It was created in 1935 and typically makes up almost one-fifth of total federal spending.
Today, we look at the program 66 million Americans rely on called Social Security.
Social Security was created with the goal of providing economic security to the nation’s elderly; it was expanded in the 1950s to include support for the disabled. The program is operated largely on a pay-as-you-go basis: current employers and employees contribute taxes that fund benefits to retired workers and survivors in the Old-Age and Survivors Insurance program, as well as disabled workers and their families under the Disability Insurance program.
Social Security is the largest program in the federal budget. The program provides benefits to about 20% of the American population. Nearly 9 out of 10 individuals over the age of 65 receive benefits, and those benefits represent about 30% of total income to older Americans.
THEN AND NOW
HOW IT IS FUNDED?
Social Security is mainly funded through a dedicated payroll tax created by the Federal Insurance Contributions Act. Employers and employees each pay 6.2% of wages, with a cap on the amount of wages subject to the tax ($160,200 for 2023, adjusted annually for growth in economy-wide wages).
Those who are self-employed pay both the employee’s and the employer’s share of the tax. Those revenues are credited to the OASI and DI trust funds, which keep track of the programs’ receipts and expenses.
The programs also receive income from a tax on Social Security benefits paid by higher-income beneficiaries, as well as income generated by the investment of the trust fund reserves in non-marketable U.S. Treasury securities. However, from the perspective of the government’s overall budget, the interest income paid to the trust funds by the Treasury has no effect. Although it is a receipt to the trust funds, it is an equal dollar expense to the Treasury.
TOTAL OASI AND DI INCOME IN 2022
During 2022, an estimated 181 million workers had earnings covered by Social Security and paid $1,107 billion in payroll taxes.
Source: Social Security Administration, The 2023 Annual Report of the Board of Trustees of the Federal Old-Age Survivors Insurance and Federal Disability Insurance Trust Funds
AVERAGE MONTHLY COST
Benefits vary greatly, depending on age and how much an individual put into the system over their work years. But using the average monthly amount of $1,781, the system would cost about $133 billion a month.
NUMBER OF RETIRED WORKERS BY AGE AND SEX (as of Dec. 31, 2022)
SOCIAL SECURITY SURPLUSES/DEFICITS (as a percent of GDP)
Without changes, either in the form of higher taxes on higher incomes, reduced benefits, or some combination of the two, this is how the federal government projects Social Security funding to look over the rest of this century.
Sources: Social Security Administration, Peter G. Peterson Foundation, The Associated Press, Forbes, Congressional Research Service
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