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A Primer On Social Security

December 02, 2015

Social Security represents a major part of the safety net for poor, elderly, and disabled Americans. In 2015, 60 million people received Social Security benefits, including 11 million disabled workers, 2 million dependants of deceased workers, and almost 47 million elderly people. Social Security’s budget for 2015 will be about $859 billion, making Social Security the largest single outlay in the Federal budget (although Social Security is technically independently financed through workers’ savings). Social Security is an important social insurance program that helps to pull millions of seniors out of poverty, and this primer provides a brief background on the program, its financing, and ways that it can be reformed to remain solvent for the long-term.


The Social Security Act was signed into law on August 14th, 1935 by President Franklin Delano Roosevelt as part of his New Deal program. When passed, the program only included retirement benefits for the primary worker (not spouses or dependents). Between 1937 and 1940, the Social Security Administration started registering workers, collecting taxes, and paying the first lump-sum payments. In 1939, the Social Security program was amended to include payments for spouses and dependents, and in 1940 the program started paying monthly payments rather than one-time lump-sum payments. The program did not see any significant changes until the 1950s, when benefits for older disabled workers and their children were added (the program was later extended to disabled workers of all ages). Benefits were later adjusted to provide automatic cost-of-living increases and to make the ‘adult categories’ (beneficiaries who are either adult disabled children or the aged blind and disabled) a program fully funded at the federal level. In addition, amendments that created the Medicare and Medicaid programs as they exist today were added to the Social Security Act. [1]

The social Security program is run by a Commissioner, who is usually an appointed official, and the Social Security Administration. The program has six trustees- the Secretaries of Labor, Health and Human Services, and Treasury, as well as the Commissioner and two public trustees who must be of different political parties, are appointed by the President, and approved by the Senate. Each year, the Trustees issue an annual report describing the financing of the Social Security program and its long-term outlook.[2] The program is funded by a payroll tax of 12.4%, 6.2% of which is paid directly out of the first $118,500 of the worker’s wages and 6.2% of which is matched by the employer.[3] This money is either used to pay for retiree and disability benefits, or allocated to one of two different trust funds (one for old age benefits and one for disability benefits). The Social Security trust currently has about $2.8 trillion in reserves.[4]


In order to receive Social Security retirement benefits, a worker must have worked for at least 10 years (paying 40 quarters worth of taxes into the system). This level of contribution guarantees a worker a monthly retirement check for life.[5] Workers can retire and begin applying for benefits at age 62, but the full retirement age is between 65 and 67 (the age will be fully raised to 67 by 2027) but those who apply for benefits early can expect a lower monthly check than those who wait to retire at the later age.[6] Those who wait past the full retirement age to register for benefits receive a bonus percentage added to future checks for each year that they don’t register, until they reach about age 70.[7];Replacement Rates for Retired Worker 65, 2015

Source: National Academy of Social Insurance, October 2015

The average yearly benefit amounts to about $16,000, with a worker and his/her spouse receiving about $26000 on average. These benefit amounts are calculated based upon the worker’s wages during working years. For example, if the worker made a certain amount of money and contributed into the system, he will receive a percentage of his former income as benefits. The ‘replacement rate’, or the percentage of former income that he or she receives in benefits, is higher for low-income workers than it is for high-income workers. A doctor making $200,000 will not receive as large a percentage of his income in benefits as a steelworker who made $60,000 a year throughout his career, although the doctor will have a higher monetary amount on his check than the steelworker. The benefits for Social Security are not large, and for 1 in 3 elderly persons receiving a check, they amount to over 90% of their income.[8]

Percentage of Seniors in Poverty

Source: Center for Budget and Policy Priorities, 2015.

Benefits for those who are disabled are calculated a bit differently. Eligibility requirements are less stringent in terms of time worked, but the program also requires that an applicant provide medical evidence of their disability and not be able to work in any significant capacity (i.e. not just be unable to do the job they previously had done). The disability must be expected to last longer than 12 months, or result in death.[9] Applications are reviewed by the local Social Security offices, and it is typically difficult to qualify to become a disability beneficiary-only about a third of applicants are awarded benefits.[10] The average yearly disability benefit is about $14,000 per worker, with small additional increases available for disabled workers who have dependent children.[11] While retirement and disability benefits are the two most common forms of Social Security payments, the program also provides support for adult disabled children who have never worked, spouses of retirees, spouses of deceased workers, and the children of deceased workers and retirees. The majority of benefits are paid to the elderly and disabled combined, but benefits to the other groups listed provide an important safety net for families.

Challenges and Areas for Reform

Social Security currently receives more in tax income than it spends on benefits. However, due to increased life expectancy and a decreasing reproductive rate, the United States is aging. The amount of benefits paid to retirees is expected to increase, while the amount that current workers are paying into the system will decrease. In 2019, the Trust Fund will have accumulated about $2.9 million in savings, but that will be the last year that the program is able to bring in more money than it spends. The Trustees’ Report indicates that the Trust Fund will be totally depleted in 2034. This does not mean that benefits will not be paid out, but rather that seniors will see a dramatic benefit cut, amounting to over 20% of their current benefits.[12]

OASDI Cost and Scheduled Tax Revenue as a Percentage of GDP

Source: Washington Post Wonk Blog, 2010.

While the shortfall in funds for Social Security is a concern, the program has faced significant budgetary issues previously that have been resolved through acts of Congress. Given the current gridlock in Congress, this may not seem reassuring, but Congress recently passed an amendment to the program’s financing in 2015 that extended the financing of the disability benefits trust fund until 2022 (it was expected to run out of funds in 2016).[13] This movement bodes well for reform of the program as a whole. Many different possibilities for reform exist and have been suggested. A short list includes raising the payroll tax rates, raising the retirement age, decreasing benefits directly, and switching to a different cost-of-living-adjustment measurement system. A combination of these reforms is likely needed to close the 75 year predicted shortfall in the program’s funding. However, given the popularity of the program, it is unlikely that politicians will decide to underfund Social Security.

  [1] “Historical Background and Development of Social Security”, Social Security Administration, https://www.ssa.gov/history/briefhistory3.html.


  [2] “Short Answers to Common Questions about Social Security”, National Academy of Social Insurance, November 2015, https://www.nasi.org/research/2015/short-answers-common-questions-about-social-security.


  [3] “Social Security Benefits, Finances, and Policy Options: A Primer”, National Academy of Social Insurance, October 2015, https://www.nasi.org/socialsecurityprimer.


  [4] Ibid.


  [5] “How does my work now equal benefits later?”, CNN Money, http://money.cnn.com/retirement/guide/SocialSecurity_basics.moneymag/index3.htm?iid=EL.


  [6] Kelly Miller, “10 Things You Should Know About social Security”, AARP, August 2013, http://www.aarp.org/work/social-security/info-08-2010/10-things-you-need-to-know-about-social-security.html.


  [7] “How much will my payouts be if I collect at 62?”, “How much will my payments be if I wait until age 70?”, CNN Money, http://money.cnn.com/retirement/guide/SocialSecurity_basics.moneymag/index10.htm?iid=EL.


  [8] “Social Security Benefits, Finances, and Policy Options: A Primer”, National Academy of Social Insurance, October 2015, https://www.nasi.org/socialsecurityprimer.


  [9] “Disability Benefits”, Social Security, May 2015, https://www.ssa.gov/pubs/EN-05-10029.pdf.


  [10] “Selected Data from Social Security’s Disability Program”, Social Security, 2015, https://www.ssa.gov/oact/STATS/dibStat.html.


  [11] “Social Security Benefits, Finances, and Policy Options: A Primer”, National Academy of Social Insurance, October 2015, https://www.nasi.org/socialsecurityprimer.


  [12] Ibid.


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