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Policy Basics: Top Ten Facts about Social Security

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Eighty years after President Franklin Roosevelt signed the Social Security Act on August 14, 1935, Social Security remains one of the nation’s most successful, effective, and popular programs. It provides a foundation of income on which workers can build to plan for their retirement.  It also provides valuable social insurance protection to workers who become disabled and to families whose breadwinner dies.

Fact #1: Social Security is more than just a retirement program. It provides important life insurance and disability insurance protection as well.

Some 60 million people, or more than one in every six U.S. residents, collected Social Security benefits in June 2015.  While three-quarters of them received benefits as retirees or elderly widow(er)s, 11 million (18 percent) received disability insurance benefits, and 2 million (3 percent) received benefits as young survivors of deceased workers.

Workers earn life insurance and disability insurance protection by making Social Security payroll tax contributions:

  • About 96 percent of people aged 20-49 who worked in jobs covered by Social Security in 2014 have earned life insurance protection through Social Security. [1]
  • For a young worker with average earnings, a spouse, and two children, that Social Security protection is equivalent to a life insurance policy with a face value of $612,000. [2]
  • About 90 percent of people aged 21-64 who worked in covered employment in 2014 are insured through Social Security in case of disability. [3]

The risk of disability or premature death is greater than many people realize.  Of recent entrants to the labor force, about one-third (36 percent of men and 31 percent of women) will become disabled or die before reaching the full retirement age. [4]

Fact #2: Social Security provides a guaranteed, progressive benefit that keeps up with increases in the cost of living.

Social Security benefits are based on the earnings on which you pay Social Security payroll taxes.  The higher your earnings (up to a maximum taxable amount, currently $118,500), the higher your benefit.

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 2015 replace about 52 percent of his or her prior earnings.  But benefits for a person who always earned the maximum taxable amount replace only about 25 percent of his or her prior earnings, though they are larger in dollar terms than those for the lower-wage worker. [5]

In recent years, fewer employers have offered defined-benefit pension plans, which guarantee a certain benefit level upon retirement, and more have offered defined-contribution plans, which pay a benefit based on a worker’s contributions and the rate of return they earn. [6]   Thus, for most workers, Social Security will be their only source of guaranteed retirement income that is not subject to investment risk or financial market fluctuations.

Once someone starts receiving Social Security, his or her benefits automatically increase

to keep pace with inflation, helping to ensure that people do not fall into poverty as they age.  In contrast, most private pensions and annuities are not adjusted (or are only partly adjusted) for inflation.

Fact #3: Social Security provides a foundation of retirement protection for nearly every American, and its benefits are not means-tested.

Almost all workers participate in Social Security by making payroll tax contributions, and almost all elderly people receive Social Security benefits.  In fact, 97 percent of people aged 60-89 either receive Social Security or will receive it. [7]   The near-universality of Social Security brings many important advantages.

Social Security provides a foundation of retirement protection for people at all earnings levels.  It encourages private pensions and personal saving because it isn’t means-tested — in other words, it doesn’t reduce or deny benefits to people whose current income or assets exceed a certain level. [8]   Social Security provides a higher annual payout than private retirement annuities per dollar contributed because its risk pool is not limited to those who expect to live a long time, no funds leak out in lump-sum payments or bequests, and its administrative costs are much lower. [9]

Indeed, universal participation and the absence of means-testing make Social Security very efficient to administer.  Administrative costs amount to only 0.7 percent of annual benefits, far below the percentages for private retirement annuities. [10]  Proposals to means-test Social Security would impose significant reporting and processing burdens on both recipients and administrators, undercutting many of those important advantages. [11]

Finally, the universal nature of Social Security assures its continued popular and political support.  Large majorities of Americans say that they don’t mind paying for Social Security because they value it for themselves, their families, and millions of others who rely on it. [12]

Fact #4: Social Security benefits are modest.

Social Security benefits are much more modest than many people realize; the average Social Security retirement benefit in June 2015 was $1,335 a month, or a bit over $16,000 a year. [13]   (The average disabled worker and aged widow received slightly less.)  For someone who worked all of his or her adult life at average earnings and retires at age 65 in 2015, Social Security benefits replace about 40 percent of past earnings. [14]  This “replacement rate” will slip to about 36 percent for a medium earner retiring at 65 in the future, chiefly because the full retirement age, which has already risen to 66, will climb to 67 over the 2017-2022 period.

Moreover, most retirees enroll in Medicare’s Supplementary Medical Insurance (also known as Medicare Part B) and have Part B premiums deducted from their Social Security checks.  As health care costs continue to outpace general inflation, those premiums will take a bigger bite out of their checks. [15]

Social Security benefits are modest by international standards, too.  The United States ranks 31 st among 34 developed countries in the percentage of a median worker’s earnings that the public-pension system replaces. [16]

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