The System Today
Social Security is the single largest item in the federal budget, consuming over 22% of total expenditures. (For comparative purposes, 17% of the budget is spent on national

defense, 0.5% is spent on training and employment, and 2.5% is spent of food and nutritional assistance.) In 1996, the system is projected to collect $387 billion in tax revenues and distribute $355 billion to over 43 million recipients.

Social Security is an entitlement program and is thus funded automatically rather than through the annual appropriations process. All individuals who are legally eligible for benefits automatically receive them. As a result, it is demand, not supply, that sets spending levels for the program. The only way to alter spending for Social Security is to change the guiding legislation.

There are a number of basic principles underlying today's structure of Social Security system, including:

1. The system is work related - Benefit levels for retirees and their families are related to earning history and wage level. The higher the contributions, the higher the benefits.

2. Benefits are not means tested - Benefits are paid regardless of income from saving, pensions, insurance, or other forms of non-work income. Workers do not have to prove need to receive benefits.

3. Universal compulsory coverage - Workers may not opt out of the Social Security system. By mandating participation, adverse selection (the situation that arises when individuals who draw the most from an insurance system are the ones who join it) is avoided.

4. Benefits are defined by law - Any person who meets the legal requirements qualifies for benefits. Disagreements may be taken to court.

Coverage
Ninety-five percent of workers, or 135 million people, are covered by the system. In addition to workers in the U.S. and territories, the system covers work done by U.S. citizens and resident aliens outside of the U.S. who are:

· Employed by an American employer;

· Employed by an American affiliate who has elected coverage;

· Self-employed (in certain circumstances).
Workers who are excluded from coverage include:

· Federal civilian employees hired before 1984;

· Railroad workers who are covered by the Railroad Retirement System;

· Some state and local government employees;

· Household and farm workers whose earning don't meet certain minimum requirements;

· Self-employed workers whose earnings are very low;

· Some children who work in family businesses;

· Some people who, for religious reasons, are granted exemptions.

Payroll Taxes
The Social Security system is funded by payroll taxes paid by employees and employers through the Federal Insurance Contributions Act (FICA) and the Self Employment Contributions Act (SECA). (The payroll tax is also used to fund part of the Medicare system.) Today the total employee/employer payroll tax is 15.3%, with 12.4% of that going to Social Security. This rate has been increased dramatically since 1937, when the rate was 2%.

Employers and employees each pay a 7.65% payroll tax. They pay 1.45% on all earnings for Medicare, and they pay 6.2% for Social Security up to a capped amount of $72,600. (This cap changes each year.)

Self-employed individuals pay the full 15.3% tax, but one half of the tax can be deducted as a business expense. Because the employer's portion of the payroll tax translates into lower wages for workers, it is most accurate to talk about the combined level of the payroll tax.