Social Security

What It Means

Social Security commonly refers to a U.S. government program designed to help the elderly, the surviving family members of deceased breadwinners, and the disabled. The program, administered by the Social Security Administration (SSA), provides monthly payments to those Americans who have reached retirement age or who otherwise qualify for Social Security benefits. The SSA also oversees the payment of health care benefits under a system called Medicare.

Social Security payments are primarily funded through payroll taxes (a percentage of an employee’s salary that is withheld by his or her employer each payday), together with a matching amount paid by the employer. The employer sends these monies to the government. The logic behind the program is that people pay into the Social Security system over the course of their career and are then entitled to be paid back in monthly installments upon retirement or disability. The benefit extends to the spouses and dependents of qualifying workers who die before retirement age.

Anyone in the United States who has worked the minimum amount specified by the SSA and who files for old-age benefits can currently retire at age 62 and receive some amount of Social Security payments. To receive full benefits (the largest amount to which a person is entitled based on his or her work history), however, those born before 1950 can only file for benefits upon reaching age 65. Those born between 1950 and 1960 can retire with full benefits at age 66, and those born after 1960 must continue working until they are 67. The maximum amount that the benefit pays usually does not rise far above the poverty level (the amount of income that the government says is required to purchase the most basic necessities).

When Did It Begin

Social security in its broader sense refers to any government attempt to provide its citizens with a safety net should they become unable to work. Among modern nations Germany was the first to create a nationwide system of such protections when it provided workers and their dependents with sickness and old-age insurance in the 1880s. Other industrialized countries in Europe and elsewhere followed suit in the next decades, but the U.S. government generally stuck to a policy of not involving itself in citizens’ economic affairs. It was not until 1935, as a response to the ongoing Great Depression (from 1929 to about 1939) that had impoverished large numbers of U.S. citizens through no fault of their own, that President Franklin D. Roosevelt introduced the Social Security Act. The centerpiece of Roosevelt’s New Deal (a sweeping system of laws meant to counteract the effects of the Depression), the Social Security Act created the Social Security Administration.

More Detailed Information

The Social Security Act of 1935 was not especially progressive by European standards, which tended to redistribute wealth (taxing the wealthy and using that money to pay for social benefits that would bring poorer people up to a reasonable level of comfort) rather than requiring employees to pay part of their own social security benefits. The European systems also covered a wider proportion of the population. The U.S. program initially covered primarily industrial workers, excluding those in such fields as education, farm work, and domestic services and those in family businesses, as well as all people who were self-employed. Nevertheless, the new Social Security system represented a dramatic departure from the existing U.S. government approach to the public welfare. Prior to the establishment of Social Security and other New Deal programs, government in the United States took little or no active role in ensuring all citizens a degree of financial stability, regardless of their individual circumstances. At the time of the Social Security Act, conservative critics argued that social security contradicted the basic American philosophy of self-determination (the belief that each individual is entirely responsible for his or her own well-being). Meanwhile, progressive critics argued that the program did not go far enough to protect U.S. citizens from circumstances beyond their control.

The principle features of the U.S. Social Security system (that it collects payroll taxes from employers and makes payments to those in old-age and their survivors, as well as the disabled) have remained in place during the decades since the program was established; the largest change to its structure was the addition of industries that had been excluded and the expansion of the program to include Medicare. Although it is still funded in the same way as Social Security, Medicare has gone on to function as a separate program, both in practice and in the minds of most Americans. Together, these two government programs represent the largest-ever U.S. government effort to provide for the economic welfare of its population. They are not, however, what is commonly referred to as welfare. This term is applied to programs that exclusively target the poor. Because Social Security and Medicare serve all retirees regardless of their poverty or wealth, these programs typically do not come under attack as directly or as fiercely as so-called welfare programs, which are often faulted (as the Social Security program once was) for contradicting the self-reliance that some believe is essential to the American character.

As a program that primarily benefits the elderly, however, the Social Security system has a key vulnerability. In the United States the baby boomer generation (those born in the two decades after World War II, which ended in 1945) represents a much larger group of potential retirees than the country has ever seen before (78 million by some estimates). To compound the challenges faced by the Social Security program because of this generation’s size, life expectancy has increased greatly in the United States in the years since World War II. This means that an unprecedented number of people are poised to enter the ranks of Social Security beneficiaries (those who claim benefits) and that they can be expected to collect benefits for much longer, on average, than any other generation has so far done.

Recent Trends

The U.S. Social Security program is funded by payroll taxes, but these taxes have usually generated a surplus. In other words, more money has been collected in any given moment than has been distributed to beneficiaries at that same moment; the leftover money is called the surplus. This surplus is placed in a trust fund (an arrangement allowing one person, in this case the government, to hold the property of another person, in this case all citizens who contribute payroll taxes), and the trust fund is invested in government bonds (a form of risk-free investment that pays a low but steady rate of interest. Many economists and politicians predict, however, that when the full force of baby boomer retirement is felt, the Social Security trust fund will be exhausted, and payroll taxes alone will not allow the system to pay back what workers retiring in the future will have put into it. In 2007 the program’s trustees predicted that the amount paid out in benefits would begin to exceed the amount collected as taxes in 2017 and that the program would run out of money in 2041, when Americans born in 1974 would be ready to retire. The program would still be taking in taxes but only enough to pay 75 percent of the promised benefits.

The issue of how to deal with this predicted shortage of funds has been hotly debated. One idea is to raise the retirement age, which for those born after 1960 was 67 years old. This would serve to reduce the total amount of money paid to retirees. Reducing benefits would have a similar effect. Cutting benefits, however, is never a popular option, and many politicians are hesitant to support this idea lest they alienate voters. Another suggestion is to increase the Social Security tax. As of 2007 the Social Security payroll tax was 12.4 percent (with 6.2 percent paid by the employee and 6.2 percent paid by the employer); the trustees estimated that, in order for the program to remain solvent for the following 75 years, the payroll tax would need to be increased to 14.35 percent. Opponents of this idea say that it would put a greater financial burden on many workers. They also argue that it would make it more expensive for employers, who have to pay matching amounts for employee contributions to Social Security, to hire people, which would lead to the loss of jobs.

Some politicians proposed increasing the Social Security tax on high-income workers. As of 2007 there was a Social Security tax cap: only the first $97,500 of a person’s annual earnings was subject to the 12.4 percent payroll tax. Raising the cap would enable the program to collect more revenue; for instance, raising it to $150,000 would mean that for each person earning this amount or more, the government would collect $18,600 a year for Social Security, as opposed to $12,090. Similar proposals included imposing a surtax (additional tax) on earnings over the $97,500 cap.

Many conservatives advocate allowing part of the Social Security trust fund to be invested on the stock market (where people can buy and sell stocks, or shares of ownership in private companies), which is capable of larger returns than government bonds. Money invested in the stock market can be lost at any moment, however; neither the government nor any other force can guarantee funds that are invested in this way. Critics of this approach worry that ordinary people would be exposed, in such a situation, to the very economic insecurity against which Social Security was designed to protect them. The issue of how to fund the Social Security system in the future remains one of the central political debates of the early twenty-first century.