How the Social Security System Works

Before talking about fixing Social Security, let's get our ducks in a row and make sure everyone understands just what the system offers. You might be surprised to know that many of the people who debate it on television don't really know what it entails -- I always am.

We'll break this up into two main parts:

1. What benefits does Social Security provide?
2. How are those benefits paid for?

So let's dig in with...

Social Security Benefits

1. Retirement Benefits

Most of us are aware that Social Security pays a monthly benefit to individuals beginning at age 65. People can also start receiving benefits as early as age 62 by taking a life-long reduction of up to 20%. And people who are still working at age 65 can also delay their retirement benefits and their payments will be increased.

Now, starting in the year 2000, the age for the basic plan of "unreduced" benefits is going to rise. In other words, people will have to wait longer to retire, or they'll have to accept early and reduced benefits at age 65. Benefits will still be available at age 62, but the reductions will be even steeper.

Our legislators don't like to call this a reduction in Social Security benefits, but that's exactly what it is. People who were born after 1959 must now wait until they are 67 to receive full Social Security benefits (sorry about that, Tom and Dave). These changes have been instituted to strengthen the underlying financials of the system.

2.Cost-of-Living Increases

Social Security began the tradition of cost-of-living increases in 1952 with a 77% increase to cover the 12-year period since the first monthly check was sent out in 1940. Numerous smaller ad-hoc increases were granted until 1975, when the first automatic increase took effect. Since 1975, Social Security benefits have methodically increased every year.

Recently, though, studies have confirmed that cost-of-living adjustments have actually been slightly overstated. As a result, the government just altered the method of determining cost-of-living increases, bringing them down. The adjustment now used for the 1998 increase will be about 0.8% less than it would have been under the old method (this is a one-time adjustment back to 1995), and future years adjustments are expected to be about 0.2% per year less than under the old method.

These are small numbers at a glance, but are large monetary differences when applied to the entire nation and compounded over time.

3. Medicare

The third benefit to mention, Medicare, is also part of Social Security. It is split into two parts:

  • Part A provides hospital and medical insurance. It's largely provided free to anyone over age 65 who qualifies for Social Security. Part A is also available to people who've been getting Social Security disability benefits for two years.
  • Part B provides cash for doctors' fees and outpatient services. About 25% of the cost of Part B benefits are paid by the retirees themselves through their premiums. The remainder is paid through "general revenues" (i.e. federal income taxes).

Currently, Medicare is available on an "indemnity basis" without the managed-care constraints that are present in many health insurance plans. As such, the program is very popular with retirees, but it's also very expensive to provide.

4. Other Benefits

Social Security also provides other benefits, including:

  1. Disability: Benefits are paid to people who have a severe physical or mental impairment that is expected to prevent them from doing substantial work for a year or more.
  2. Family benefits: If you are receiving Social Security, then benefits may also be paid to your spouse (if age 62 or over) or your children (if age 18 or younger). Family benefits may even be payable to your ex-spouse if you're divorced.
  3. Survivors: A small benefit is paid to survivors when a Social Security recipient dies.

Next -- how these benefits get funded