The History of FICA

In August 1935, President Roosevelt signed the Social Security Act. Enacted during the dark days of the Depression, it is perhaps the greatest legacy of FDR's administration and a prime example of the "New Deal." As a form of "social insurance," Social Security provided payments to retirees over 65, widows with dependent children and the disabled. Back then, as it is today, workers and employers pay a percentage of the employee's wages into the Social Security Trust Fund under provisions of the Federal Insurance Contributions Act, or FICA.

After the end of the Civil War, Congress authorized pension benefits to disabled veterans, as well as the widows and children of the fallen. But by the mid-1930s, most of those old pensioners had died off. However, with the onset of the Depression and the collapse of the American economy, FDR understood that the government had an obligation to care for its most vulnerable citizens, many of whom were too old to work and living in poverty. Social Security was designed to assist those people as well as infuse needed spending power into the moribund economy.

The concept of "social insurance" began gaining traction during the late 1800s. President Theodore Roosevelt understood the need for America to build a safety net for its older workers and the disabled, but congressional action on the matter stalled. However, by the early 1930s, many individual states had enacted a hodgepodge of retirement and pension programs that filled the void. With the passage of the Social Security Act, a uniform nationwide standard was finally established for everyone.

When Social Security was enacted, payments were one-time lump sums, monthly checks were not introduced until 1940. According to the Social Security website, Ernest Ackerman was the first applicant to receive a lump-sum benefit. He retired one day after the Social Security program began and was awarded a lump-sum payment of 17 cents.

Since the Social Security Act was initially passed, Congress has intervened on several occasions to broaden the base of qualified recipients and has added program enhancements such as cost-of-living-adjustments (COLA). To help maintain the fiscal viability of Social Security, it has also increased the payroll contribution percentage and wage limits that are subject to Social Security contributions. It has also begun to gradually raise the age at which an individual can collect full retirement benefits.

Read More: Average Cost of Living Increase

During the Johnson administration, Medicare was established to help provide health care coverage for retirees. And during the Nixon administration, a new entitlement, SSI (Supplemental Security Income), was passed to provide Social Security benefits to disabled workers under the age of 65. Both of these programs are also administered by the Social Security Administration.

Medicare contributions are also deducted from worker's pay under FICA rules. As of 2010, FICA is 85 years old, meaning the history of FICA, is really history of Social Security. In 2020, the FICA tax rates are as follows: 6.2 percent Social Security tax for both the employer and employee, 1.45 percent Medicare tax for both the employer and employee, and 0.9 percent additional Medicare tax on wages of $200,000 or more.

Read More: Early Social Security Retirement Vs. Full Social Security Retirement