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Short term federal government investments may be more secure but pay much lower average percentages.

Nearly all other federal, state and local retirement systems work in a similar fashion with different benefit retirement ratios.

Some plans are now combined with Social Security and are "piggy backed" on top of Social Security benefits.

For example, the current Federal Employees Retirement System, which covers the vast majority of federal civil service employees hired after 1986, combines Social Security, a modest defined-benefit pension (1.1% per year of service) and the defined-contribution Thrift Savings Plan.

The current Social Security formula used in calculating the benefit level (primary insurance amount or PIA) is progressive vis-à-vis lower average salaries.

Anyone who worked in OASDI covered employment and other retirement would be entitled to both the alternative non-OASDI pension and an Old Age retirement benefit from Social Security.

Because of their limited time working in OASDI covered employment the sum of their covered salaries times inflation factor divided by 420 months yields a low adjusted indexed monthly salary over 35 years, AIME.

The progressive nature of the PIA formula would in effect allow these workers to also get a slightly higher Social Security Benefit percentage on this low average salary.

Congress passed in 1983 the Windfall Elimination Provision to minimize Social Security benefits for these recipients.

The basic provision is that the first salary bracket, $0–791/month (2013) has its normal benefit percentage of 90% reduced to 40–90%see Social Security for the exact percentage.

The reduction is limited to roughly 50% of what you would be eligible for if you had always worked under OASDI taxes.

The 90% benefit percentage factor is not reduced if you have 30 or more years of "substantial" earnings.

The average Social Security payment of $1,230/month ($14,760/year) in 2013 is only slightly above the federal poverty level for one$11,420/yr and below the poverty guideline of $15,500/yr for two.

For this reason, financial advisers often encourage those who have the option to do so to supplement their Social Security contributions with private retirement plans.

Many of these employers will match a portion of an employee's savings dollar-for-dollar up to a certain percentage of the employee's salary.

Even without employer matches, individual retirement accounts (IRAs) are portable, self-directed, tax-deferred retirement accounts that offer the potential to substantially increase retirement savings.

Financial advisers often suggest that long-term investment horizons should be used, as historically short-term investment losses "self correct", and most investments continue to deliver good average investment returns.

The IRS has tax penalties for withdrawals from IRAs, 401(K)s, etc.

This presents challenges to businesses, governments, and individuals seeking to ensure future benefits or having to deal with taxation authorities in multiple countries.

To that end, the Social Security Administration has signed treaties, often referred to as Totalization Agreements, with other social insurance programs in various foreign countries.

First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings.

Second, the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country.

The social security number, or SSN, is issued pursuant to section 205(c)(2) of the Social Security Act, codified as .

The government originally stated that the SSN would not be a means of identification, but currently a multitude of U.S. entities use the Social Security number as a personal identifier.

Importantly, most parents apply for Social Security numbers for their dependent children in order to include them on their income tax returns as a dependent.

Everyone filing a tax return, as taxpayer or spouse, must have a Social Security Number or Taxpayer Identification Number (TIN) since the IRS is unable to process returns or post payments for anyone without an SSN or TIN.

As the "baby boomers" move out of the work force and into retirement, however, expenses will come to exceed tax receipts and then, after several more years, will exceed all OASDI trust income, including interest.

At that point the system will begin drawing on its trust fund Treasury Notes, and will continue to pay benefits at the current levels until the Trust Fund is exhausted.

In 2013 all Social Security programs except the retirement trust fund (OASDI) spent more than they brought in and relied on significant withdrawals from their respective trust funds to pay their bills.

The retirement (OASDI) trust fund of $2.541trillion is expected to be emptied by 2033 by one estimate as new retirees become eligible to join.

The total "Social Security" expenditures in 2013 were $1,360billion dollars, which was 8.4% of the $16,200billion GNP (2013) and 37.0% of the federal expenditures of $3,684billion (including a $971.0billion deficit).

All other parts of the Social Security program: medicare (HI), disability (DI) and Supplemental Medical (SMI) trust funds are already drawing down their trust funds and are projected to go into deficit in about 2020 if the present rate of withdrawals continue.

As the trust funds are exhausted either benefits will have to be cut, fraud minimized or taxes increased.

In 2005, this exhaustion of the OASDI Trust Fund was projected to occur in 2041 by the Social Security Administration or by 2052 by the Congressional Budget Office, CBO.

Nevertheless, from 2010 through 2022, total trust fund income, including interest income, is more than is necessary to cover costs, so trust fund assets will continue to grow during that time.

Beginning in 2023, trust fund assets will diminish until they become exhausted in 2036.

Non-interest income is projected to be sufficient to support expenditures at a level of 77 percent of scheduled benefits after trust fund exhaustion in 2036, and then to decline to 74 percent of scheduled benefits in 2085.

In 2007, the Social Security Trustees suggested that either the payroll tax could increase to 16.41 percent in 2041 and steadily increased to 17.60 percent in 2081 or a cut in benefits by 25 percent in 2041 and steadily increased to an overall cut of 30 percent in 2081.

The Social Security Administration projects that the demographic situation will stabilize.

The cash flow deficit in the Social Security system will have leveled off as a share of the economy.

Some demographers argue that life expectancy will improve more than projected by the Social Security Trustees, a development that would make solvency worse.

Some economists believe future productivity growth will be higher than the current projections by the Social Security Trustees.

In this case, the Social Security shortfall would be smaller than currently projected.

Tables published by the government's National Center for Health Statistics show that life expectancy at birth was 47.3 years in 1900, rose to 68.2 by 1950 and reached 77.3 in 2002.

The latest annual report of the Social Security Agency (SSA) trustees projects that life expectancy will increase just six years in the next seven decades, to 83 in 2075.

A separate set of projections, by the Census Bureau, shows more rapid growth.

The Census Bureau projection is that the longer life spans projected for 2075 by the Social Security Administration will be reached in 2050.

Other experts, however, think the past gains in life expectancy cannot be repeated, and add that the adverse effect on the system's finances may be partly offset if health improvements or reduced retirement benefits induce people to stay in the workforce longer.

Actuarial science, of the kind used to project the future solvency of social security, is subject to uncertainty.

The SSA actually makes three predictions: optimistic, midline, and pessimistic (until the late 1980s it made four).

The Social Security crisis that was developing prior to the 1983 reforms resulted from midline projections that turned out to be too optimistic.

It has been argued that the overly pessimistic projections of the mid to late 1990s were partly the result of the low economic growth (according to actuary David Langer) assumptions that resulted in pushing back the projected exhaustion date (from 2028 to 2042) with each successive Trustee's report.

During the heavy-boom years of the 1990s, the midline projections were too pessimistic.

Obviously, projecting out 75 years is a significant challenge and, as such, the actual situation might be much better or much worse than predicted.

The Social Security Advisory Board has on three occasions since 1999 appointed a Technical Advisory Panel to review the methods and assumptions used in the annual projections for the Social Security trust funds.

The most recent report of the Technical Advisory Panel, released in June 2008 with a copyright date of October 2007, includes a number of recommendations for improving the Social Security projections.

Costs of Social Security have already started to exceed income since 2018.

This means the trust funds have already begun to be empty and will be fully depleted in the near future.

As of 2018, the projections made by the Social Security Administration estimates that Social Security program as a whole will deplete all reserves by the year 2034.

Increased spending for Social Security will occur at the same time as increases in Medicare, as a result of the aging of the baby boomers.

If workers and employers each paid 7.6% (up from today's 6.2%), it would eliminate the financing gap altogether.

This 1.4% increase (2.8% for self-employed) has over 60% support in surveys conducted by the National Academy of Social Insurance (NASI).

A phase out of Social Security benefits for those who already have income over $48,000/year ($4,000/month) would eliminate over 20% of the funding gap.

This is not very popular, with only 31% of surveyed households favoring it.

Social Security benefits are now based on an average of a worker's 35 highest paid salaries with zeros averaged in if there are fewer than 35 years of covered wages.

The averaging period could be increased to 38 or 40 years, which could potentially reduce the deficit by 10 to 20%, respectively.

Require all newly hired people to join Social Security.

Over 90% of all workers already pay FICA and SECA taxes, so there is not much to gain by this.

As explained below, in the case of employment, the employer and employee are each responsible for one half of the Social Security tax, with the employee's half being withheld from the employee's pay check.

In the case of self-employed persons (i.e., independent contractors), the self-employed person is responsible for the entire amount of Social Security tax.

The portion of taxes collected from the employee for Social Security are referred to as "trust fund taxes" and the employer is required to remit them to the government.

These taxes take priority over everything, and represent the only debts of a corporation or LLC that can impose personal liability upon its officers or managers.

For each calendar year for which the worker is assessed the FICA contribution, the SSA credits those wages as that year's covered wages.

The income cutoff is adjusted yearly for inflation and other factors.

A separate payroll tax of 1.45% of an employee's income is paid directly by the employer, and an additional 1.45% deducted from the employee's paycheck, yielding a total tax rate of 2.90%.

There is no maximum limit on this portion of the tax.

This portion of the tax is used to fund the Medicare program, which is primarily responsible for providing health benefits to retirees.

The Social Security tax rates from 1937–2010 can be accessed on the Social Security Administration's website.

The combined tax rate of these two federal programs is 15.30% (7.65% paid by the employee and 7.65% paid by the employer).

In 2011–2012 it temporarily dropped to 13.30% (5.65% paid by the employee and 7.65% paid by the employer).

In essence, a self-employed individual pays both the employee and employer share of the tax, although half of the self-employment tax (the "employer share") is deductible when calculating the individual's federal income tax.

If an employee has overpaid payroll taxes by having more than one job or switching jobs during the year, the excess taxes will be refunded when the employee files his federal income tax return.

Any excess taxes paid by employers, however, are not refundable to the employers.

By Congressional Budget Office (CBO) calculations the lowest income quintile (0–20%) and second quintile (21–40%) of households in the U.S. pay an average income tax of −9.3% and −2.6% and Social Security taxes of 8.3% and 7.9% respectively.

A student who is a household employee for a college club, fraternity, or sorority, and is enrolled and regularly attending classes at a university.

A child under age 18 (or under age 21 for domestic service) who is employed by their parent.

A person who receives payments from a state or a local government for services performed to be relieved from unemployment.

An incarcerated person who works for the state or local government that operates the prison in which the person is incarcerated.

A person at an institution who works for the state of local government that operates the institution.

An employee of a state or local government who was hired on a temporary basis in response to a specific unforeseen fire, storm, snow, earthquake, flood, or a similar emergency, and the employee is not intended to become a permanent employee.

A real estate agent or salespeople's compensation if substantially all the compensation is directly related to sales or other output, rather than to the number of hours worked, and there is a written contract stating that the individual will not be treated as an employee for federal tax purposes.

The compensation is exempt if * Employees of state or local government entities in Alaska, California, Colorado, Illinois, Louisiana, Maine, Massachusetts, Nevada, Ohio, and Texas.

Earnings as a council member of a federally recognized Indian tribe.

A fishing worker who is a member of a federally recognized Indian tribe that has recognized fishing rights.

A nonresident alien who is an employee of a foreign government on wages paid in their official capacities as foreign government employees.

A nonresident alien who is employed by a foreign employer as a crew member working on a foreign ship or foreign aircraft.

A nonresident alien who works in Guam, is a resident of the Philippines, and is on an H-2A, H-2B, or H-2R visa.

A member of certain religious groups, such as the Mennonites and the Amish, who consider insurance to be a lack of trust in God, and see it as their religious duty to provide for members who are sick, disabled, or elderly.

A person who is temporarily working outside their country of origin and is covered under a tax treaty between their country and the United States.

Net annual earnings from self-employment of less than $400.

Wages received for service as an election worker, if less than $1,400 a year (in 2008).

Wages received for working as a household employee, if less than $1,700 per year (in 2009–2010).

In 1984, the portion of the benefits potentially subject to tax was 50%.

The Deficit Reduction Act of 1993 set the portion to 85%.

Therefore, high earners pay a lower percentage of their total income because of the income caps; because of this, and the fact there is no tax on unearned income, social security taxes are often viewed as being regressive.

However, benefits are adjusted to be significantly more progressive, even when accounting for differences in life expectancy.

The low income bias of the benefit calculation means that a lower paid worker receives a much higher percentage of his or her salary in benefit payments than higher paid workers.

In fact, a married low salaried worker can receive over 100% of their salary in benefits after retiring at the full retirement age.

High-salaried workers receive 43% or less of their salary in benefits despite having paid into the "system" at the same rate (see benefit calculations above).

To minimize the impact of Social Security taxes on low salaried workers the Earned Income Tax Credit and the Child Care Tax Credit were passed, which largely refund the FICA and or SECA payments of low-salaried workers through the income tax system.

By Congressional Budget Office (CBO) calculations the lowest income quintile (0–20%) and second quintile (21–40%) of households in the U.S. pay an average federal income tax of −9.3% and −2.6% of income and Social Security taxes of 8.3% and 7.9% of income respectively.

By CBO calculations the household incomes in the first and second quintiles have an average total federal tax rate of 1.0% and 3.8% respectively.

However, these groups also have by far the smallest percentage of American household incomesthe first quintile earns just 3.2% of all income, while the second quintile earns only 8.4% of all income.

Higher-income retirees will have to pay income taxes on 85% of their Social Security benefits and 100% on all other retirement benefits they may have.

The act requires that if a couple is cohabitating they should be considered married for purposes of the SSI program.

Consequently, if the claimant is found disabled and found to be "holding out"; this claimant will be entitled to reduced or no SSI benefits.

However, the Social Security Act does not accept that a claimant "holding out as husband or wife" should be entitled of Survivor, Retirement or Widows benefits, when the claimant's "husband or wife" dies.

SSA rules and regulations about marital status either prohibit (SRDI program) or reduce (SSI program) benefits to indigent claimants.

The sudden loss of confidence resulting in a collapse of a conventional Ponzi scheme when the scheme's true nature is revealed is unlikely to occur in the case of the Social Security system.

Private sector Ponzi schemes are also vulnerable to collapse because they cannot compel new entrants, whereas participation in the Social Security program is a condition for joining the U.S. labor force.

Using this calculator it is possible to estimate net Social Security benefits (i.e., estimated lifetime benefits minus estimated lifetime FICA taxes paid) for different types of recipients.

In the book Democrats and RepublicansRhetoric and Reality Joseph Fried used the calculator to create graphical depictions of the estimated net benefits of men and women who were at different wage levels, single and married (with stay-at-home spouses), and retiring in different years.

These graphs vividly show that generalizations about Social Security benefits may be of little predictive value for any given worker, due to the wide disparity of net benefits for people at different income levels and in different demographic groups.

For example, the graph below (Figure 168) shows the impact of wage level and retirement date on a male worker.

As income goes up, net benefits get smallereven negative.

However, the impact is much greater for the future retiree (in 2045) than for the current retiree (2005).

The male earning $95,000 per year and retiring in 2045 is estimated to lose over $200,000 by participating in the Social Security system.

In the next graph (Figure 165) the depicted net benefits are averaged for people turning age 65 anytime during the years 2005 through 2045.

However, we do see the impact of gender and wage level.

Because women tend to live longer, they generally collect Social Security benefits for a longer time.

As a result, they get a higher net benefit, on average, no matter what the wage level.

The next image (Figure 166) shows estimated net benefits for married men and women at different wage levels.

In other words, the average married person (with a stay-at-home spouse) gets a greater benefit per FICA tax dollar paid than does the average single person, no matter what the gender or wage level.

Second, there is only limited progressivity among married workers with stay-at-home spouses.

Review Figure 166 carefully: The net benefits drop as the wage levels increase from $50,000 to $95,000; however, they increase as the wage levels grow from $5,000 to $50,000.

In fact, net benefits are lowest for those earning just $5,000 per year.

The last graph shown (Figure 167) is a combination of Figures 165 and 166.

In this graph it is very clear why generalizations about the value of Social Security benefits are meaningless.

At the $95,000 wage level a married person could be a big winner, getting net benefits of about $165,000.

On the other hand, he could lose an estimated $152,000 in net benefits if he remains single.

Altogether, there is a "swing" of over $300,000 based upon the marriage decision (and the division of earnings between the spouses).

In addition there is a large disparity between the high net benefits of the married person earning $95,000 ($165,152) versus the relatively low net benefits of the man or woman earning just $5,000 ($30,025 or $41,890, depending on gender).

In other words, the high earner, in this scenario, gets a far greater return on his FICA tax investment than does the low earner.

In the book How Social Security Picks Your Pocket other factors affecting Social Security net benefits are identified: Generally, people who work for more than 35 years get a lower net benefit, all other factors being equal.

People who do not live long after retirement age get a much lower net benefit.

Finally, people who derive a high percentage of income from non-wage sources get high Social Security net benefits because they appear to be poor, when they are not.

It has been argued that Social Security is an insurance plan as opposed to a retirement plan.

Unlike a pension, for example, Social Security pays disability benefits.

A private pension fund accumulates the money paid into it, eventually using those reserves to pay pensions to the workers who contributed to the fund; and a private system is not universal.

Social Security cannot "prefund" by investing in marketable assets such as equities, because federal law prohibits it from investing in assets other than those backed by the U.S. government.

As a result, its investments to date have been limited to special non-negotiable securities issued by the U.S. Treasury, although some argue that debt issued by the Federal National Mortgage Association and other quasi-governmental organizations could meet legal standards.

Social Security cannot by law invest in private equities, although some other countries (such as Canada) and some states permit their pension funds to invest in private equities.

As a universal system, Social Security generally operates as a pipeline, through which current tax receipts from workers are used to pay current benefits to retirees, survivors, and the disabled.

When there is an excess of taxes withheld over benefits paid, by law this excess is invested in Treasury securities (not in private equities) as described above.

Of these two, Social Security is more similar to a defined benefit pension plan.

In a defined benefit pension plan, the benefits ultimately received are based on some sort of pre-determined formula (such as one based on years worked and highest salary earned).

Defined benefit pension plans generally do not include separate accounts for each participant.

By contrast, in a defined contribution pension plan each participant has a specific account with funds put into that account (by the employer or the participant, or both), and the ultimate benefit is based on the amount in that account at the time of retirement.

Some have proposed that the Social Security system be modified to provide for the option of individual accounts (in effect, to make the system, at least in part, more like a defined contribution pension plan).

Specifically, on February 2, 2005, President George W. Bush made Social Security a prominent theme of his State of the Union Address.

He described the Social Security system as "headed for bankruptcy", and outlined, in general terms, a proposal based on partial privatization.

Critics responded that privatization would require huge new government borrowing to fund benefit payments during the transition years.

Both "defined benefit" and "defined contribution" private pension plans are governed by the Employee Retirement Income Security Act (ERISA), which requires employers to provide minimum levels of funding to support "defined benefits" pensions.

The purpose is to protect the workers from corporate mismanagement and outright bankruptcy, although in practice many private pension funds have fallen short in recent years.

Like any insurance program, Social Security "spreads risk" as the program protects workers and covered family members against loss of income from the wage earner's retirement, disability, or death.

For example, a worker who becomes disabled at a young age could receive a large return relative to the amount they contributed in FICA before becoming disabled, since disability benefits can continue for life.

As in private insurance plans, everyone in the particular insurance pool is insured against the same risks, but not everyone will benefit to the same extent.

The analogy to insurance, however, is limited by the fact that paying FICA taxes creates no legal right to benefits and by the extent to which Social Security is, in fact, funded by FICA taxes.

During 2011 and 2012, for example, FICA tax revenue was insufficient to maintain Social Security's solvency without transfers from general revenues.

These transfers added to the general budget deficit like general program spending.

This has caused workers' supplemental retirement plans such as 401(k)s to perform substantially more poorly than expected when current retirees were investing the bulk of their savings in them.

In 2010, the median household retirement account balance for workers aged 55 to 64 was $120,000, which will provide only a trivial supplement to Social Security benefits, but about a third of households had no retirement savings at all.

When Social Security was first passed, there were significant questions over its constitutionality as the Court had found another pension scheme, the original Railroad Retirement Act, to violate the due process clause of the Fifth Amendment.

Some, such as University of Chicago law professor Richard Epstein and Harvard University professor Robert Nozick, have argued that Social Security should be unconstitutional.

In the 1937 U.S. Supreme Court case of Helvering v. Davis, the Court examined the constitutionality of Social Security when George Davis of the Edison Electric Illuminating Company of Boston sued in connection with the Social Security tax.

The U.S. District Court for the District of Massachusetts first upheld the tax.

The District Court judgment was reversed by the Circuit Court of Appeals.

Commissioner Guy Helvering of the Bureau of Internal Revenue (now the Internal Revenue Service) took the case to the Supreme Court, and the Court upheld the validity of the tax.

Modified versions of the affected programs were afterwards approved by the Court, including Social Security.

When Helvering v. Davis was argued before the Court, the larger issue of constitutionality of the old-age insurance portion of Social Security was not decided.

The case was limited to whether the payroll tax was a suitable use of Congress's taxing power.

Despite this, no serious challenges regarding the system's constitutionality are now being litigated, and Congress's spending power may be more coextensive, as shown in cases like South Dakota v. Dole during the Reagan Administration.

In February 2006, the Social Security Administration received several reports of an email message being circulated addressed to "Dear Social Security Number And Card owner" and purporting to be from the Social Security Administration.

The message informs the reader "that someone illegally is using your Social Security number and assuming your identity" and directs the reader to a website designed to look like Social Security's Internet website.

Once directed to the phony website, the individual is reportedly asked to confirm his or her identity with "Social Security and bank information".

Specific information about the individual's credit card number, expiration date and PIN is then requested.

The Social Security Administration has its own investigatory unit to combat and prevent fraud, the Cooperative Disability Investigations Unit (CDIU).

The Cooperative Disability Investigations (CDI) Program continues to be one of the most successful initiatives, contributing to the integrity of SSA's disability programs.

In response, Congress amended the Social Security Act in 1988 to prohibit the private use of the phrase "Social Security" and several related terms in any way that would convey a false impression of approval from the Social Security Administration.

The constitutionality of this law () was upheld in United Seniors Association, Inc. v. Social Security Administration, 423 F.3d 397 (4th Cir.

In 2011, there will be 56 million beneficiaries and 158 million workers paying in.

In 2010, total income was $781.1billion and expenditures were $712.5billion, which meant a total net increase in assets of $68.6billion.

Assets in 2010 were $2.6trillion, an amount that is expected to be adequate to cover the next ten years.

In 2023, total income and interest earned on assets are projected to no longer cover expenditures for Social Security, as demographic shifts burden the system.

By 2035, the ratio of potential retirees to working age persons will be 37 percentthere will be less than three potential income earners for every retiree in the population.

At this rate the Social Security Trust Fund would be exhausted by 2036.

The wealth substitution effect occurs when a person saving for retirement recognizes that the Social Security system will take care of him and decreases his expectations about how much he needs to personally save.

The retirement effect occurs when a taxpayer saves more each year in an effort to reduce the total number of years he must work to accumulate enough savings before retirement.

Some economists argue that the consumer price index overestimates price increases in the economy and therefore is not a suitable metric for adjusting benefits, while others argue that the CPI underestimates the effect of inflation on what retired people actually need to buy to live.

The current cost of living adjustment is based on the consumer price index for Urban Wage Earners and Clerical Workers (CPI-W).