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Social Security Primer

History of the Social Security Program

Social Security is a lifeline: In 1935, after bank failures and a stock market crash had wiped out the savings of millions of Americans, the nation turned to Washington to guarantee the elderly a decent income.  In those days, only a handful of workers had access to pensions from their employers or through State governmental pension programs.  Over half of America's elderly lacked sufficient income to be self-supporting.  The Social Security Act was enacted at the urging of President Franklin D. Roosevelt to create a social insurance program that would ensure workers would have a source of income after they retired.

In the decades that have followed, Social Security has become one of the federal government's most successful and essential programs.  Despite all our efforts to encourage savings and investment, the private retirement picture has not changed much in recent decades. Even today, barely half of all workers have access to retirement plans at work, and millions reach retirement age without enough private savings to provide an adequate living in retirement.  Social Security is still the foundation for most seniors' retirement.  Without this critical safety-net program, over half of all older Americans would fall into poverty.  More than many other federal programs, Social Security does exactly what it was designed to do - it gives retired people a secure, basic income for as long as they live.

Over time, Congress has made adjustments to the program in order to address changing times and fiscal challenges.  The last major changes to the program came in 1983, when the Social Security program was facing imminent insolvency.  At that time, Congress passed a package of changes recommended by the National Commission on Social Security Reform, also known as the Greenspan Commission. Among its major provisions, the amendments accelerated previously scheduled increases in the payroll tax to its current level, began a very slow phase-in of a two-year increase in the retirement age (from age 65 to 67) over a 45 year period of time, covered federal employees for the first time, and enacted a tax on some of the Social Security benefits of higher-income retirees.  These changes helped prepare Social Security for the anticipated retirements of the baby boom generation and extended the solvency of the Trust Funds for decades.

Social Security Benefits

The Social Security system contributes to the well-being of Americans by providing a foundation of retirement income that permits seniors to live in dignity, while also providing support to younger family members who may have caregiver responsibilities.  In addition to retirement and spousal benefits, workers receive insurance protection that benefits workers and their dependents if the wage earner becomes disabled or dies.  In fact, while the vast majority of individuals who receive Social Security are retirees and their family members, nearly 20 percent of all Social Security beneficiaries are disabled workers and their families.  Ten percent of beneficiaries qualify as the survivors of deceased workers.  No other wage-replacement program - public or private - offers the protection Americans receive from the Social Security program.

At the end of 2015, nearly 60 million people were receiving approximately $876 billion in Social Security benefits: 43 million retired workers and their dependents, 6.1 million survivors of deceased workers, and 10.8 million disabled workers and their families.  That same year, an estimated 167 million people had earnings covered by Social Security and paid payroll taxes.

To qualify for retirement benefits, a typical worker must have earned 40 Social Security credits, which usually requires 10 years of work.  Contributions are made through payroll taxes, divided between workers and their employers.  Employees pay 6.2 percent of their incomes (up to a ceiling of $7,347 in 2016), with employers contributing another 6.2 percent (subject to the same $7,347 ceiling). Self-employed workers pay 12.4 percent of their income, subject to a ceiling of $14,694.  In 2016, the maximum amount of an individual’s earnings that are subject to this tax is $118,500.  Earnings over this limit are not taxed.

Social Security benefits are based on the amounts earned during a worker's lifetime, adjusted to make sure that the value of the wages earned are indexed to reflect the overall growth in wages in the economy during the employee's working years.  Adjustments are also made to give a higher proportionate benefit to low-income workers.  This feature is particularly important to women, who typically earn less than men over their lifetimes. Initial benefits are increased each year through cost of living adjustments (COLAs) to keep up with inflation after retirement.

In 2016, the average monthly retirement benefit is $1,340 for an individual and $2,210 for a couple, both receiving benefits.  Disabled workers receive an average of $1,166 per month, while the benefit for a widow with two children average $2,647 per month.  The value of the life insurance provided to survivors through Social Security is over $612,000 and the value of disability protection for a young disabled worker with a spouse and 2 children is about $580,000.

Social Security's Finances

When working Americans pay their Social Security payroll taxes to the United States Treasury, those taxes are credited to the Social Security Trust Fund.  Most of those taxes are paid out monthly in Social Security benefits.  Money left over is credited to the trust fund and invested in U.S. Treasury bonds called "special issue" U.S. securities.  These securities earn interest that is also credited to the Trust Funds.  These obligations owed to the Trust Fund by the Treasury are recognized by Congress as part of the national debt.  On a regular basis, Congress authorizes that debt, along with all the other debt of the United States, when legislators raise the national debt ceiling.

Total income to the Social Security Trust Fund in 2014 was $884 billion and total expenditures (benefits and other expenses) were $859 billion, resulting in a surplus of $25 billion.  The Trust Funds were credited with $98 billion in interest from earnings, which represented an effective annual rate of return of 3.6 percent.  Surpluses over the past two decades built up the assets in the Trust Funds to $2.7 trillion at the end of 2014.  These surpluses will continue for the next several years, reaching a peak amount of $2.8 trillion in 2019.

Every year, Social Security's actuaries estimate the program's long-term finances under a variety of economic assumptions for the next 75 years.  The Trustees currently project that Social Security's surpluses will end by 2019.  At that point, first the interest income credited to the Trust Funds and later the bonds themselves will have to be made available to cover a portion of the cost of benefits, rather than being used to cover other federal expenditures.

By 2034, the assets saved up in the Trust Funds are projected to be depleted, and only incoming payroll tax revenues will be available to pay benefits.  This income is expected to be enough to pay about 79 percent of the promised benefits.  While this shortfall poses a challenge, it in no way constitutes a crisis and can be resolved by a number of options that are available to policymakers that are consistent with how such shortfalls have resolved in the past and that do not result in cuts to seniors’ benefits.

The Importance of Social Insurance

Social Security was never intended to be an investment program;  Instead, it is a contributory social insurance program, designed to protect workers and their families from loss of income due to death, disability or retirement.  Social Security is not a needs-based program.  Rather, it is a true entitlement program in which people earn the right to participate by working and contributing.

Unlike private retirement plans, Social Security has broader policy goals than merely providing retirement benefits.  Social Security was also established to protect our most vulnerable citizens from falling into poverty, raise the standard of living for lower-income workers, and provide financial security to the spouses and dependent children in the event of a worker's disability or death.

Under Social Security all workers contribute to a universal pool of funds from which benefits are paid. Social Security financing is shared equally by employer and employee, is portable from job to job, provides inflation-adjusted benefits, and covers all earnings over a working lifetime up to the taxable wage base.  The benefit formula is weighted in favor of workers with lower average lifetime earnings.

Social Security Is More than Just a Retirement Plan

Social Security means life insurance for workers and their families:  About one-third of today’s 20 year olds will die or become disabled before their reaching full retirement age of 67.  Many workers do not have life insurance to protect their families from the loss of the earnings of their primary breadwinner.  What workers may not realize is that their payroll taxes entitle their families to survivor's benefits, providing life insurance protection worth over $612,000.

Social Security means disability insurance for workers and their families:  One in four of today's 20-year-olds will become disabled before reaching age 67.  Yet the vast majority of workers have no long-term disability insurance.  Individuals with a prior history of medical problems or who work in industries with a high rate of injury frequently find it prohibitively expensive or impossible to obtain coverage.  Many workers don't realize their Social Security payroll taxes are also buying them this critical protection.  For a young disabled worker with a spouse and two children, the disability insurance value of the benefit they get through Social Security is over $580,000.  And, unlike private disability policies and annuities, Social Security benefits are increased annually to keep up with the cost of living.  This protection is particularly valuable in times of double-digit inflation such as we experienced in the late 1970's and early 1980's.

What Social Security Means for Seniors

Social Security is the cornerstone of retirement:  From the program's beginning, Social Security was intended to be a base of protection, supplemented by private pensions and savings, not an individual's sole source of retirement income.  Today, nine out of ten people over age 65 receive Social Security benefits.  Nearly two out of every three Social Security beneficiaries receive over half of their income from Social Security, and it's the only source of income for nearly one-in-five seniors.  Without Social Security, almost half of older Americans (43 percent) would live in poverty.

Unlike virtually any other program, Social Security protects retirees from the ravages of inflation.  Seniors are more sensitive to increases in living costs and because they are no longer collecting paychecks they are forced to rely heavily on their savings and Social Security to keep up with their expenses.  Social Security has a built-in cost-of-living adjustment (COLA) so that inflation does not erode the value of their benefits over time.  While these increases lag behind some expenses like the skyrocketing cost of health care, they do help keep seniors from falling further behind. And unlike private investments, they do it without putting the senior at any financial risk.

Social Security is Important to Women

While Social Security is a program that is vitally important to all Americans, it is especially important to the financial security of women.  There are a number of reasons why this is so:

Women live longer than men:  Statistics tell us that on average women today who reach age 65 outlive men by 2.3 years.  That is, women can expect to live to age 86, while men are likely to live to just over age 84.  Nearly three out of every four individuals age 85 or older are women. These additional years of longevity increase the risk that women may outlive their savings or that their pensions may lose their purchasing power.

Women earn smaller paychecks than men:  Women who are employed full-time earn almost 20 percent less than men. They are also more likely to have low-wage and part-time jobs than men.  These realities lead to smaller earned benefits from their pension plans and makes it more difficult to save for retirement.

Women have more years out of the workforce than men:  Women are more likely than men to take time completely out of the workforce to raise children or take care of elderly parents.  The shorter work history combined with lower wages means that the lifetime earnings for women are lower than for men.

Social Security is the only program that is designed to protect workers with lower lifetime earnings and non-earning years.  When determining retirement benefits, more credit is given for the first dollars of a worker's average lifetime earnings than for higher levels of earnings, thus creating a bias in favor of the lower-wage worker.  Workers are also hurt less by years with no earnings because benefit amounts are based on a worker's highest 35 years of wages.

Women are less likely to have pensions and other savings:  On average, only 22 percent of women received income from pensions, compared to 27.7 percent of men.  Moreover, when a woman does have a pension, it is likely to be smaller than a man's, for precisely the same reasons that their Social Security benefits are likely to be lower than a man's - they have lower lifetime earnings and are more likely to work in jobs that don't offer pensions.  In the case of pensions, however, there's no built-in system that improves the benefit relative to earnings for lower wage-earners as there is in Social Security, leaving women without that important protection.  Among today's retirees, the average private pension benefit for women is less than two-thirds the amount of her male counterpart.

The Drive to Dismantle Social Security

A variety of proposals that would dismantle the Social Security program have been circulated recently.  These proposals would be particularly detrimental to low income workers, minorities, and women.  The National Committee is committed to a secure, equitable retirement for all Americans and is concerned that the following proposals would renege on the promise to all of America's seniors.

Privatizing Social Security:  A number of political leaders, including some Presidential candidates and Representative Paul Ryan, have proposed plans that would offer a partially privatized Social Security option for workers under 55.  These plans usually involve diverting some payroll taxes out of Social Security into private accounts which would put additional strains on the Social Security system.  Included in many of these proposals are benefit reductions for certain future retirees.

Americans rejected a similar proposal by President George W. Bush in 2005 and will once again if privatization plans advance in the Congress.  Women and minorities, who are frequently on the lower end of the wage scale, fare better under today's more progressive Social Security system which replaces a higher percentage of salary for low income wage earners.  Additionally, Social Security's all important cost-of-living adjustments (COLAs) ensure that benefits are protected against inflation, a protection that would not be available with private accounts.

Increasing the retirement age:  Many policymakers on the right, including some Presidential candidates, have proposed increasing the retirement age.  Advocates for this option argue that people are living longer, and can therefore work longer.  Although on average people are living longer, these longer life expectancies are by no means across-the-board.  Over the last quarter-century, the life expectancy of lower-income men increased by one year compared to 5 years for upper-income men.  Lower-income women have actually experienced a decline in longevity during that period.  These increases in retirement age would apply to all workers, whether or not they are living longer. If this proposal is enacted, future retirees will face benefit reductions that grow larger with each generation, resulting in as much as a 15 percent cut in benefits.

Changing the benefit formula: Several proposals have been offered to change the benefit computation formula in an effort to make it less generous to high wage earners.  However, the proposed changes affect all workers and some reduce benefits for workers earning as little as $11,000 per year.  With women and minorities disproportionately occupying lower wage jobs, any change from the current formula, which replaces a higher percentage of salary for lower wage workers, will adversely affect them.

National Committee Position

The National Committee to Preserve Social Security and Medicare strongly opposes shifting payroll taxes into private accounts.  We also oppose cutting benefits by changing the benefit formula or by increasing the retirement age.  We believe the Social Security program provides valuable benefits to both retirees and younger workers, but that those benefits must be strengthened to better serve the needs of all Americans.  We all agree that the program faces future challenges, chiefly a modest funding gap; however, we must meet these challenges without dismantling the program, undermining its guarantees, or cutting benefits.  Social Security gives the American people a secure, basic income that lasts as long as they live. We are pledged to preserve it for all generations.

 

Government Relations and Policy, March 2016


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