Why is Social Security so important?

Social Security works for all Americans, and it has never been more important to our economic security:

  • Sixty-one million depend on Social Security – more than 1 out of every 6 Americans.
  • Just over 3 in 5 seniors depend on Social Security for most of their income.
  • One-third of seniors rely on it for at virtually all (90% or more) of their income.
  • Social Security’s benefits are modest, but vital, averaging around $15,000 per year.
  • Social Security lifts 22.1 million Americans out of poverty. Without it, the poverty rate of our seniors would be nearly 41%; instead it is just under 9%.
  • It is an extremely efficient program, with administrative costs of less than a penny on the dollar.

Is Social Security just for seniors?

Not at all. Social Security is the nation’s largest and most generous program for disabled workers, providing 8.9 million with benefits. It is also the nation’s largest and most generous children’s program, serving 4.3 million children. In fact, about one in three Social Security beneficiaries are receiving disability or survivor benefits.

Social Security is by far the nation’s most important life insurance policy, providing benefits to older persons (i.e., widow and widowers) whose spouse has died, to many younger spouses caring for dependent children, and to children whose parent has died. Social Security’s protections are estimated to have a present value of $612,000 in life insurance and $631,000 in disability insurance for a married worker who has average earnings and two children under 5 years old.

Why are Social Security’s protections irreplaceable?

The best part about Social Security benefits is that, in contrast to savings in a 401(k) or IRA, they never run out (until surviving children become adults). Furthermore, in contrast to a pension, they are fully portable between jobs. And in contrast to both 401(k)s/IRAs and the vast majority of pensions, benefits are protected from erosion by inflation, through the COLA.

How important is Social Security for retirement?

For most Americans,Social Security is essential for retirement. Just over 3 in 5 seniors rely on Social Security benefits for most of their income. And Social Security’s importance is increasing. Americans have traditionally relied on the “three-legged stool” – Social Security, employer pensions, and personal savings (including home equity) – to have sufficient income for retirement. But employer pension plans are disappearing, most Americans have been unable to accumulate meaningful savings in 401(k)s/IRAs, and homeownership rates and housing values have declined. For many, Social Security is the only stable leg of the “three-legged stool.”

How is Social Security funded?

Social Security’s revenue was about $957 billion in 2016. The program has three sources of income. The largest source comes from workers and employers who contribute 6.2% each on wages up to $127,200 a year; this raises 87% of the total. The second source is investment income from Social Security’s reserves, which are held in Trust and invested in interest-bearing U.S. treasury bonds; this raises 9% of total revenue. Finally, Social Security gets 3% of its revenue from the taxes that beneficiaries pay on their Social Security benefits.

Isn’t Social Security the cause of our large federal deficit?

Not at all. Social Security has its own dedicated revenue stream described above, so it cannot contribute a penny to the federal deficit. In fact, it currently enjoys a $2.8 trillion surplus that will grow to $2.9 trillion by 2019. And Social Security is forbidden by law from borrowing, so it cannot deficit spend.

Where does Social Security’s surplus go?

Social Security’s surplus is in a trust fund that is invested in interest-bearing government bonds, backed by the full faith and credit of the United States.

Isn’t the trust fund just a bunch of IOUs?

No, unless you consider U.S. savings bonds mere “IOUs” or the green stuff in your wallet worthless because it, too, only has value because it is backed by the full faith and credit of the United States of America. The Social Security trust fund is fully invested in U.S. treasury bonds.

Is Social Security going bankrupt?

Social Security can never go bankrupt. Nearly all (97 percent) of its income comes from the contributions of workers and employers, or interest on these contributions. Hence as long as there are workers in America, Social Security will have income. Even if Congress were to take no action, Social Security could pay 100% of promised benefits for the next 17 years, and more than three-quarters of benefits after that. Around 2034 there will be a modest funding gap requiring modest increases in revenues to guarantee everyone 100% of promised benefits.

What’s the best way to solve Social Security’s long-range funding gap?

We can close the vast majority of Social Security’s funding gap by scrapping the payroll tax cap. Currently, millionaires and billionaires make payroll tax contributions on only the first $127,200 they make in annual wages.

Why shouldn’t the retirement age be raised?

A few reasons. The first thing to understand is that raising Social Security’s full retirement age from 67 to 69 would amount to a 13% across-the-board benefit cut, no matter what age an eligible worker retires. What’s more, raising the retirement age would be especially unfair to low-income workers and minorities, who are more likely to work in physically demanding jobs. In fact, it could make many low-income workers, who have seen few or no gains in life expectancy in recent decades, work until they die. Finally, raising the retirement age discriminates against the growing number of elderly unemployed, who have a much harder time finding new work after being laid off. A more detailed fact sheet is available here.

Should rich people continue to collect Social Security, or should it be “means-tested”?

A very small portion of Social Security benefits go to the wealthy, so excluding them from the program would save little. In order to save a meaningful sum through means-testing, Social Security would have to “means-test away” some or all of the benefits of many middle-class retirees – those with household incomes starting at $50,000, many of whom could not afford to forgo their Social Security benefits. Moreover, if Social Security stopped paying benefits to upper-income seniors, political pressure would mount to have it stop collecting contributions from high earners as well, which would hurt the program’s finances. Or, if means-testing were implemented so as to require high earners to keep paying but get little in return, Social Security would become more like a welfare program, which Americans would not support.

In short, it makes far more sense to leave intact the current system’s fair and intelligent design, whereby everyone pays in, and everyone receives their earned benefits. A more detailed fact sheet is available here.

Some politicians say that Social Security’s COLA is too generous. Should it be reduced?

Social Security benefits are adjusted automatically each year, through the cost-of-living adjustment (COLA), to keep pace with inflation. Without the COLA, the real value of a retiree’s benefits would be cut in half in 20 years. The COLA formula is not overly generous; in fact it should be increased because the current COLA does not fully account for rising medical costs.

What are the values that underlie Social Security?

Discussions of Social Security too often focus on technical questions rather than the broader goals of the program. Generations of Americans have built the Social Security system because we believe that all Americans should work hard and provide for our families’ economic security through a lifetime of contributions and, in turn, know that our families will be able to live in dignity when we retire, become disabled, or suffer premature death.