What Is FICA
Under the Federal Insurance Contribution Act (FICA), employers must withhold an established percentage from every employee's salary for each pay period. They are also required to match this amount and forward the funds to the Social Security Trust Fund. Along with income for retirement, this fund is used for other entitlement programs, such as Medicare, disability insurance, and survivors' benefits.
History of FICA
In 1935, President Franklin Roosevelt proposed the Social Security Act, and in 1937, the program started collecting taxes and began paying benefits as well. Two years later, FICA was amended to include elderly citizens who had never contributed to the system, along with widows and orphans of those who had paid into it during their working years.
At first, the only people entitled to Social Security benefits were those who worked in what was designated as "commerce and industry" and were also below the age of 65. This meant that attorneys, people who worked in the medical field, farm workers, and government employees were not entitled to FICA benefits because they were not contributing to it. Today, such restrictions no longer exist, and no worker is automatically excluded from the program. However, 70 years later, employees of certain industries still have the option of not paying into it.
What FICA Does
Since 1939, the Social Security Trust Fund has had the duty of collecting the funds from employer and employee contributions that FICA requires under the law. The Treasury Department has the mandate of managing those funds and invests them in securities that have the backing of the Federal Government. Essentially, the government is actually borrowing the money from itself in this process, and it uses the funds for other projects. At the time the related bonds are due, this debt is repaid (put back into the trust fund).
Taxing Social Security
While Social Security benefits were not taxable originally, Congress amended the Social Security Act in 1983, and 50% of these benefits were considered to be taxable for those beneficiaries whose total income exceeded the established limit. Ten years later, the taxable amount increased to 85%.
Social Security Beneficiaries
Only those workers who have contributed to Social Security via FICA qualify for benefits from the fund, and at this time, an individual is eligible for reduced benefits at age 62. In regard to the distribution of full benefits, that is determined by an employee's birth year, and this procedure is carried out as follows:
Those born prior to 1938 are eligible for full benefits at age 65.
For those who were born from 1938 to 1943, the retirement age increases at 2 months per year ending at age 66.
Those born during 1943 to 1954 are also eligible for full retirement benefits at age 66.
For those born in 1960 and thereafter, the age requirement has been raised to 67.
Social security is facing some major funding problems, but it is also a genuine safety net and a significant social insurance program.
