Social Security: Still Going Strong at Age 80
Eighty years ago, on August 14, 1935, President Franklin Roosevelt signed the Social Security Act into law. Social Security remains one of the most effective and popular programs in the country.
Nearly every American benefits from Social Security. Almost all workers participate in the program by making payroll tax contributions, and 97 percent of people aged 60-89 either receive Social Security or will in the future.
While Social Security provides a foundation of retirement protection for nearly every American, it also encourages private pensions and personal saving to help pay for retirement because it doesn't limit benefits to people below a certain income or asset level. But with fewer employers offering pension plans that guarantee a certain benefit level upon retirement, Social Security will be most workers' only source of guaranteed retirement income that isn't subject to fluctuations in stock or bond markets.
Another important difference between Social Security and most private pensions or annuities is that Social Security benefits are automatically adjusted for inflation, which prevents them from shrinking in value over time.
Social Security is also progressive. Benefits represent a higher share of previous earnings for workers at lower earnings levels.
Contrary to some popular perceptions, Social Security benefits are very modest. The average Social Security retirement benefit was slightly more than $16,000 a year in June 2015, and nearly 98 percent of retirees' received less than $30,000. (Disabled workers and widows receive even less.) For a retiree who worked his or her entire life at average earnings and retires at age 65 this year, Social Security replaces just 40 percent of past earnings. And that "replacement rate" will fall to about 36 percent as the program's full retirement age, now 66, climbs to 67 starting in 2017.
Nevertheless, most seniors rely on Social Security for the majority of their income. It's particularly important for groups with low earnings and less opportunity to save and earn pensions, including African Americans and Hispanics. It's also particularly important for older seniors, who tend to rely more heavily on Social Security because they are less likely to work and more likely to have exhausted their retirement savings. Almost half of beneficiaries aged 80 or older have little or no income except from Social Security.
While Social Security is best known for providing retirement income, it does much more: Workers also earn life and disability insurance protection through their Social Security payroll tax contributions. These benefits are a critical part of Social Security, since about one-third of recent entrants to the labor force will become disabled or die before reaching the full retirement age.
Social Security also reaches many people who aren't elderly. For example, about 6 million children under age 18 were living in families that received income from Social Security in 2013. Overall, Social Security lifted 1.2 million children out of poverty that year.
Even more dramatic than its impact on child poverty is Social Security's dramatic role in reducing poverty among seniors. Without Social Security benefits, more than 40 percent of seniors would have incomes below the poverty line; with Social Security, fewer than 10 percent do. Social Security lifts 14.7 million Americans aged 65 and older out of poverty, and three out of five are women.
After eighty years, Social Security's successes are clear. The program faces challenges, but these are often misunderstood and overstated.
As the large baby boom generation retires, Social Security's costs will grow. However, Social Security has collected more in taxes than it pays out in benefits, and its two trust funds, which support the disability and retirement programs, contain a combined $2.8 trillion.
By modestly shifting revenues between the trust funds, as they've often done in the past, policymakers can enable all of Social Security to pay full benefits until 2034.
Even after 2034, when those trust funds would be exhausted, Social Security would still be able pay three-fourths of its scheduled benefits using its annual tax revenue. Alarmists who suggest that Social Security won't be around for today's workers either misunderstand or misrepresent the facts.
Nevertheless, policymakers should act sooner rather than later to ensure the program's long-term solvency. Changes such as a mix of tax increases and modest benefit reductions would preserve Social Security indefinitely, though they should be designed to protect the neediest recipients and to give ample notice to all participants.
With these changes, policymakers can ensure that Social Security remains a successful and effective program for generations to come.