When President Franklin D. Roosevelt signed the Social Security Act into law 80 years ago this month, he said that while “[w]e can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life … we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”
In
the decades since then, Social Security has developed into one of the most
popular federal programs, though that popularity is tempered by concern over
its long-term financial outlook.
In a 2014 Pew Research Center survey, for instance, 50% of Gen
Xers and 51% of Millennials said they believed they would receive no Social
Security benefits at all by the time they’re ready to retire.
Earlier this
year, 66% of Americans said taking steps to make Social Security financially
sound should be a top priority for President Obama and Congress this
year, placing it fifth among 23 issues asked about.
But any reform plan
entailing cuts to benefits likely would face an uphill battle for public
support.
The 2014 Pew Research survey also found large majorities across
all generations agreeing that Social Security benefits shouldn’t be
reduced; even among Millennials, the generation furthest from retirement, only
37% said future benefit reductions should be considered.
There’s
often considerable confusion as to just how Social Security works, which
is perhaps not surprising given the program’s complexity. (The original
1935 Social Security Act was 29 pages long; the current
law, much amended and expanded, runs nearly 2,600 printed
pages.) Here’s a primer on the program:
1. Social
Security touches more people than just about any other federal program. At the end of 2014,
according to the most recent trustees’
report, some 59 million Americans were receiving retirement, disability or
survivors’ benefits from the system; the total cost was
$848.5 billion. 166 million people paid payroll taxes into the system.
2. Social
Security is, and always has been, an inter-generational transfer of wealth. The taxes paid by
today’s workers and their employers don’t go into dedicated individual accounts
(although 32% of Americans think they do, according to the 2014 Pew Research
survey). Nor do Social Security checks represent a return on invested capital,
though you might be forgiven for thinking so since the “personalized Social
Security statements” that used to be mailed out once a year and now are available online detail your
payment history and projected monthly benefits. Rather, the benefits received
by today’s retirees are funded by the taxes paid by today’s workers; when those
workers retire, their benefits will be paid for by the next generation of
workers’ taxes (caveat: see Point 3). Your benefit amount is based on your earnings history and age at
retirement, not on how much you and your employer paid in Social Security
taxes (although for most people, taxes paid are closely tied to their
earnings).
3. Right
now, Social Security has plenty of assets. For much of its history, Social Security
was a strictly pay-as-you-go system, with current tax receipts funding current
benefits. That changed in 1983, when Congress (as part of a comprehensive
overhaul of the program) raised the payroll taxes that provide the bulk of
Social Security’s revenue, to build up a cushion for the coming onslaught of
Baby Boomer retirees. For nearly three decades, the system took in far more
revenue than it paid out in benefits; the surplus was invested in special
non-tradeable Treasury bonds, with interest credited to the system’s two trust
funds (one for old-age and survivors’ benefits, the other for disability
payments). As of July 31, those trust funds together held $2.83 trillion in
Treasuries. (Some people characterize that as the government “borrowing from”
or “raiding” Social Security, but the system is in essentially the same
position as any other investor who buys Treasuries.)
4. But
since 2010, Social Security’s cash expenses have exceeded its cash receipts. Negative cash flow
last year was about $74 billion, according to the latest trustees’ report, and
this year the gap is projected to be around $84 billion. While the
credited interest on all those Treasuries is still more than enough to cover
the shortfall, that will only be true until 2020. After that, Social Security
will begin redeeming its hoard of Treasuries for cash to continue paying
benefits – as was the plan all along.
5. Social Security’s
combined reserves likely will be fully depleted by 2034, according to the
trustees’ intermediate forecast. The disability-insurance trust fund could run
dry as soon as the end of 2016, while the old-age and survivors’ fund is
expected to be depleted in 2035 – assuming it’s not tapped to backfill the
disability fund. (The Congressional Budget Office, in a separate report that uses somewhat different
demographic assumptions, projects that the disability fund will be
exhausted in fiscal 2017 and the old-age and survivors’ fund in calendar 2031;
if the funds are combined, they would be exhausted in calendar 2029.) The exact
depletion dates depend, of course, on future demographic and economic trends.
After the reserves are exhausted, the system still will be receiving tax
revenue, but it will only be enough to pay about three-quarters of scheduled
benefits – unless Congress changes the benefit formulas, raises the
payroll tax, or makes other changes such as raising the cap on taxable wage income (currently $118,500).
