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 enough 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 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 deteriorated in recent decades. Even today, barely half of all workers participate in 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, almost 40 percent 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 adjusted the program 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 the Social Security benefits of some 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. 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 most individuals who receive Social Security are retirees and their family members, over 14 percent of all Social Security beneficiaries are disabled workers and their families. Nine 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.
In 2021, 65 million people were receiving approximately $1.1 trillion in Social Security benefits: 49.6 million retired workers and their dependents, 5.9 million survivors of deceased workers, and 9.4 million disabled workers and their family members. That same year, an estimated 180 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 $8,853.60 in 2021, $9114 in 2022), with employers contributing another 6.2 percent (subject to the same ceiling amounts). Self-employed individuals pay 12.4 percent of their income, subject to a ceiling of $17,707.20 ($18,228 in 2022). In 2021, the maximum amount of an individual’s earnings that are subject to this tax is $142,800. In 2022, this maximum will be $147,000. 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 2021, the average monthly retirement benefit is $1,553 for an individual and $2,570 for a couple, both receiving benefits. Disabled workers receive an average of $1,280 per month, while the benefit for a widow with two children averages $2,934 per month. The value of the life insurance provided to survivors through Social Security is over $725,000 and the value of disability protection for a young disabled worker with a spouse and 2 children is about $580,000. The 5.9% COLA in January 2022 will increase these averages proportionately.
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. Social Security is largely a “pay as you go” program, meaning today’s benefits are funded primarily by the payroll taxes collected from today’s workers. For over three decades, however, Social Security collected more in payroll taxes and other income than it paid in benefits and other expenses, and the Treasury invested the surplus in interest-bearing Treasury securities, ultimately reaching a total of nearly $2.9 trillion in trust fund reserves. In 2020, Social Security began redeeming those reserves to help pay benefits. Payroll taxes from current workers will continue to pay for the bulk of benefits. The trust fund reserves will make up the difference between income and costs until the reserves are depleted. At that point, Social Security’s income will still be able to pay 79 percent of promised benefits — even in the unlikely event that policymakers fail to act.
Every year, Social Security’s actuaries estimate the program’s long-term finances under a variety of economic assumptions for the next 75 years. Total income to the Social Security Trust Fund in 2020 was just over $1.118 trillion and total expenditures (benefits and other expenses) were $1.107 trillion. The Trust Funds were credited with $76 billion in interest from earnings, an effective interest rate of 2.8 percent. Surpluses over the past two decades built up the assets in the Trust Funds to $2.9 trillion at the end of 2020.
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 78 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 been resolved in the past and that do not result in cuts to Social Security 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 objectives than only 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 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 progressive benefit formula provides a more generous benefit to 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 in nine of today’s 20-year-olds will die before reaching the 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 $725,000.
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.
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. More than half of seniors receive over half of their income from Social Security, and it provides at least 90 percent of income for more than one-in-five seniors. Without Social Security, almost half of older Americans (40 percent) would live in poverty.
Unlike virtually any other program, Social Security protects benefits from the erosion 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 vital to the financial security of women for the following reasons.
Women live longer than men: Statistics tell us that on average women today who reach age 65 outlive men by 2.6 years. That is, women can expect to live to age 86, while men are likely to live to age 84. Women represent 66 percent of beneficiaries age 85 and older. 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: Median earnings for women who were employed full-time in 2020 totaled $46,488 while men’s earnings reached $55,744. They are also more likely to have low-wage and part-time jobs than men. These realities lead to smaller earned benefits from their defined benefit and defined contribution retirement 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.
Women are less likely to have pensions and other savings: On average, 32 percent of women received income from pensions, compared to 34 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 about two-thirds the amount of her male counterpart.
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 benefit structure that favors lower-wage workers. Workers are also hurt less by years with no earnings because benefit amounts are based on a worker’s highest 35 years of wages.
Americans Support Social Security
Public opinion about Social Security has been favorable throughout the history of the program. Strong support has been voiced for the Government to spend more for Social Security, for benefits to increase with inflation, and for benefits to increase even if it means higher taxes. Many individuals rely on income from the program or expect to rely on it when they retire. The public clearly wants the program to continue.
In fact, according to a poll commissioned by the National Committee in 2017, 79 percent of likely voters including Democrats, Republicans and Independents, supported increasing Social Security benefits and paying for it by having wealthy Americans pay the same rate into Social Security as everyone else.
These results are similar to a poll conducted by the National Academy of Social Insurance. Large majorities said they do not mind paying Social Security taxes because of the security and stability the benefits provide to millions of retired Americans, disabled individuals, and children and widowed spouses of deceased workers. These findings hold true across party lines (those agreeing include 87 percent of Democrats, 81 percent of Independents, and 72 percent of Republicans). Americans are also willing to pay for Social Security because they value it for themselves (73 percent) and their families (73 percent).
Proposals to Enhance Social Security
Several bills have been introduced in Congress to improve benefits and extend Social Security Trust Fund solvency. The National Committee supports many of these bills and cites the following proposals from its own legislative agenda to strengthen the program:
Strengthen the COLA
A fully-developed Consumer Price Index for the Elderly (CPI-E) would more accurately measure the effect of inflation on the price of goods and services that are purchased by seniors than does the current CPI-W, which reflects price increases based on the purchasing patterns of urban wage earners and clerical workers. The 2021 COLA increase of 1.3 percent was inadequate and does not compensate for no COLA in 2016 and a miniscule 0.3 percent COLA in 2017. In 2022 the larger COLA of 5.9% attempts to keep pace but does not mitigate the impact of a long line of inadequate COLA adjustments. Years of using the CPI-W instead of the CPI-E to reflect older American’s costs more accurately, cannot be overcome in one year. A long-term solution is needed. Implementing the use of the CPI-E is the solution.
Improve the Basic Benefit of All Current and Future Beneficiaries
After years of operating under a COLA that does not reflect seniors’ spending patterns and given the fact that seniors devote a higher percentage of their monthly income to meeting health care costs, all seniors need to have their rising costs offset by an across-the-board benefit increase. We propose an increase to the basic benefit of all current and future beneficiaries by 5 percent of the average benefit (approximately $70 per month).
Enhance the Special Minimum Primary Insurance Amount (PIA)
The Special Minimum Benefit is intended to provide a slightly more generous benefit amount to individuals who work for many years in low-wage employment. The method by which this benefit amount is calculated should be updated so that more individuals, many of them women, can qualify.
Eliminate the Cap on Social Security Payroll Tax
In 2021, only the first $142,800 of a worker’s wages are subject to the Social Security payroll tax. In 2022 this will increase to $147,000. Eliminating this wage cap and modestly adjusting the benefit formula when determining benefits for high-wage earners would play a central role in strengthening Social Security’s finances.
Increase the Social Security Tax Rate by 1/20th of One Percent Over 20 Years
A gradual increase in the Social Security payroll tax rate by a very small percentage to be phased in over a long period of time would significantly strengthen Social Security’s long-term financial outlook and provide revenue for some of the benefit improvements discussed above.
NATIONAL COMMITTEE POSITION
These proposals, along with other creative ideas to enhance the program deserve attention because Social Security provides valuable benefits to both retirees and younger workers. 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, October 15 2021