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Social security || Facts about social security || Myths about social security || What's the difference?

Social Security has been providing benefits to millions of workers for 65 years.

Social Security, sometimes referred to by its full name, Old-Age, Survivors, and Disability Insurance (OASDI) is a social insurance system established in 1935 to provide benefits to workers and their family members upon retirement, disability, or death. It is an earned benefit insurance program, which means that only those who work and pay taxes are eligible for Social Security benefits.

At the end of December 2003, Social Security provided monthly benefits to 47 million beneficiaries (or one in every 6 Americans). Social Security paid a total of $471 billion to retired workers, disabled workers, and to the surviving family members of deceased workers in 2001 (SSA 2004 Trustees Report). In 2002, Social Security beneficiaries included about 3 million children under the age of 18.

Social Security benefits are guaranteed to beneficiaries. Because Social Security is not an investment scheme but rather a social insurance program, its benefits will continue to be paid as long as a beneficiary depends on them. Social Security's finances are not subject to the ups and downs of the stock market, or the luck of individual investors. The promise of Social Security benefits is instead backed by the good faith of the U.S. government, pretty much in the same way that the government backs the value of the dollar. Thus, there is no uncertainty for beneficiaries, once they start receiving benefits, they will continue to receive them in the future. Social Security offers mainly retirement benefits.

Workers can receive four different types of benefits under Social Security: retirement, early retirement, disability, and survivorship benefits.

Workers are entitled to retirement benefits if they have contributed to Social Security for at least 10 years, and if they have reached the normal retirement age, which is currently 65 (and is set to increase to 67 for workers born after 1959).

Early retirement benefits are available to workers if they have contributed to Social Security for at least 10 years, and if they have reached the earliest age at which benefits can be paid, currently 62. Benefits, however, are reduced by 20% compared to what the retiree would have received at age 65.

Both full and early retirement benefits were paid to 29.2 million retired workers in 2002. Of these, 71% or 20.8 million retirees received a reduced benefit payment because they chose the early retirement option. Average monthly retirement benefits for all workers receiving retirement benefits were $895 in 2002, or about $10,700 per year. In comparison, workers who had retired early received on average $830 per month.

Workers are also insured in case they become disabled.

Social Security provides insurance to workers in case they become disabled and can no longer work. The disability need not be related to an accident at the worker's job. The number of years that are required to receive disability benefits varies with the age of a worker. Younger workers need fewer years to qualify for disability benefits. In 2002, Social Security paid an average monthly disability benefit of $834 to 5.5 million beneficiaries.

Social Security offers life-insurance type benefits to workers.

If a worker dies, her family receives benefits from Social Security. Survivorship benefits are paid if the deceased worker has, on average, worked at least one quarter for each year after he or she attained the age of 21. In 2002, Social Security paid an average monthly survivorship benefit of $861.

Social Security is the most significant source of income for the majority of retirees over 65 years old.

Social Security benefits are the most important source of income for the majority of elderly households. Although these benefits are modest, they account for a large portion of income for many elderly households.

Social Security is a social insurance program.

Social Security replaces the source of income a worker has lost due to retirement or disability, or the income a family has lost due to the worker's death. To ensure that Social Security benefits are adequate for every worker who is insured, Social Security?like any other insurance?pays disproportionately more benefits to those who need them most. Workers with low lifetime earnings receive relatively higher benefits (in relation to their lifetime earnings) than workers with high lifetime earnings. The retirement benefit received by a low earner is smaller in absolute terms, but larger as share of earnings, than the benefits received by high earning workers. For example, typical low-wage workers will receive annual benefits that are more than half as large (57%) as their average yearly earnings. Benefits for high-wage workers are larger but on average just 38% of their annual earnings. This progressive benefit structure boosts the retirement incomes of low- and middle-wage workers.

Social Security also provides higher lifetime benefits to workers who live longer.

By the time a worker retires, benefits are granted on the basis of a workers age and earnings history. Because women have significantly higher life expectancies than men, they will receive the same monthly Social Security benefits than men.

Social Security is particularly important to women.

Women have fewer earnings to rely on in retirement. Less than half of all workers (46%) had a private pension through their employer in 2002, women are less likely than men: 44% of women have pensions compared to 47% of men. Women of color are even less likely to have a pension than are white women. Furthermore, a woman's pension is typically smaller than a man's because women earn less per hour, and often work part time or spend time out of the labor force.

Because they earn less, women have fewer savings than men to depend upon in retirement, thus they rely more heavily on Social Security.

Since women live in retirement an average of three and a half years more than men, they need more retirement income over the course of their lives, not less. They need a retirement program - like Social Security - that provides more income to people who live longer.

Given their longer life spans, it is especially important for women that Social Security benefits be adjusted each year for inflation. If inflation were 3% per year but benefits were not adjusted accordingly, benefits would buy 25% less after 10 years and 45% less after 20 years.

A woman who never worked but stayed home to care for family is still entitled to a Social Security benefit equal to half that of her working husband.

Widows and divorced women (after a marriage of at least 10 years) are entitled to Social Security benefits even if they never worked, so long as their husbands were eligible for benefits.

To pay for benefits, Social Security receives income from three sources.

Most of the money that is needed to pay for benefits comes from payroll taxes. Currently, employees and employer each pay 6.2% to Social Security, for a combined tax rate of 12.4% of wages and salaries. Self-employed workers pay the full 12.4% out of their earnings. Taxes, however, have to be paid only up to an earnings ceiling, which is $90,000 annually in 2005. Earnings above the ceiling are not subject to the payroll tax. In 2003, Social Security received a total of $535.2 billion in payroll taxes.

As a result of reforms to Social Security in 1983, a trust fund was specifically set up as a savings account to pay for baby boomers. Since then, Social Security has taken in more money than it has paid out in benefits. Consequently, it has built up a trust fund over the years. Social Security earns interest on this trust fund. In 2003, the Old Age and Survivor's Insurance trust fund received 6.0% interest on its assets, earning $75.2 billion in interest, and the Disability Insurance trust fund received 5.9% interest, earning $9.7 billion in interest.

Finally, some Social Security benefits are subject to taxes, which are then paid to Social Security. In 2003, taxes on Social Security benefits amounted to a total of $13.4 billion.

Social Security is building up a trust fund.

Because income is currently exceeding expenditures, Social Security is building up a trust fund. Total income to Social Security was $632 billion in 2003. Its expenditures came to $479 billion, $471 billion of which was benefit payments. Consequently, Social Security managed to increase its trust fund by $153 billion in 2003. As a result, Social Security held a total of $1,531 billion in assets at the end of 2003. If Social Security faces a shortfall in income, the trust fund assets can be used to pay for the additional benefits.

Trust fund assets are invested in government bonds.

Social Security trust fund assets, currently worth over $1.5 trillion, are invested in special, non-tradable government bonds. Each year the U.S. Treasury issues these government bonds, up to the amount of the Social Security trust fund surplus, to be added to the account. The bonds earn an interest rate comparable to the market interest rate for tradable government bonds. During 2003, the effective annual interest rate earned on all bonds held by the trust funds was roughly 6.0%.

Social Security is not going broke.

Each year, in early spring, the trustees of Social Security release their report. As required by law, the trustees present what can be described as their best guesses for three different scenarios for the future of Social Security. In their annual report for 2004, the trustees project that Social Security will take in more in income than it will pay out in expenditures until 2018. Between 2018 and 2028, interest income earned on the trust fund assets is forecasted to make up the difference between income and expenditures. After 2028, Social Security is expected to draw down its trust funds to pay for the expenditures that are not covered by income. Finally, in 2042, the trust fund assets are expected to be gone, and income is projected to be less than expenditures. However, the trustees project that Social Security will still be able to pay 74% of its promised benefits from 2042 to 2078, and those benefits would still be higher in real (inflation-adjusted) terms than retirees are being paid today.

Social Security is not going broke. The trustees instead project a financing shortfall that may happen almost 40 years from now. The nonpartisan Congressional Budget Office doesn't project a shortfall until 2052. The trustees' projections are based on pessimistic assumptions. Real growth is expected to fall to between 1.7% and 1.8% over the long-run, which has never been the case for an extended period of time during the post-war years. Similarly, the trustees assume that in the long-run the economy will settle on an average productivity growth rate of 1.6%, which is again too low by historical standards. Higher productivity and consequently faster real wage growth which have both historically been about 2.0% would be more realistic and improve Social Security's finances.

Myths and misstatements of fact frequently circulate on the Internet, in email and on websites, and are repeated in endless loops of misinformation. One common set of such misinformation involves the history of the Social Security system.

One Common Form of the Myths:

"Franklin Roosevelt introduced the Social Security (FICA) program. He promised:
1) That participation in the program would be completely voluntary;
2) That the participants would only have to pay 1% of the first $1,400 of their annual incomes into the program;
3) That the money the participants elected to put into the program would be deductible from their income for tax purposes each year;
4) That the money the participants paid in would be put into the independent "Trust Fund," rather than into the General operating fund, and therefore, would only be used to fund the Social Security Retirement program, and no other Government program.;
5) That the annuity payments to the retirees would never be taxed as income."

CORRECTING THE MYTHS AND MISSTATEMENTS

Myth 1: President Roosevelt promised that participation in the program would be completely voluntary.

Persons working in employment covered by Social Security are subject to the FICA payroll tax. Like all taxes, this has never been voluntary. From the first days of the program to the present, anyone working on a job covered by Social Security has been obligated to pay their payroll taxes.

In the early years of the program, however, only about half the jobs in the economy were covered by Social Security. Thus one could work in non-covered employment and not have to pay FICA taxes (and of course, one would not be eligible to collect a future Social Security benefit). In that indirect sense, participation in Social Security was voluntary. However, if a job was covered, or became covered by subsequent law, then if a person worked at that job, participation in Social Security was mandatory.

There have only been a handful of exceptions to this rule, generally involving persons working for state/local governments. Under certain conditions, employees of state/local governments have been able to voluntarily choose to have their employment covered or not covered.

Myth 2: President Roosevelt promised that the participants would only have to pay 1% of the first $1,400 of their annual incomes into the program.

The tax rate in the original 1935 law was 1% each on the employer and the employee, on the first $3,000 of earnings. This rate was increased on a regular schedule in four steps so that by 1949 the rate would be 3% each on the first $3,000. The figure was never $,1400, and the rate was never fixed for all time at 1%.

Myth 3: President Roosevelt promised that the money the participants elected to put into the program would be deductible from their income for tax purposes each year.

There was never any provision of law making the Social Security taxes paid by employees deductible for income tax purposes. In fact, the 1935 law expressly forbid this idea, in Section 803 of Title VIII.

Myth 4: President Roosevelt promised that the money the participants paid would be put into the independent "Trust Fund," rather than into the General operating fund, and therefore, would only be used to fund the Social Security Retirement program, and no other Government program.

The idea here is basically correct. However, this statement is usually joined to a second statement to the effect that this principle was violated by subsequent Administrations. However, there has never been any change in the way the Social Security program is financed or the way that Social Security payroll taxes are used by the federal government.

The Social Security Trust Fund was created in 1939 as part of the Amendments enacted in that year. From its inception, the Trust Fund has always worked the same way. The Social Security Trust Fund has never been "put into the general fund of the government."

Most likely this myth comes from a confusion between the financing of the Social Security program and the way the Social Security Trust Fund is treated in federal budget accounting.

Starting in 1969 (due to action by the Johnson Administration in 1968) the transactions to the Trust Fund were included in what is known as the "unified budget." This means that every function of the federal government is included in a single budget. This is sometimes described by saying that the Social Security Trust Funds are "on-budget." This budget treatment of the Social Security Trust Fund continued until 1990 when the Trust Funds were again taken "off-budget." This means only that they are shown as a separate account in the federal budget. But whether the Trust Funds are "on-budget" or "off-budget" is primarily a question of accounting practices--it has no affect on the actual operations of the Trust Fund itself.

Myth 5: President Roosevelt promised that the annuity payments to the retirees would never be taxed as income.

Originally, Social Security benefits were not taxable income. This was not, however, a provision of the law, nor anything that President Roosevelt did or could have "promised." It was the result of a series of administrative rulings issued by the Treasury Department in the early years of the program.

In 1983 Congress changed the law by specifically authorizing the taxation of Social Security benefits. This was part of the 1983 Amendments, and this law overrode the earlier administrative rulings from the Treasury Department.

Although Social Security is sometimes compared to private pensions, this is an improper comparison since Social Security is social insurance and not a retirement plan. The payment of disability benefits also distinguishes Social Security from most private pensions. In other ways the two systems are fundamentally different as well.

A private pension fund accumulates the money paid into it, eventually using those reserves to pay pensions to the workers who contributed to the fund; and a private system is not universal. Social Security cannot "prefund" by investing in marketable assets such as equities, because federal law prohibits it from investing in assets other than those backed by the U.S. government.

As a result, its investments to date have been limited to "special" non-negotiable securities issued by the U.S. Treasury, although some argue that debt issued by the Federal National Mortgage Association and other quasi-governmental organizations could meet legal standards. Social Security cannot by law invest in private equities, although some other countries (such as Canada) and some states permit their pension funds to invest in private equities.

As a universal system, Social Security operates as a pipeline, through which current tax receipts from workers are used to pay current benefits to retirees, survivors, and the disabled. There is an excess of taxes withheld over benefits paid, and by law this excess is invested in Treasury securities (not in private equities) as described above.

Two broad categories of private pension plans are "defined benefit pension plans" and "defined contribution pension plans." Of these two, Social Security is more similar to a defined benefit pension plan. In a defined benefit pension plan, the benefits ultimately received are based on some sort of pre-determined formula (such as one based on years worked and highest salary earned). Defined benefit pension plans generally do not include separate accounts for each participant.

By contrast, in a defined contribution pension plan each participant has a specific account with funds put into that account (by the employer or the participant, or both), and the ultimate benefit is based on the amount in that account at the time of retirement. Some have proposed that the Social Security system be modified to provide for the option of individual accounts (in effect, to make the system, at least in part, more like a defined contribution pension plan).

Specifically, on February 2, 2005, President George W. Bush made Social Security a prominent theme of his State of the Union Address. He described the Social Security system as "headed for bankruptcy", and outlined, in general terms, a proposal based on partial privatization. Critics responded that privatization would worsen the program's solvency outlook and would require huge new borrowing.

Private pensions are governed by the Employee Retirement Income Security Act (ERISA), which requires minimum levels of funding. The purpose is to protect the workers from corporate mismanagement and outright bankruptcy, although in practice many private pension funds have fallen short in recent years. In terms of financial structure, Social Security would be analogous to an underfunded pension ("underfunded" meaning not that it is in trouble, but that its "savings" are not enough to pay future benefits without collecting future tax revenues).

Sources:
Century Foundation. 1998. Social Security Reform: A Twentieth Century Fund Guide to the Issues, New York, N.Y.: Century Foundation.
Mishel, Lawrence et al. 2004. The State of Working America, 2004/2005, Washington, D.C.: Economic Policy Institute.
Social Security Administration. 2003. Annual Statistical Supplement to the Social Security Bulletin. Washington, D.C.: Social Security Administration.
Social Security Administration, 2004, The 2004 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, Washington, D.C.: Social Security Administration.
Social Security Administration. 2002. Income of the Population 55 or Older. Washington, D.C.: Social Security Administration.