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How Does Social Security Work?

Chandramita Bora Aug 25, 2020
Social security protects you against some adverse and unforeseen circumstances. Read to know more about this system and its working mechanism.
Social security is a system through which government provides financial protection to individuals against some socially recognized and adverse conditions like unemployment, old age, sickness, poverty, and disability.

Types of Benefits

Social security can take the form of social insurance and income maintenance programs. The financial protection is usually provided through the pension schemes, retirement benefits, unemployment insurance and benefits, disability benefits, and survivor benefit programs.
Social insurance is an insurance program managed by the government, where people receive benefits from their contributions to the insurance scheme. It provides protection against conditions like old age, unemployment, sickness, and disability.
Accordingly, the insurance programs can be pension schemes, unemployment insurance, health insurance, disability insurance, or survivor benefit programs.
In income maintenance programs, cash payment is made to an individual whose employment is terminated due to disability and retirement. The retirement benefit programs provide a continuous income, once an employee reaches the retirement age. The amount is based on the average earning throughout the employment period.
Disability benefits are provided to those who have not attained the retirement age, but cannot participate in income-earning activities at least for a year due to physical or mental impairments or injuries. Whereas, the widow and minor, unmarried or disabled children of the deceased employee can avail financial benefits under the survivor benefit programs.

The Working Mechanism

The social security programs are self-financing in the sense that they generate their own resources. The history of a self-financing social security system dates back to 1935, when President Roosevelt signed the Social Security Act.
It was the period of Great Depression, and as a result, a large number of people lost their jobs. So, a large section of the population needed benefits and support from the government. But there was not enough money to pay the huge amount of benefits, and so, the idea of a self-financing social security system came into being.
In such a self-financing system, contributions are made by the employees, employers, and the self-employed individuals in the form of payroll taxes to the various security programs.
The money paid by the present contributors is used to assist those who need support from the government. In other words, the contributions made by the present employees are used to provide financial benefits to the past employees.
The contributions that one has to make to these schemes depend on the income level of the individual during his or her working period. The amount of benefits also depends on the level of income of the beneficiaries. By this logic, people who earn more and pay more to the security schemes, would naturally receive more benefits in the future.


Social security has been surrounded by controversies from the day of its inception. When the Social Security Act was proposed in the United States, it argued that this system would cause loss of jobs. This argument was countered by the conviction that this system would prompt the older workers to retire, and create new employment opportunities for the young.
Another point of criticism was the exclusion and the inadequate coverage of certain groups of people. For example, the social security schemes of USA excluded women and minorities from the benefits. Certain job categories, like agricultural labor, domestic service, teaching, social service, and nursing jobs were also not covered under the act.
Nowadays, the survival of this system has become a debatable issue. It is believed that with the growing population and the increase in life expectancy, the working population will not be able to support the ever-increasing retired population, and as a result, the system might collapse.
Experts suggest privatization of the system, as this system reduces individual ownership and involves the redistribution of wealth from workers to retirees. This deviates from the ideal of free market mechanism.
Social security is also losing its former appeal due to the emergence of attractive investment and insurance schemes offered by the private sector, which often promise higher returns on the invested money.
This system is also criticized for the payroll tax. Some experts are of the opinion that payroll tax increases the cost of business, which in turn, reduces the number of employees a company can hire. It also reduces remuneration of the employees. Thus, a company can deduct the payroll tax as a business expense from its income tax, and decrease its liability.
Despite all the criticism that is casting a shadow on the future of the social security system, it is the responsibility of the state to provide protection to its citizens through various programs. These programs not only provide economic security to individuals, but also help maintain stability in the society by reducing income inequalities.
By providing income through various programs, this system helps prevent the fall of income below a certain level during recession. This helps counteract the deflationary tendencies of the economy.