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Social Security

Born from President Franklin Roosevelt's New Deal entitlement policies, Social Security functions as a system of social insurance in which a portion of workers and employers earnings are taxed to fund government-managed trust funds. These funds pay out retirement benefits, disability payments upon injury, and in some cases death benefits. Currently, over 54 million Americans receive some supplemental income from the program.

From its beginning in 1935, the Social Security was arranged to transfer wealth from current workers to Americans of retirement age. Ostensibly starting in 1939, the program was supposed to build a trust-fund of managed assets that would provide security for the program and ensure its ability to provide financial assistance to accepted individuals. Even before Social Security was put into effect, many questioned the veracity and practicality of such a goal.

In 1965, President Lyndon B. Johnson and the Congress added Medicare and Medicaid to the Social Security program. Additionally, they made the separate Social Security Trust Fund a part of the general federal budget. In other words, any net tax revenue from Social Security no longer went into a separate fund, but rather went into the general federal budget and the money could be spent on any government program. By the late 1960s, the funds from Social Security were used to offset the federal government’s deficit spending.

In 1960, the Supreme Court ruled in Flemming v. Nestor that individuals do not have a right to the money that they paid into the program. According to the Social Security Administration:

“There has been a temptation throughout the program's history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. That is to say, if a person makes FICA contributions over a number of years, Congress cannot, according to this reasoning, change the rules in such a way that deprives a contributor of a promised future benefit.
…
In its ruling, the Court rejected this argument and established the principle that entitlement to Social Security benefits is not contractual right.”

By the late 1970s and early 1980s, Social Security was nearly bankrupt as a program. While various changes and reforms had been made, much of the reform culminated in 1983 when major changes were made to taxes and payouts. As a result of the changes, Social Security ran a short-term surplus. This surplus was used to buy the federal government’s debt. By 2011, the Federal Old-Age and Survivors Insurance Trust Fund holds roughly $2.5 trillion of the United States’ $14.3 trillion national debt.

Recent forecasts, however, question the sustainability of the program - numerous studies have suggested the baby boomer generation will eventually suck the whole system dry. In 2010, Social Security ran a deficit with more money going out to payees than tax revenue generated. In 2011, the program is expected to be in the red as well. While some analysts agree with these predictions, others believe that with modest reforms the system possesses the longevity to last through such conditions.

Still, others question the morality of the program itself. They ask: Should the government take from the current generation to pay for the retirements of the following generation? Should individual Americans be responsible for their own retirement? Should Americans have control over their own finances? Can the system be "sunsetted" so as to continue providing for those dependent upon Social Security while allowing current and future generations to have control over their finances and responsibility for their retirement? 

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Commentary or Blog Post

"Today, the Social Security Trustees released their 2011 report on the financial status of both Social Security and Medicare. The reports make clear that both programs are on unsustainable paths, and reforms will be necessary to make them solvent. This analysis focuses on the financial status of Social Security."

"Assuming that no white knight (aka NJ Gov. Christie) enters the scene for the Republicans, this fall will be a race between Mitt & 'O.' I’ve listened to them discuss their views on a hot button of mine, Social Security.

Not surprisingly, both sides have dodged this issue. They say we need adjustments and refer to the 'need' to extend the retirement age. They also agree that some...

"Action is needed on Social Security reform before the first wave of baby boom retirements-starting in 2008-threaten the resources of the system, Greenspan told the Senate Banking Committee."

But three neighboring Texas counties, which opted out of Social Security 30 years ago by creating personal retirement accounts, have avoided a fiscal train wreck while providing retirees with even more retirement income.

According to this recent investment article, retirees shouldn't count on Social Security to care of all their post-retirement expenses. Bruno writes, "There's simply too much risk associated with taking a wait-and-see approach on both programs. And the costs of under-saving clearly outweigh the risks of over-saving when it comes to retirement security."

"The findings of a new report released today indicate that the
decline in the stock market in the last six months of 2008 dramatically worsened the
retirement outlook for middle-class Americans. The analysis, conducted by Ernst &
Young LLP on behalf of the retirement coalition Americans for Secure Retirement
(ASR), finds that due to the economic downturn, the...

Recognizing that something must be done (and soon) to reform the Federal Entitlement Programs, President Obama acknowledged that, "What we have done is kicked this can down the road. We are now at the end of the road and are not in a position to kick it any further. We have to signal seriousness in this by making sure some of the hard decisions are made under my watch, not someone else's."

"I happily support a social safety net (preferably financed by the private sector but I'm OK with the public sector taking up the slack), especially for people who cannot care for themselves. But we have taken the idea of a safety net and transmogrified it into an entitlement state that gives more and more money (and cheap drugs!) to folks who can afford to pay their own freight. That just ain...

Social security personal-accounts "are not the speculative vehicles Deomcrats want you to think they are."

Cato Instituter's Michael Tanner writes, “In financing terms, the Social Security trust fund is an irrelevancy. Come 2014, when Social Security's payroll tax income falls below its benefit obligations, the program will need large infusions of tax dollars. The existence of the Trust Fund means only that until 2034 those dollars will come through increased income taxes rather than increased...

Moos reports on recent pushes for Social Security reform.

"The 2009 Social Security and Medicare Trustees Reports show the combined unfunded liability of these two programs has reached nearly $107 trillion in today's dollars - about seven times the size of the U.S. economy and 10 times the size of the outstanding national debt. The Social Security and Medicare deficits are on a course to engulf the entire federal budget. If our policymakers wait to...

"Here’s some bad news: The latest report of the Social Security and Medicare trustees shows an unfunded liability for both programs of $63 trillion. That is equal to about 4.5 times the entire U.S. gross domestic product.

The unfunded liability is the amount we have promised in benefits, looking indefinitely into the future, minus the payroll taxes and premiums we expect to collect. It’...

"This week, Mercatus Center Research Fellow Veronique de Rugy examines the annual share of the U.S. budget spent on programs benefiting senior citizens (i.e., those aged 65 and over). Data on Social Security and Medicare spending from the Congressional Budget Office is used to show the historical trends and projected share of the budget between 1970 and 2084."

This short article compares the political and economic climate of the Reagan reforms to Social Security in the early 1980's with the situation currently facing Congress. As today, there was great debate over the existence of structural problems with Social Security as well as what the right course of action was to fix its bad health. But unlike the 1983 reforms, today's highly politicized...

"Numerous lawmakers embrace a discredited theory of the Constitution that would not only end Medicare outright but also cause countless other cherished programs to be declared unconstitutional. Under this theory, Pell Grants, federal student loans, food stamps, federal disaster relief, Medicaid, income assistance for the poor, and even Social Security must all be eliminated as offensive to the...

This article addresses the difficulty of formulating and implementing policy quickly in the current Congress. As Goldwein writes, "Although the features of Clinton's health care reform and Bush's Social Security reform were quite different, I believe they failed for the same reason: crowded politics. In both cases, the overwhelming number of groups and individuals interested...

While the most recent Trustees' Report "shows some deterioration in the program's long-run outlook", the progressive Center on Budget and Policy Priorities claims that "the report does not depict a program in crisis. [Still], policymakers should act sooner rather than later to put the program on a sound long-run footing. Today's beneficiaries and workers approaching retirement, however, need...

Harvard economist Greg Mankiw lays three reasons why democrats oppose social security reform: 1) Political opportunism; 2) They oppose the spread of stock ownership; and 3) They distrust the public with their own money.

Chart or Graph

"That's a Math Problem...

- If an expense rises by 26% and the ability to pay rises by only 3%, the math doesn’t work. A computer in a science fiction movie might blurt out, 'does not compute…does not compute…'

- 'Something’s Gotta Give…' as the 2003 film put it.

- A mathematician or economist would say, 'the expense must go down or the ability to pay must rise to match...

These charts show a breakdown by age group of ownership rates according to the type of asset.

"Households in all age groups have made gains compared with their predecessors over the course of many decades, but the incomes of the oldest households have risen four times as sharply as those of the youngest ones. As a result, incomes of the oldest households, which have been lower than those of younger households, are catching up.

In households headed by adults younger than 35, the...

"The latest Trustees report shows Social Security’s position has deteriorated since last year. The Trustees estimate that the 75-year actuarial imbalance has now increased to 0.8 percent of GDP (2.22 percent of taxable payroll) compared to 0.7 percent of GDP (1.92 percent of taxable payroll) in last year’s report. Over the coming decade, the
Trustees project cash-flow deficits of about $...

"Medicare and Social Security accounts are currently in cash flow deficit, these deficits are projected to continue and grow into the future, from around 3% of GDP in 2010 to 16% of GDP in 2083. These accounts represent a liability of $45.9 trillion over the next 75 years."

"This chart by Mercatus Center Senior Research Fellow Veronique de Rugy uses data from the Congressional Budget Office to illustrate the change in federal income tax rates that would be required to pay for federal entitlement spending.  Even for the lowest tax bracket, taxes would have to more than double to pay for current Medicare, Medicaid and...

"In 2009, households headed by adults ages 65 and older possessed 42% more median net worth (assets minus debt) than households headed by their same-aged counterparts had in 1984. During this same period, the wealth of households headed by younger adults moved in the opposite direction. In 2009, households headed by adults younger than 35 had 68% less wealth than households of their same-aged...

These charts show a breakdown of assets factoring into the net worth of different age groups.

The table above provides a breakdown of the number of Social Security and Supplemental Security Income beneficiaries for the month of December 2011.

"Because the primary source of income for OASDI and HI is the payroll tax, it is customary to compare the programs’ non-interest income and costs expressed as percentages of taxable payroll, the “income rate” and “cost rate” shown in Chart B. Both the OASDI and HI annual cost rates increase over the long run from their 2010 levels (13.40 and 3.76 percent). Projected Social Security costs grow...

"In the near-term, the reason for larger shortfalls in this year’s report is largely due to economic changes that caused considerably lower taxable earnings in 2010 and projected taxable earnings over the next few years than were projected in the August report.

Over the longer-term, the changes stem from multiple factors, but mainly from demographic shifts. In addition to revised...

"In 2006, 89% of married couples and 88% of nonmarried persons aged 65 or older received Social Security benefits. Social Security was the major source of income (providing at least 50% of total income) for 52% of aged beneficiary couples and 72% of aged nonmarried beneficiaries. It was 90% or more of income for 20% of aged beneficiary couples and 41% of aged nonmarried beneficiaries. Total...

"Median income is a measure of what is happening in the middle of the population. Poverty statistics reflect what is happening at the bottom, and they tell a familiar story of changes in economic status for young and old.

Among households headed by adults younger than 35, the share with income below the poverty line has jumped since 1967. Among households headed by adults ages 65 and...

The tables above provide a breakdown of total and average monthly payments to Social Security and Supplemental Security Income beneficiaries for the month of February 2011.

"This chart compares the Congressional Budget Office’s (CBO’s) projections for the end of year balance of Social Security accounts from 2008 and 2009. These balances are presented as a percentage of taxable payroll, a weighted average of taxable wages and taxable self-employment income which provides an estimate of the earnings subject to payroll taxation each year...

"Impact on the Federal Budget.

The combined deficits of both programs now require about 14 percent of general income tax revenues [see the figure above]. As baby boomers begin to retire, however, that number will soar, and it will be increasingly difficult for the government to continue spending on other activities. In the absence of a tax increase, if the federal government keeps its...

"These long-term deficits are due to the aging of the population, which has pushed the program’s costs from 4.2 percent of GDP in 2000 to 4.9 percent this year, and will push them to as high as 6.2 percent by 2035. Revenues, meanwhile, will fail to keep up. Though they are projected to rise from 4.6 percent of GDP today to 4.9 percent by 2020 – as the economy recovers – they will then...

"Repaying what is owed to Social Security will add to deficits in the rest of the budget each year over the next 75 years ....

The situation has also deteriorated over the long-run. Deficits are projected to rise to about 0.4 percent of GDP (1.1 percent of payroll) in 2020, 1.2 percent of GDP (3.4 percent of payroll) by 2050, and 1.4 percent of GDP (4.1 percent of payroll) by 2080."

" - Social Security tax receipts exceeded outlays in every year between 1984 and 2008, leading to a cumulative surplus of $1.4 trillion.

- These surpluses have been used to fund other parts of federal government operations (including Medicaid, infrastructure and defense...) under the unified budget accounting rules.

- Without these past Social Security surpluses, USA Inc. would...

"The reports measure the short-range adequacy of the OASI, DI, and HI Trust Funds by comparing fund assets to projected costs for the ensuing year (the "trust fund ratio"). A trust fund ratio of 100 percent or more -- that is, assets at least equal to projected costs for a year -- is a good indicator of a fund’s short-range adequacy. That level of projected assets for any year means that even...

"Disability Insurance faces the most immediate threat. Technically, Social Security is two programs – an old-age program, which stakes claim on 10.6 percent of payroll taxes, and a DI program which is funded by the remaining 1.8 percent (for a total of 12.4 percent). When looked at together, there are sufficient revenues and trust fund assets to last through 2036. The DI program, though, is...

"Half of the entire budget will be consumed by payments for senior citizens by 2030.

In 1970, spending on Social Security and Medicare was one-fifth of the budget (blue portion). This portion has since grown to nearly 37 percent of the budget in 2010; this amounts to over twice spending on defense or 8.4 percent of the country’s gross domestic product. Other spending (red portion),...

Analysis Report White Paper

"This paper analyzes 'progressive price indexing.' It contains five significant findings:

  • Progressive price indexing would impose substantial benefit reductions on average workers. ...
  • Progressive price indexing would use benefit reductions to close about 70 percent of the 75-year shortfall. ...
  • ...

Examines ten common misconceptions about how Social Security functions. Written in question/answer format, John first addresses the myth and then combats it with the factual interpretation of what the actual data suggests.

Suggestions and recommendations from the Cato Institute for members of the 108th Congress. Information includes quotations from expert witnesses, testimonies, and charts and graphs.

This document includes a great deal of current and historical data about Social Security benefits.

"In less than a decade, members of the baby boom generation will begin reaching their retirement years. At that time, 77 million people will begin to leave the labor market. They will cease to be taxpayers and begin to receive Social Security and Medicare benefits. This will mark the beginning of an enormous conflict over resources. Indeed, it is probably no...

This report demonstrates through 12 case studies how Social Security reform could help workers create new and lasting wealth and help provide for their retirement. Since critics of Personal Retirement Accounts (PRAs) often focus on concerns for lower-income workers, the 12 case studies focus exclusively on low-income and moderate-income earners.

 

"As America moves into the 21st century, two public policy issues are becoming increasingly important: the need to reform Social Security and the need to spur economic growth and raise real wages. Recent evidence suggests that it may be possible to solve both problems simultaneously.

Privatizing Social Security, transforming it from an unfunded pay-as-you-go system to a system of...

An examination of eight of the most frequently asked questions about Social Security including questions like, "Social Security seems to have been working fine for decades. Why is there a problem with it now?", "Are things really so bad that the program will go bankrupt?", and "What would it take to fix Social Security's finances?"

"The analysis finds that almost three out of five middle-class new retirees can expect to outlive their financial assets if they attempt to maintain their current pre-retirement standard of living. To avoid outliving their financial assets, middle-class retirees will have to reduce their standard of living, on average, by 24 percent. Furthermore, the analysis finds that almost three out of...

"There have been a number of proposals to invest the Social Security surplus in the financial markets. Some proposals call for the government to do the investing. Others would have workers deposit part of their payroll tax payments in individual accounts that would be invested in assets, such as stocks and bonds. Are such investments inherently risky?

The returns on both stocks and...

This article provides a good overview of the social security problem and explains why regardless of the reform-whether it be benefit reductions, tax increases, debt issuance or privatization-solving the social security problem will cost money. The only question is who will pay and when.

This web memo concisely addresses the following social security issues:

  • What is Social Security?
  • What is FICA?
  • What are the Trust Funds?
  • How are Social Security benefits determined?
  • What (if anything) is wrong with Social Security?
  • Approaches to reform
  • Reform in the United States and other countries

"The argument that Social Security is a bad deal for today's workers and that they would get higher returns and benefits by investing through personal accounts instead has gained broader and broader acceptance. This view has greatly fueled reforms and proposals in the United States and abroad that are based on personal, private investment and insurance accounts.

However, the National...

This Congressional Budget Office primer on Social Security describes the elements of the program that are most relevant to the current debate about Social Security's future. This primer examines the demographic patterns that are causing the graying of the U.S. population and looks at several strategies that have been proposed for preparing for that aging population.

"Prompt action is essential if we are to restore confidence in the future of Social Security and enable today's workers to plan for a secure retirement." The report points out the importance of acting sooner rather than later because delay will only serve to give policymakers fewer and more difficult choices.

One of the foremost Social Security analysts addresses Personal Retirement Accounts. John covers how one might structure and regulate PRA's and "deals with the question of raising or eliminating the existing cap on wages."

"Households headed by older adults have made dramatic gains relative to those headed by younger adults in their economic well-being over the past quarter of a century, according to a new Pew Research Center analysis of a wide array of government data."

This article debunks many of the "myths" underlying the arguments against privatizing a portion of Social Security.

"This paper critically examines ten leading myths that have gained currency in the debate about reforming the U.S. Social Security system, including myths that have been propagated by both proponents and opponents of including personal accounts as part of any reform package."

"In July, 2008, Ernst & Young LLP released a report entitled 'Retirement Vulnerability of New Retirees,' commissioned by the Americans for Secure Retirement (ASR) coalition. Following the publication of that report, the American and global financial markets have suffered dramatic declines, and the United States economy as a whole has entered a severe recession. In response to ASR's request...

"This report looks at the federal government as if it were a business, with the goal of informing the debate about our nation’s financial situation and outlook. In it, we examine USA Inc.’s income statement and balance sheet. We aim to interpret the underlying data and facts and illustrate patterns and trends in easy-to-understand ways. We analyze the drivers of federal revenue and the history...

Video/Podcast/Media

Video clip of President Roosevelt signing the 1935 Social Security bill into law and his speech to the American Public afterwards.

A recent report "indicates that the decline in the stock market in the last six months of 2008 worsened the retirement outlook for middle-class Americans. The analysis, conducted by Ernst & Young on behalf of the Americans for Secure Retirement coalition (ASR), shows that the retirement assets of recent and near retirees decreased between 14 and 17 percent in the last six months of 2008...

Primary Document

The full text version of the original legislation which was signed into law August 14, 1935 by FDR.

This government report concludes that "under current law the cost of Social Security will increase faster than the program's income, because of the aging of the baby-boom generation, expected continuing low fertility, and increasing life expectancy. Based on the Trustees' best estimate, program cost will exceed tax revenues starting in 2018 and throughout the remainder of the 75-year...

This annual report presented by Social Security and Medicare Boards of Trustees describes the current and projected financial conditions of the two programs.

"The financial conditions of the Social Security and Medicare programs remain challenging. Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and will...

Full Audio and text of FDR's comments after signing into law the Social Security Act of 1935.

From the Social Security Administration's "Background to the Case":

"The fact that workers contribute to the Social Security program's funding through a dedicated payroll tax establishes a unique connection between those tax payments and future benefits. More so than general federal income taxes can be said to...

Mises explained economic phenomena as the outcomes of countless conscious, purposive actions, choices, and preferences of individuals, each of whom was trying as best as he or she could ... to attain ... wants and ... avoid ... consequences.

Provides breakdown data of Social Security beneficiaries.

"In this extensive collection of history-related materials, we present both the institutional
history of the Social Security Administration and the history of the Social Security program."

Summarized charts of the SSA which discuss the provisions of the original legislation.

"SSA will do the best it can to provide the American people with the service they need, and I know firsthand how important the program can be to a family facing catastrophic illness or the loss of a family member. It is clear that we are stretching our ability to balance funding realities with the quality service the American people have come to expect from our Agency."

"The Old-Age, Survivors, and Disability Insurance (OASDI) program in the United States makes available a basic level of monthly income upon the attainment of retirement eligibility age, death, or disability by insured workers. The OASDI program consists of two separate parts that pay benefits to workers and their families—Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI)....

Under Section 2 of this report, the Congressional Budget Office addresses Social Security. CBO makes predictions of future deficit growth and provides possible solutions that include decreasing initial benefits and raising the Retirement Age.

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