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Last updated May 2005

Facts about Social Security benefits

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.

Figure 1 presents a summary of data collected by the Social Security Administration (SSA) from 2001. The SSA found that Social Security provided more than half of the total income for almost two-thirds of households comprised exclusively of those aged 65 and older and provided at least 90% of income for a third of this group.

Social Security is a successful anti-poverty program for workers 65 and older.
Because Social Security is an insurance program, it includes a number of features that redistribute income to ensure that everybody receives adequate benefits. While Social Security benefits provide the lion's share of income for most Americans aged 65 and over, their incomes remain far below those of the general population. Figure 2 compares data on 65-and-olderhouseholds from the SSA with data on all household incomes from the Census Bureau, showing the percentage of households that fall within certain income bands. Twenty-one percent of 65-and-over households earn less than $10,000 in total money income annually, compared to 9% of all households. On the upper-end of the distribution, only 15% of 65-and-older households earn more than $50,000, compared to 44% of all 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.

Facts about Social Security finances

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.

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.

 

 

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