The Federal Insurance Contributions Act is federal legislation in the United States that mandates employers withhold a set percentage of their employees' salary each pay period. FICA also requires that the employers match the employees' amount and contribute the money to a government account known as the Social Security Trust Fund. This fund provides retirement income, as well as disability insurance, Medicare and benefits for survivors.
FICA was the result of the Social Security Act of 1935, which was proposed by U.S. president Franklin D. Roosevelt. The program began collecting taxes and paying benefits in 1937. In 1939, FICA was amended to include widows and orphans of working spouses, as well as elderly people who had not paid into the system.
Originally, Social Security benefits were available only to people who had worked in what was considered commerce and industry. Government employees, medical personnel, lawyers and agricultural workers were all exempt from FICA, and because they were not required to pay into the fund, they could not collect payments from it. These restrictions were lifted, and although there still are categories of workers who can opt out of paying into FICA, no one is expressly excluded from participation.
Social Security Trust Fund
The Social Security Trust Fund, established in 1939, is responsible for collecting the money that is raised through the employer and employee contributions that are required by FICA. The U.S. Department of the Treasury is responsible for managing these funds and is charged with investing this money in securities that are backed by the U.S. government. The government, in effect, loans the money to itself and then uses it to finance other projects. The money is repaid when the bonds come due.
A person can collect reduced Social Security benefits starting at age 62. Distribution of full benefits is determined by an individual's birth year. People who were born before 1938 were able to collect full benefits at 65. For those born between 1938 and 1943, the age increases at a rate of two months per year up to the age of 66 for those born in 1943. As of 2011, the retirement age was 66 for everyone born from 1943-1954, and then it increased again for people who were born from 1955-1959, up to a maximum of age 67 for people who were born in 1960 and after.
Originally, Social Security benefits were not taxable. In 1983, however, the U.S. Congress passed amendments to the Social Security Act that would consider 50 percent of benefits to be taxable income for beneficiaries who had a total income that exceeded an established limit. This amount was increased to 85 percent in 1993.