Celebrating 77 Years of Social Security

Originally Posted on GovLoop 

Most of us are familiar with the program and see the FICA taxes taken out each pay stub to support Social Security and Medicare. So I’ll start with a quick program overview, and then what Social Security actually does for Americans. Hopefully you will learn something new.

On August 14, 1935, President Franklin Roosevelt signed the Social Security Act. For 77 years, social security has be a staple of American democracy. The Social Security Act preamble states:

“An act to provide for the general welfare by establishing a system of Federal old-age benefits, and by enabling the several States to make more adequate provision for aged persons, blind persons, dependent and crippled children, maternal and child welfare, public health, and the administration of their unemployment compensation laws; to establish a Social Security Board; to raise revenue; and for other purposes.”

As many of us know, and as the legislation reads, not only does social security help Americans plan for their retirement and serve as supplemental income, social security is an extremely valuable safety net for Americans. If an individual becomes disabled, or a family is struck with a tragedy, Social Security steps in to keep the family out of poverty.

Although Social Security has many beneficiaries, the elderly are the dominant recipients of Social Security. Just take a look at the chart to the below, social security is critical to keep seniors out of poverty. Kathy Ruffing, of the Center on Budget Policy and Analysis, states:

“Social Security marks its 77th birthday today.  This highly successful program pays benefits to 56 million Americans.  It’s the single most important source of income for its elderly beneficiaries, contributing on average two-thirds of income for recipients over age 65.  For more than one-third of them, Social Security constitutes 90 percent or more of income.  Reliance on Social Security is especially high among the oldest old — those who can no longer work and may have outlived their savings — and elderly blacks and Hispanics.  Without Social Security, nearly half of elderly Americans would live below the official poverty level; instead, fewer than 10 percent do.”

The monetary breakdown of benefits for recipients is quite small, once again Kathy states,  “Social Security benefits are modest.  Retired workers and elderly widows collect an average of $1,200 a month, and disabled workers even less.” Kathy continues to provide data that only 7% of retired workers earn more than $2,000 per month, and .5% earn more than $2,500. Not surprisingly, social security benefits are low compared to other nations.
As I’ve mentioned, social security is a lot more than just a retirement program. In 2010, 1 in every 6 Americans collected Social Security benefits. Center on Budget Policy and Analysis breaks down the beneficiaries:

  • Three-quarters of them received benefits as retirees or elderly widow(er)s,
  • 10.0 million (19 percent) received disability insurance benefits,
  • 2.3 million (4 percent) received benefits as young survivors of deceased workers.

Warning the next statistic is somewhat grim, so skip if you’d like and I will take no offense. The Center on Budget Policy and Analysis also reports that our chances of disability and premature death are actually fairly high. The post cites that 38% of men and 31% of women will become disabled or die before reaching full retirement age. I was surprised when I saw those figures, and frankly, they are more evidence of the need for government to provide a safety net to those in need.

Center on Budget Policy and Analysis also reminds us that social security is fairly progressive, stating, “Social Security benefits are based on the earnings on which you pay Social Security payroll taxes. The higher are your earnings (up to a maximum taxable amount, currently $106,800), the higher will be your benefit.” (The 2012 maximum taxable amount currently is 110,000).

If you need some more information on this, Center on Budget Policy and Analysis breaks it down further:

“Social Security benefits are progressive: they represent a higher proportion of a worker’s previous earnings for workers at lower earnings levels. For example, benefits for someone who earned about 45 percent of the average wage and then retired at age 65 in 2010 replace about 55 percent of his or her prior earnings. But benefits for a person who always earned the maximum taxable amount — while higher in dollar terms — replace only 28 percent of his or her prior earnings.”

Many of us have been enrolled in defined-contribution pension plans, in which our retirement is based on how much we pump into the system and our employers match. As we have seen during the Great Recession, these plans are subject to market fluctuations, so when the markets fell, thousands of people lost retirement plans. So, for many, the modest social security payments are the only source of income for retirees.

Essentially, social security provides a small safety net for those in need, but it also really incentives citizens to save and take advantage (to the extent they can) of defined-contribution pension plans, and defined-benefit plans if their company offers one. Social security was never intended to be the sole means of retirement income, but it is a very critical program for retirees, disabled, and keeping families out of poverty.

Next post I will take a look at if we will have social security down the road, and what kind of reforms are needed.

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