President Franklin D. Roosevelt enacted the Social Security Act on August 14, 1935. It has been one of the country’s most well-known, successful, and liked programs for 88 years.
Social Security offers an investment source of income upon which employees can utilize in preparation for retirement.
It also offers much-needed insurance coverage for employees who develop a disability and to households whose breadwinner passes away.
But what exactly does Social Security entail? This post will discuss the top ten facts about Social Security and its policy basics.
Fact #1: Social Security is not only a retirement program but also avails critical life insurance and disability insurance protection
In January 2022, over 65 million Americans, or about one in every six citizens, received Social Security benefits. Nearly four out of five recipients are older adults. Another fifth either collected Social Security Disability Insurance (SSDI) or were young survivors of workers who had died.
Workers who contribute Social Security payroll taxes get life insurance and SSDI protection on top of retirement benefits:
- Approximately 96 percent of adults between 20 and 49 working in occupations covered by Social Security received life insurance protection in 2020.
- Social Security analysts estimate that a young worker with an average income, a partner, and two children, would have a life insurance coverage of about $800,000 in 2020.
- Roughly 89% of individuals between ages 21 and 64 working in covered jobs have Social Security Insurance that protects them in the event of a severe disability.
The risk of premature death or disability is higher than we realize. New entrants into the labor market will experience a seven percent mortality rate and a much higher disability rate than those who reach full retirement age.
Fact #2: Social Security offers assured, progressive benefits that account for the rising cost of living
The income by which individuals contribute Social Security payroll taxes serves as the basis for Social Security payments. The more their income (up to a maximum taxable limit of $147,000 in 2022), the greater their benefit.
Benefits from Social Security are generally progressive– they reflect a considerable percentage of past income for workers in lower income brackets.
For instance, benefits for a low-income earner retiring at age 65 in 2022 who earns 45% of the average wage replace nearly half of their past income.
Yet, despite being higher in absolute terms than those for low-paid workers, benefits for high earners (with 160% of the average income) only replace 30% of past income.
Most employers today offer defined-contribution plans like 401(k), which pay benefits based on an employee’s contributions and the rate of return earned, rather than conventional defined-benefit schemes, which provide a fixed amount upon retirement.
That means Social Security will remain workers’ only source of guaranteed retirement funds immune to investment risk and volatility in the stock market.
Once someone begins collecting Social Security, their payouts increase in accordance with inflation, ensuring that individuals do not fall into poverty as they age. This is known as the Cost of Living Adjustment (COLA), which is a raise specifically to ensure inflation does not hit as hard.
Contrary to this, most private pensions and annuities do not really (or do so only partially) account for inflation.
Fact #3: Social Security offers retirement protection for almost all U.S. residents
The third fact relating to Social Security is that most workers, if not all, participate in the program by paying payroll taxes, and almost all retirees collect benefits.
Social Security Administration’s (SSA) projections show that 97% of older adults (aged 60 to 89) collect or will eventually collect Social Security. The nearly universal accessibility of Social Security yields several significant benefits.
First, it offers a retirement protection framework for individuals at all income levels. It does not decrease or deny benefits to those whose earnings or assets exceed a specific threshold, which promotes private pensions and individual saving.
Social Security offers a greater yearly payout per dollar invested than private retirement plans. That is because the Social Security risk pool is not limited to those who expect to live longer, it does not lose funds to lump sum payouts, and its administrative expenses are substantially lower.
Social Security is equally simple to administer because of universal participation and the lack of means testing. Means testing is a determination of whether an individual or family is eligible for government assistance or welfare, based upon whether the individual or family possesses the means to do without that help.
Only 0.6% of benefits are spent on administration, a much smaller fraction than private retirement plans.
Subjecting Social Security to means-testing would undercut benefits and yield minimal savings since beneficiaries burden administrators with heavy reporting and processing requirements.
Lastly, the universality of Social Security ensures that it will maintain public and political support.
Most Americans claim they value Social Security for themselves, their families, and the millions of others who depend on it; therefore, they don’t mind contributing to it.
Fact #4: Social Security benefits are modest
Social Security benefits are not as much as most people assume. The average Social Security benefit payout was around $1,614 per month in January 2022, or roughly $19,370 per year (On average, elderly widows and disabled workers received significantly less).
Social Security benefits will replace around 37% of past income for a person who worked their entire adult life with an average income and retires at 62 in 2022.
The ‘replacement rate’ of Social Security decreased as the full retirement age in the program gradually increased from 65 in 2000 to 67 in 2022.
Most seniors enlist in Medicare’s Supplementary Medical Insurance, generally known as Part B of Medicare, and get their Social Security benefits deducted for the Part B premiums.
These premiums exhaust their paychecks more quickly if medical costs outpace overall inflation.
Social Security benefits are also low based on international standards. Among developed nations, the United States comes in slightly outside the bottom third in the average worker’s income, replaced by the federal pension scheme.
Fact #5: Children have a significant stake in Social Security
Another fact about Social Security is that the program is as important for children as it is for seniors and their families. About 6.5 million children under 18 lived in families collecting Social Security benefits in 2019.
In addition to others who stayed with parents or other family members who got Social Security benefits, this figure included roughly 2.8 million children who collected benefits as dependents of disabled, retired, or deceased workers. Social Security pulled 1.1 million children out of poverty in 2020.
Fact #6: Social Security pulls millions of seniors above the poverty line
Government projections based on the 2021 Current Population Survey show that the income of nearly 4 in 10 persons over 65 would be below the poverty line; all other factors held constant.
About 16 million seniors get Social Security benefits, which pull them out of poverty.
The official figures of how much elderly persons rely on Social Security may be exaggerated, according to a major study on retirement income from the U.S. Census Bureau that compares Census figures to administrative data.
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According to the report, Social Security rescued approximately 10 million retirees from poverty by Social Security in 2012, 3 out of 10 of whom would have been poor without it.
Regardless of the parameters used, it’s evident that Social Security takes millions of senior citizens out of poverty and significantly lowers their poverty rate.
Fact #7: Senior beneficiaries receive most of their income from Social Security
Most elderly persons receive most of their income from Social Security.
Some studies, including the Census Bureau, report that Social Security provides not less than 50% of earnings for nearly half of this population and at least 90% of income for around one in four older persons.
Retirees do not make much except for a few individuals at the highest income scale. According to the U.S. Census Bureau study, most aged low-income Americans receive modest pension earnings, if any.
Most retiree households in the bottom third of the income distribution had no pension benefits.
An SSA research that correlates survey and administrative data found that one in every four of these households had an annual income of below $20,000, and about half had a yearly income of less than $50,000.
Fact #8: People of color need Social Security more than anyone else.
Black and Latina workers and their families experience higher poverty rates throughout their work lives and in old age.
Social Security is a crucial income source for people who earn less and have fewer opportunities to save and accumulate pensions.
The poverty rate for Black and Latina seniors is nearly 2.5 times that for white older adults. Older people of color experience greater retirement insecurity than their white counterparts due to the considerable gap in racial wealth.
Black and Latino workers are unlikely likely to be enrolled in workplace retirement plans and are more likely to hold low-wage positions with minimal savings potential.
Social Security tends to reduce the economic differences between older whites and older people of color.
The importance of Social Security to people of color goes beyond retirement.
On average, Blacks and Latinos experience higher rates of disability and lower lifetime income than their white counterparts, and blacks also have a higher rate of early death. For this reason, they benefit from Social Security more.
Black workers are more at risk of becoming disabled or dying before retirement because of longstanding racial inequities in access to quality health care and food, affordable housing, good schools, and economic opportunities.
Although they also are more likely to become disabled than whites, Latino workers tend to live longer on average, allowing them more time to collect retirement benefits.
Fact #9 Social Security is particularly advantageous to women
Women often earn less than men, spend more time outside paid labor, live longer, save less money, and receive smaller pensions.
So, they need Social Security more than men do. And with Social Security recipients in their 60s and 90s, women make up 7 out of 10 recipients.
Additionally, about 96% of Social Security survivor recipients are women. Since they typically live longer than men, women gain more from the scheme’s inflation-protected benefits, its progressive method of calculating benefits (because they often earn less than men), and it’s spousal and survivor benefits.
Fact #10: Relatively minor adjustments would stabilize Social Security finances
Since the 1980s, Social Security has collected more taxes and related income yearly than it pays in income.
It has amassed roughly $2.9 trillion in trust funds, with the surplus revenue reinvested in interest-bearing Treasury securities. Yet, Social Security costs will go up as baby boomers retire.
The trustees predict that the program’s combined Old-Age and Survivors Insurance (OASI) and Disability Insurance trust funds will run out by 2034 if lawmakers don’t take action.
Even if lawmakers do not take action after the trust fund holdings are exhausted, Social Security may still cover three-fourths of the scheduled payouts by using Social Security taxes as they collect them.
Fearmongers who assert that Social Security will not survive when young workers now retire either do not understand or are wrong in their representation of the estimates.
Over the next 75 years, the difference between Social Security’s predicted income and pledged benefits could amount to 1.2 percent of the country’s gross domestic product.
Politicians should focus on raising Social Security’s tax revenues to solve the program’s long-term funding gap primarily.
Social Security will take a significant portion of our country’s resources as the population ages. Fortunately, most people are ready to sustain it by raising their tax contributions.
Current trends also support increasing Social Security payroll taxes. Since lawmakers last reviewed solvency in 1983, Social Security’s tax base has been falling.
That is partly due to growing inequality and the increasing costs of non-taxable fringe benefits like health insurance.
If you have read the above facts about Social Security to the end, the take-home is that you shouldn’t rely on the scheme as your only source of income in retirement.
The typical retired worker payout is about $20,000 annually, which isn’t enough to sustain you and your family during retirement. Seeking additional retirement options is crucial.
Legal Giant can link you up with a Social Security expert to guide you through your options and explain everything else you may need to know about Social Security.
Contact us at (855) 740-5024 to schedule a free consultation today.