What Is Social Security?
Social Security is the term used for the Old-Age, Survivors, and Disability
Insurance (OASDI) program in the United States, run by the Social Security
Administration (SSA), which is a federal agency. While best known for retirement
benefits, it also provides disability income and survivor benefits. It is
independent of a lump sum pension.
History of Social Security
All people throughout all of human history have faced the uncertainties brought
on by unemployment, illness, disability, death, and old age. In the realm of
economics, these inevitable facets of life are said to be threats to
one's economic security.
For the ancient Greeks, economic security took the form of amphorae of olive
oil. Olive oil was very nutritious and could be stored for relatively long
periods. To provide for themselves in times of need the Greeks stockpiled olive
oil and this was their form of economic security.
In medieval Europe, the feudal system was the basis of economic security, with
the feudal lord responsible for the economic survival of the serfs working on
the estate. The feudal lord had economic security as long as there was a steady
supply of serfs to work the estate, and the serfs had economic security only so
long as they were fit enough to provide their labor. During the Middle Ages, the
idea of charity as a formal economic arrangement also appeared for the first
Family members and relatives have always felt some degree of responsibility to
one another, and to the extent that the family had resources to draw upon, this
was often a source of economic security, especially for the aged or infirm. And
the land itself was an important form of economic security for those who owned
it or who lived on farms.
These then are the traditional sources of economic security: assets; labor;
family; and charity.
The Rise of Formal Systems of Economic Security
As societies grew in economic and social complexity, and as isolated farms gave
way to cities and villages, Europe witnessed the development of formal
organizations of various types that sought to protect the economic security of
their members. Probably the earliest of these organizations were guilds formed
during the Middle Ages by merchants or craftsmen. Individuals who had a common
trade or business banded together into mutual aid societies, or guilds. These
guilds regulated production and employment and they also provided a range of
benefits to their members including financial help in times of poverty or
illness and contributions to help defray the expenses when a member died.
When the English-speaking colonists arrived in the New World they brought with
them the ideas and customs they knew in England, including the "Poor Laws." The
first colonial poor laws were fashioned after those of the Poor Law of 1601.
They featured local taxation to support the destitute; they discriminated
between the "worthy" and the "unworthy" poor, and all relief was a local
responsibility. No public institutions for the poor or standardized eligibility
criteria would exist for nearly a century. It was up to local town elders to
decide who was worthy of support and how that support would be provided.
As colonial America grew more complex, diverse, and mobile, the localized
systems of poor relief were strained. The result was some limited movement to
state financing and the creation of almshouses and poorhouses to "contain" the
problem. For much of the 18th and 19th centuries, most poverty reliefs were
provided in the almshouses and poorhouses. Relief was made as unpleasant as
possible to "discourage" dependency. Those receiving relief could lose their
personal property, the right to vote, the right to move, and in some cases were
required to wear a large "P" on their clothing to announce their status.
Support outside the institutions was called "outdoor relief" and was looked upon
with distrust by most citizens. It was felt that "outdoor relief" made things
too easy on the poor who should be discouraged from the habit of poverty in
every way possible. Nevertheless, since it was expensive to build and operate
the poorhouses, and since it was relatively easy to dispense cash or in-kind
support, some outdoor relief did emerge. Even so, prevailing American attitudes
toward poverty relief were always skeptical and the role of government was kept
to the minimum. So much so that by as late as 1915 at most only 25% of the money
spent on outdoor relief was from public funds.
Civil War Pensions: America's First "Social Security" Program
Although Social Security did not really arrive in America until 1935, there was
one important precursor that offered something we could recognize as a social
security program, to one special segment of the American population. Following
the Civil War, there were hundreds of thousands of widows and orphans, and
hundreds of thousands of disabled veterans. Immediately following the Civil War
a much higher proportion of the population was disabled or survivors of deceased
breadwinners than at any time in America's history.
This led to the development
of a generous pension program, with interesting similarities to later
developments in Social Security. (The first national pension program for
soldiers was passed in early 1776 prior even to the signing of the Declaration
of Independence. Throughout America's antebellum period pensions of limited
types were paid to veterans of America's various wars. But it was with the
creation of Civil War pensions that a full-fledged pension system developed in
America for the first time.)
The Civil War Pension program began shortly after the start of the War, with the
first legislation in 1862 providing for benefits linked to disabilities
"incurred as a direct consequence of military duty." Widows and orphans could
receive pensions equal in amount to that which would have been payable to their
deceased soldier if he had been disabled. In 1890 the link with a
service-connected disability was broken, and any disabled Civil War veteran
qualified for benefits.
In 1906, old age was made a sufficient qualification for
benefits. So that by 1910, Civil War veterans and their survivors enjoyed a
program of disability, survivors, and old-age benefits similar in some ways to
the later Social Security programs. By 1910, over 90% of the remaining Civil War
veterans were receiving benefits under this program, although they constituted
barely .6% of the total U.S. population of that era. Civil War pensions were
also an asset that attracted young wives to elderly veterans whose pensions they
could inherit as the widow of a war veteran. Indeed, there were still surviving
widows of Civil War veterans receiving Civil War pensions as late as 1999.
In the aggregate, military pensions were an important source of economic
security in the early years of the nation. In 1893, for example, the $165
million spent on military pensions was the largest single expenditure ever made
by the federal government. In 1894 military pensions accounted for 37% of the
entire federal budget. (The Civil War pension system was not without its
But these figures based on the federal budget exaggerate the role of military
pensions in providing overall economic security since the federal government's
share of the economy was much smaller in earlier times. Also, there were
features of the system which meant that many veterans did not receive any
benefits. For example, former Confederate soldiers and their families were
barred from receiving Civil War pensions. So in 1910 the per capita average
military pension expenditure for residents of Ohio was $3.36 and for Indiana, it
was $3.90. By contrast, the per capita average for the Southern states was less
than 50 cents (it was 17 cents in South Carolina).
Even though America had a "social security" program in the form of Civil War
pensions since 1862, this precedent did not extend itself to the general
society. The expansion of these types of benefit programs to the general
population, under Social Security, would have to await additional social and
The Company Pension
Before the rise of company pension plans, paternalistic companies sometimes
"graduated" older workers to token jobs at reduced pay. A few paid some form of
retirement stipend-but only if the company was so inclined since there were no
rights to any kind of retirement benefit. Most older workers were simply
dismissed when their productive years were behind them.
One of the first formal company pension plans for industrial workers was
introduced in 1882 by the Alfred Dolge Company, a builder of pianos and organs.
Dolge withheld 1% of each workers' pay and placed it into a pension fund, to
which the company added 6% interest each year. Dolge viewed providing for older
workers as being a business cost like any other, arguing that just as his
company had to provide for the depreciation of its machinery, he should also provide for the depreciation of his employees.
Despite Mr. Dolge's progressive
ideas and his best intentions, the plan proved largely unsuccessful since it
required a worker to spend many years in continuous employment with the company,
and labor mobility, then as now, meant that relatively few workers spend their
whole working career with one company. Not only was the Dolge Plan one of the
first formal company pension systems in industrial America, but it was also one
of the first to disappear when the company went out of business a few years
State Old-Age Pensions
Following the outbreak of the Great Depression, poverty among the elderly grew
dramatically. The best estimates are that in 1934 over half of the elderly in
America lacked sufficient income to be self-supporting. Despite this, state
welfare pensions for the elderly were practically non-existent before 1930. A
spurt of pension legislation was passed in the years immediately before the
passage of the Social Security Act so that 30 states had some form of old-age
pension program by 1935. However, these programs were generally inadequate and
ineffective. Only about 3% of the elderly were receiving benefits under these
state's plans, and the average benefit amount was about 65 cents a day.
There were many reasons for the low participation in state-run pension systems.
Many elderly were reluctant to "go on welfare." Restrictive eligibility criteria
kept many poor seniors from qualifying. Some jurisdictions, while having state
programs on the books, failed to implement them. Many of the state-passed
pension laws provided for counties within the state to opt to participate in the
pension program. As a result, in 1929 of the six states with operating pension
laws on the books only 53 of the 264 counties eligible to adopt a pension plan
did so. After 1929, the States began enacting laws without county options. By
1932 seventeen states had old-age pension laws, although none were in the south,
and 87% of the money available under these laws was expended in only three
states (California, Massachusetts, and New York).
Despite all of the institutional strategies adopted in early America to assure
some measure of economic security, huge changes would sweep through America
which would, in time, undermine the existing institutions. Four important
demographic changes happened in America beginning in the mid-1880s that rendered
the traditional systems of economic security increasingly unworkable:
- The Industrial Revolution
- The urbanization of America
- The disappearance of the "extended" family
- A marked increase in life expectancy
The Industrial Revolution transformed the majority of working people from
self-employed agricultural workers into wage earners working for large
industrial concerns. In an agricultural society, prosperity could be easily seen
to be linked to one's labor, and anyone willing to work could usually provide at
least a bare subsistence for themselves and their family. But when economic
income is primarily from wages, one's economic security can be threatened by
factors outside one's control--such as recessions, layoffs, failed businesses,
Along with the shift from an agricultural to an industrial society, Americans
moved from farms and small rural communities to large cities--that's where the
industrial jobs were. In 1890, only 28% of the population lived in cities, by
1930 this percentage had exactly doubled, to 56%.
The Townsend Movement:
It was a lean, bespectacled doctor from Long Beach, California. In 1933 he found
himself unemployed at age 66 with no savings and no prospects. This experience
galvanized him to become the self-proclaimed champion of the cause of the
elderly. He devised a plan known as the Townsend Old Age Revolving Pension Plan
or Townsend Plan for short.
The basic idea of the Townsend Plan was that the government would provide a
pension of $200 per month to every citizen age 60 and older. The pensions would
be funded by a 2% national sales tax.
There were three eligibility requirements:
- The person had to be retired;
- Their past life is free from habitual criminality;
- The money had to be spent within the U.S. by the pensioner within 30
days of receipt.
The Social Security Advisory Board
From the very beginning, the Social Security program has had the services of
periodic Advisory Councils composed primarily of non-government members whose
function was to represent the public at large in advising government officials
on Social Security policy. The first such Advisory Council was convened in 1934
in support of the work of the Committee on Economic Security. Over the years,
the Advisory Councils have been very influential in setting the agenda for
changes in Social Security.
The Councils were especially influential in shaping
the pivotal 1939 and 1950 amendments. Eventually, the tradition of periodic
Social Security Advisory Councils was made a standard provision of the law, with
a requirement that such a Council is appointed every four years. This law stayed
in effect until 1994 when it was repealed as part of the legislation which made SSA an independent agency.
It was thus the final Council, signaling the end of a
long tradition in Social Security. Under that 1994 law, the Councils are
abolished and a permanent one was formed to serve many of the same functions.
How Social Security Works
Social Security is an insurance program. Workers pay into the program, typically
through payroll withholding where they work. They can earn up to four credits
Social Security of Workmen in India
India's social security system is composed of several schemes and programs
spread throughout a variety of laws and regulations. Keep in mind, however, that
the government-controlled social security system in India applies to only a
small portion of the population.
Furthermore, the social security system in India includes not just an insurance
payment of premiums into government funds (like in China), but also lump sum
- Health Insurance and Medical Benefit
- Disability Benefit
- Maternity Benefit
While a great deal of the Indian population is in the unorganized sector and may
not have an opportunity to participate in each of these schemes, Indian citizens
in the organized sector (which includes those employed by foreign investors) and
their employers are entitled to coverage under the above schemes.
The applicability of mandatory contributions to social insurance is varied. Some
of the social insurances require employer contributions from all companies, some
from companies with a minimum of ten or more employees, and come from companies
with twenty or more employees.
Pension or Employees' Provident Fund
The Employees' Provident Fund Organization, under the Ministry of Labor and
Employment, ensures superannuation pensions and family pensions in case of death
during service. Presently, only about 35 million out of a labor force of 400
million have access to formal social security in the form of old-age income
protection in India.
Out of these 35 million, 26 million workers are members of
the Employees' Provident Fund Organization, which comprises private-sector
workers, civil servants, military personnel, and employees of State Public
Sector Undertakings (PSUs).
The schemes under the Employees' Provident Fund Organization apply to businesses
with at least 20 employees. Contributions to the Employees' Provident Fund
Scheme are obligatory for both the employer and the employee when the employee
is earning up to Rs 15,000 (US$220) per month, and voluntary when the employee
earns more than this amount. If the pay of any employee exceeds this amount, the
contribution payable by the employer will be limited to the amount payable on
the first Rs 15,000 (US$220) only.
The Employees' Provident Fund Organization includes three schemes:
- The Employees' Provident Fund Scheme, 1952;
- The Employees' Pension Scheme, 1995; and,
- The Employees' Deposit Linked Insurance Scheme, 1976.
The Employees' Provident Fund (EPF) Scheme is contributed to by the employer
(1.67-3.67 percent) and the employee (10-12 percent).
The Employee Pension Scheme (EPS) is contributed to by the employer (8.33
percent) and the government (1.16 percent), but not the employee.
Finally, the Employees' Deposit Linked Insurance (EDLI) Scheme is contributed to
by the employer (0.5 percent) only.
Four main types of pension (all monthly) are offered:
- Pension upon superannuation or disability;
- Widows' pension for death while in service;
- Children's pension; and,
- Orphan's pension.
In addition, there are separate pension funds for civil servants, workers
employed in coal mines and tea plantations in the state of Assam, and seamen.
Health Insurance and Medical Benefit
India has a national health service, but this does not include free medical care
for the whole population. The Employees' State Insurance (ESI) Act creates a
fund to provide medical care to employees and their families, as well as cash
benefits during sickness and maternity and monthly payments in case of death or
disablement for those working in factories and establishments with 10 or more
The ESI (Central) Amendment Rules, 2016 – notified on December 22, 2016
– expanded coverage to include employees earning Rs 21,000 (US$313.53) or less
in a month from January 1, 2017; previously, the wage limit for ESI subscribers
was Rs 15,000 (US$223.95) per month. Subsequently, the Employees' State
Insurance (Central) Amendment Rules, 2017 was notified on January 20, detailing
new maternity benefits for women who have insurance.
Sickness benefit under ESI coverage is 70 percent of the average daily wage and
is payable for 91 days during two consecutive benefit periods.
The Employee's Compensation Act, 1923, formerly known as the 'Workmen's
Compensation Act, 1923', requires the employer to pay compensation to employees
or their families in cases of employment-related injuries that result in death
In addition, workers employed in certain types of occupations are exposed to the
risk of contracting certain diseases, which are peculiar and inherent to those
occupations. A worker contracting an occupational disease is deemed to have
suffered an accident out of and in the course of employment, and the employer is
liable to pay compensation for the same. Injuries resulting in permanent total
and partial disablement are listed in parts I and II of Schedule I of the
Employee's Compensation Act, while occupational diseases have been defined in
parts A, B, and C of Schedule III of the Employee's Compensation Act.
Compensation calculation depends on the situation of occupational disability:
50 percent of the monthly wage multiplied by the relevant factor (age) or an
amount of Rs 80,000 (US$1,246.20), whichever is more.
- Total permanent disablement
60 percent of the monthly wage multiplied by the relevant factor (age) or an
amount of Rs 90,000 (US$1,401.98), whichever is more.
The Maternity Benefit (Amendment) Act, 2017 came into force on April 1, 2017,
and increases some of the key benefits mandated under the previous Maternity
Benefit Act of 1961.
The amended law provides women in the organized sector with
paid maternity leave of 26 weeks, up from 12 weeks, for the first two children.
For the third child, the maternity leave entitlement will be 12 weeks. India now
has the third most maternity leave in the world, following Canada (50 weeks) and
Norway (44 weeks).
The Act also secures 12 weeks of maternity leave for mothers adopting a child
below the age of three months as well as for commissioning mothers (biological
mothers) who opt for surrogacy. The 12 weeks in these cases will be calculated
from the date the child is handed over to the adoptive or commissioning mother.
In other provisions, the law mandates that every establishment with over 50
employees must provide crèche facilities within easy distance, which the mother
can visit up to four times a day. For compliance purposes, companies should note
that this particular provision will come into effect from July 1, 2017.
The Maternity Benefit (Amendment) Act introduces the option for women to
negotiate work-from-home if they reach an understanding with their employers
after the maternity leave ends.
Under the pre-existing Maternity Benefit Act of 1961, every woman is entitled
to, and her employer is liable for, the payment of maternity benefit at the rate
of the average daily wage for the period of the employee's actual absence from
work. Apart from 12 weeks of salary, a female worker is entitled to a medical
bonus of US$54.45 (Rs 3,500).
The 1961 Act states that in the event of a miscarriage or medical termination of
pregnancy, the employee is entitled to six weeks of paid maternity leave.
Employees are also entitled to an additional month of paid leave in case of
complications arising due to pregnancy, delivery, premature birth, miscarriage,
medical termination, or a tubectomy operation (two weeks in this case).
In addition to the above, the 1961 Act states that no company shall compel its
female employees to do tasks of a laborious nature or tasks that involve long
hours of standing or which in any way are likely to interfere with her pregnancy
or the normal development of the fetus, or are likely to cause her miscarriage
or otherwise adversely affect her health.
The Payment of Gratuity Act, 1972 directs establishments with ten or more
employees to provide the payment of 15 days of additional wages for each year of
service to employees who have worked at a company for five years or more.
Gratuity is provided as a lump sum payout by a company. In the event of the
death or disablement of the employee, the gratuity must still be paid to the
nominee or the heir of the employee.
The employer can, however, reject the payment of gratuity to an employee if the
individual has been terminated from the job due to any misconduct. In such a
case of forfeiture, there must be a termination order containing the charges and
the misconduct of the employee.
Gratuity is calculated through the formula mentioned below:
Gratuity = Last Drawn Salary × 15/26 × Years of Service, where
- The ratio 15/26 represents 15 days out of 26 working days in a month
- Last Drawn Salary = Basic Salary + Dearness Allowance.
- Years of Service are rounded up or down to the nearest full year. For
example, if the employee has a total service of 10 years, 10 months, and 25
days, 11 years will be factored into the calculation. Gratuity is exempt
from taxation provided that the amount does not exceed 15 days' salary for
every completed year of service calculated on the last drawn salary (subject
to a maximum of US$15,467.62 or Rs 10 lakh). It is important to note that an employer
can choose to pay more gratuities to an employee, which is known as ex-gratia
and is a voluntary contribution. Ex-gratia is subject to tax.
The Social Security system has been one of the most successful and popular
programs of the Indian Government, it also helps beneficiaries to get the
benefits. As per the current scenario, reforms must be implemented to protect
current retirees and ensure retirement security for future generations by
educating the citizens; government can increase economic stability, security,
and opportunity for all citizens.