Social Security Act (SSA)

The Social Security Act (“SSA”) establishes the federal government social insurance programs commonly known as Social Security and Medicare. Social Security provides workers with guaranteed income protection in old age and when disabled, and provides spouses and dependent children with income after the death or disability of a worker. Medicare is the federal health insurance program for the elderly that provides both hospital and medical care benefits. These programs are mandatory, cover almost all American workers, and are separate and in addition to any employer-sponsored employee benefit program. They are financed by payroll taxes paid by both employers and workers.

Workers are eligible for Social Security benefits if they have worked for 40 quarters (10 years) in jobs covered by Social Security. The amount of benefits they receive depends on the income they have earned throughout their work lives. Under the program, lower-paid workers have a higher percentage of income replaced in retirement than do their higher-paid counterparts.

Once workers are eligible for Social Security, they can receive retirement benefits on a reduced basis at age 62. The age for full retirement benefits is gradually increasing to 67. Retirement benefits are paid monthly for the remainder of the worker’s life. Prior to retirement, workers also can receive monthly disability income if they become unable to work for a year or more.

Workers are eligible for Medicare benefits when they reach age 65, whether retired or not, if they have paid Social Security taxes for 10 years (or are eligible for Social Security through their spouse’s earnings). (Workers who do not meet these requirements may also buy into the program if they are 65, have been a U.S. citizen or legal alien for at least five years, and pay a monthly premium.)

With respect to workplace flexibility, the SSA applies equally to full time and part time workers because the federal government taxes wages earned for each hour worked, regardless of the number of hours worked. However, an individual who has worked part-time throughout all or most of her or his career will have a lower level of overall income on which the Social Security benefits will be calculated.

Medicare payment rules that require employer-sponsored health insurance plans to pay health claims before Medicare will pay for any health costs are also a disincentive to phased retirement programs. Medicare-eligible workers who wish to phase into retirement and continue to work past the age of their Medicare eligibility are limited in the use of their Medicare benefits if they are covered by an employer-sponsored health plan. For example, such employees must continue to pay premiums and copays under their employer-sponsored plan. Employers must also continue to shoulder the cost of these employee health benefits that Medicare would have paid for had the worker chosen to retire completely. Such costs may make employers less inclined to provide phased retirement options for the majority of their workers.