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Updated and revised to include new legislative and political developments that impact the Social Security system. Demographics and statistical data updated.

Updated on 04 Nov 2013. The previous version of this content can be found here.
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American Social Security System

Abstract and Keywords

This entry examines why our nation’s Social Security system was built, what it does, and what must be done to maintain and improve this foundational system for current and future generations. After a discussion of the social insurance approach to economic security and its underlying principles and values, the evolution of America’s Social Security system is reviewed—beginning with the enactment of the Social Security Act of 1935, through its incremental development, to the changed politics of Social Security since the mid-1990s. Next, program benefits and financing are described and contemporary challenges and related policy options are identified, in terms of both the program’s projected shortfall and the public’s need for expanded retirement, disability, and survivorship protections. The entry concludes by noting that social workers have an important role to play in shaping Social Security’s future.

Keywords: social security, social insurance, economic security, income maintenance, generational equity, aging policy

Enacted in 1935, Social Security—the Old-Age, Survivors, and Disability Insurance program (OASDI)—does more to maintain the living standards of working Americans and reduce poverty than any other program, public or private. The nation's central retirement income policy also provides the nation’s most important disability and life insurance protections.

In the United States, “Social Security” commonly refers to the program that provides cash benefits to retired and disabled workers, their spouses and dependent children, and certain survivors of deceased workers. It is sometimes used to describe both the OASDI and the Medicare programs. In other national contexts, Social Security is often referred to as a system of social insurance, public assistance (welfare), and related social interventions. Social Security also represents an ideal, a value to be achieved by a civilized society seeking to provide widespread basic protection against what Franklin D. Roosevelt called “the vicissitudes of life.”

The Social Insurance Approach

The social insurance approach to economic security protects against identifiable risks that could overwhelm the finances of individuals and families—specifically, loss of income resulting from the death of a parent or spouse, disability, health-care expenses, retirement, unemployment, or workplace injury. Whereas welfare programs give immediate relief to extreme financial problems, social insurance programs in the United States—including Medicare, Social Security, Unemployment Insurance, and Workers' Compensation—seek to prevent financial distress. Built on the principle of universal coverage, social insurance provides a social means of pooling risks. Utilizing insurance principles, the costs and risks of coverage are spread across a broad population—in this case, all working Americans. In exchange for modest work-related contributions over many years, social insurance provides a floor of protection against predictable risk (Ball, 2000).

The right to a social insurance benefit is “earned.” Benefit receipt is tied to contributions made by an employee and/or employer. Unlike welfare, eligibility does not require a means test. By providing benefits as an “earned right” while simultaneously protecting individuals and their families against economic insecurity, Social Security enhances the dignity of beneficiaries (Ball, 2000; Schulz & Binstock, 2006).

The driving principle behind Social Security is the concept of “social adequacy,” which means that its benefits meet the basic needs of the protected population. This concern is consistent with the social goals of providing for the general welfare, maintaining dignity, and enhancing the stability of families and society. Absent a concern for widespread (ideally universal) adequate financial protection, there would be no reason for government intervention to provide public social insurance (Hohaus, 1960). Protection against risks such as disability could be left to families, private savings, private pensions, private insurance, the vagaries of the economy, and chance. But such mechanisms fall short of providing universal, adequate protection.

Commitment to adequacy is blended with concern for “individual equity”—the dominating principle in private insurance that the more one contributes to a plan, the larger the benefit returns should be. Consequently, social insurance benefits bear some relationship to contributions made, with people who have worked consistently at higher wages making larger payroll tax contributions and receiving larger monthly benefits. But reflecting the adequacy principle, people who have worked for many years at low or moderate wages receive proportionately larger benefits relative to their payroll tax contributions.

To both provide widespread adequate protection and maintain financial stability, participation must be compulsory. Of necessity, private insurance companies “cherry pick ” the least risky and try to screen out expensive risks. But publicly funded social insurance programs do not turn away “bad risks,” such as persons likely to require expensive surgery. If the “good risks” are allowed to opt out, a social insurance system becomes financially unstable and costly. Moreover, some who opt out might eventually have to be rescued by taxpayer-financed welfare (Ball, 2000; Schulz & Binstock, 2006).

Social insurance programs reflect taxpayer and politician concern for stable financing. In most instances, payroll tax contributions and other revenues flow to dedicated trust funds earmarked to pay for benefits and administration. These safeguards assure stable financing. Legislative oversight and review by program officials, actuaries, and independent experts provide an early warning system for financing problems that arise periodically. The authority and taxing power of government, as well as the self-interest of political leaders to maintain the program for current and future generations, guarantees the continuity and financial integrity of these programs. As J. Douglas Brown, a Princeton economist, eloquently observed, an implied covenant, arising from a deeply embedded sense of mutual responsibility, reinforces and underlies “the fundamental obligations of the government and citizens of one time and the government and citizens of another to maintain a contributory social insurance system” (Brown, 1977, pp. 31–32).

Social insurance programs give concrete expression to widely held and time-honored American commitments. They are grounded in values of shared responsibility and concern for all members of society. They reflect an understanding of the social compact that suggests that, as citizens and human beings, we all share certain risks and vulnerabilities; and we all have a stake in advancing practical mechanisms of self- and mutual support. The programs are based on the belief that government can and should uphold these values by providing practical, dignified, secure, and efficient means to protect Americans and their families against risks they all face (Cornman, Kingson, & Butts, 2005).

History

Faced with unprecedented economic dislocation, President Roosevelt and the New Deal reformers saw the need and opportunity for an economic security bill to address unemployment and old-age insecurity. In 1934, Roosevelt established the Committee on Economic Security (CES), chaired by social worker and first woman cabinet officer, secretary of labor Frances Perkins, and including social worker and federal relief administrator Harry Hopkins. Two young professionals on the CES staff, Eveline Burns and Wilbur Cohen, became prominent social-work educators. At Columbia University, Burns distinguished herself as a social insurance scholar. Cohen, the first Social Security employee, would later be a social-work professor at the University of Michigan, a Johnson administration cabinet officer, and the person generally credited with launching the Medicare legislative strategy (Berkowitz, 1995). Rather than merely addressing the current economic depression, Roosevelt established a Committee on Economic Security (CES) in 1934 to develop the architecture for universal social insurance program that could sustain itself in the long run.

The CES report provided the basis for the Social Security Act of 1935. In a January 17, 1935, message to Congress, Roosevelt commended the CES proposals as a plan that “is at once a measure of prevention and a method of alleviation” (Roosevelt, 1935).

We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law that will give some measure of protection to the average citizen and his family. (Roosevelt, 1935)

Signed into law on August 14, the Act initiated two social insurance programs (including Social Security), three public-assistance programs (means-tested welfare programs), and several public-health and social-service programs. Since 1935, generations of Americans have maintained the Social Security system through their contributions over lifetimes of hard work. In the early 21st century, like the nation’s highway system, Social Security is so fundamental to the day-to-day workings of America that it is virtually impossible to imagine its absence.

Incremental Expansion (1935 to 1975)

From 1939 through the mid-1970s, Social Security expanded incrementally to cover more people, provide more robust benefits, and protect against loss of income resulting from severe disabilities. Benefits were extended in 1939 to wives of retired workers and surviving wives and children of deceased workers (and to husbands in 1950). The 1950 Social Security amendments established social insurance as the nation's dominant means of protecting older Americans against loss of income in retirement. Coverage was extended to regularly employed domestic and farm workers. Congress also increased benefits, making Social Security more available and more valuable than benefits provided through the federal–state Old-Age Assistance program, the welfare program funded under the Social Security Act.

In 1956, disability insurance protections for permanently and severely disabled workers aged 50 to 64 were added; they were then extended to all workers under 65 in 1960. The 1956 amendments also gave women the right to accept permanently reduced retired workers benefits between ages 62 and 64, an option extended to men in 1961. The high poverty rate among the old—an estimated 39% of persons over age 65 in 1959—combined with a growing economy provided a political rationale for substantial benefit increases from 1965 through 1972. In 1972, the automatic cost-of-living adjustment (COLA) was incorporated into the law, assuring that, once received, benefits would maintain their purchasing power no matter how long a beneficiary lived. Although critically important for helping stabilize the incomes of the old, disabled and surviving family members, this provision makes the financing of the program more sensitive to economic change (Berkowitz, 2007). During these years, both Republicans and Democrats supported the expansion of benefits, helping to make Social Security arguably the most popular domestic policy in U.S. history.

One change made during this era would have a dramatic and unintended effect on the perception of Social Security in the future. In 1968, President Johnson created a unified federal budget, so that all receipts—including those from Social Security—would be combined. Although this made Johnson’s wartime budget look much healthier, it ultimately served to bring Social Security into contemporary deficit debates despite the fact that it does not contribute to the deficit. This accounting change would bring forward attacks on the program that are still occurring in the early 21st century (Altman, 2005).

Financing Problems Emerge (1975–1999)

By the mid-1970s, the incremental expansion halted and attention turned to program financing. Unanticipated economic changes (high inflation, slow economic growth, and lower-than-expected wage growth) created short-term financing problems in the mid-1970s and again in the early 1980s. Demographic changes (for example, declining birth rates, increased life expectancies, and the anticipated aging of 76 million baby boomers) fueled long-term financing concerns. In 1977 and 1983, Congress passed legislation to address these problems through a combination of modest benefit reductions and tax increases, spreading the pain of reform across many constituencies: working persons, employers, and current and future beneficiaries (Altman, 2005; Berkowitz, 2007). By the mid-1980s, when the federal government was running large annual deficits in general revenues, the Social Security program began accumulating large yearly surpluses, a trend expected to continue through about 2020 (Board of Trustees 2013).

In 1983, the Cato Institute published an influential article entitled, “Achieving a Leninist strategy,” outlining a plan to dismantle the Social Security system, replacing it with private accounts. The plan said that advocates for privatizing Social Security should assure older persons ages 55 and older that they will get their Social Security benefits as planned. But, they said, those advocates should work to weaken confidence in the system, especially among younger Americans, as a way to make private accounts politically acceptable (Butler & Germanis, 1983). However, except for a few doctrinaire conservatives, the voices favoring means testing and privatizing Social Security, although present, did not gain significant political traction in this period.

Attempts to Dismantle the System Brick by Brick (2000s to the Early 21st Century)

Over time, the persistent and false claims that our Social Security system is unsustainable (see, for example, Peterson, 1996), a soaring stock market, federal deficits, and growing skepticism about all institutions (public and private) undermined public confidence, especially among young adults (Altman, 2005; Herd & Kingson, 2005; Schulz & Binstock, 2006; White, 2001), and laid the foundation for radical proposals to emerge front and center on the nation’s domestic policy agenda.

By the late 1990s, proposals to partially privatize Social Security were being advanced in many quarters—conservative think tanks (for example, the Cato Institute, the Heritage Foundation), conservative advocacy groups (for example, the National Taxpayers Association), the Republican congressional leadership, and some neoliberal Democrats. With support from many business groups—including the National Association of Manufacturers, the Business Roundtable, and the Security Industry Association—advocates helped advance privatization as a possible solution to a projected financing problem (Dreyfuss, 1999).

George W. Bush seized on these concerns in the 2000 presidential election, proposing that a portion of payroll taxes be diverted to individual accounts. Aware that the elimination of Social Security, and its payroll tax, was unlikely, conservatives proposed “partial privatization.” Some hoped it might be the first step to a fully privatized system and sought to “sell a market approach as a ‘solution’ to Social Security’s financing troubles. Individual accounts, they argued, would not only cure Social Security’s "bankruptcy blues," they would allow Americans more choice, increased savings, and bigger returns on their retirement investments—all while making the program more equitable for women and minorities” (Herd & Kingson, 2005, p. 188).

Advocacy groups representing seniors (for example, AARP and the Alliance for Retired Americans), unions, and Democratic Party leadership mounted a campaign opposing privatization. Advocates, moderate and liberal think tanks, and analysts highlighted policy options that could address the projected shortfall without undermining the traditional program. They observed that partial privatization would actually make the projected shortfall much worse—in addition to dealing a devastating blow to the federal budget (Altman, 2005; Diamond & Orszag, 2005; Schulz & Binstock, 2006). Furman and Greenstein (2005) analyzed the impact of a plan similar to one the president was favoring, to divert 4 percentage points of a worker's payroll tax to private accounts without tax increases or benefit reductions for older workers and today's beneficiaries. By 2028, federal debt would increase by $4.9 trillion (about 14% of the gross domestic product in that year). The Bush administration's proposal required very large reductions in benefits for young workers by changing how benefits are computed—from “wage indexing” to “price indexing” in determining initial benefits—greatly reducing guaranteed benefits, especially for the very young. For example, the projected average retirement benefits, including anticipated returns from private accounts, of future workers who were age 15 in 2005 would be $13,104, compared with $23,300 under the current system.

Many organizations expressed concern that partial privatization would pull a critical source of economic security out from under their constituents. In a letter to President Bush on January 27, 2005, Julian Bond, chairman of the National Association for the Advancement of Colored People, and Kim Gandy, president of the National Organization for Women, wrote,

Without Social Security benefits, the poverty rate among older African Americans would more than double, pushing most African American seniors into poverty. And more than half of all elderly women would be poor. (Bond & Gandy, 2005)

Public education, a stagnant stock market, a growing federal debt, and the Bush administration’s declining approval ratings all combined to shift the politics of Social Security. The effort to privatize Social Security failed. By 2007, proposals to partially privatize Social Security were no longer politically viable.

Even so, within a few years, large federal deficits—primarily caused by two unfunded wars, an unfunded expansion of Medicare (Part D), unaffordable tax cuts, and the economic downturn—fueled yet another challenge to the future of Social Security (Ruffing & Horney, 2012). Very quickly, the program became a major target of deficit and debt reduction talks that followed, although, by law, Social Security does not have borrowing authority and therefore cannot contribute to federal deficits and debt.

Regardless, the new round of policy controversy began in 2009 when senators Kent Conrad (D-ND) and Judd Gregg (R-NH, Ret.) proposed legislation to establish a deficit commission that cited Social Security as a prime target for benefit cuts. The senators advocated for a commission that, if it reached sufficient agreement, would be able to put forth deficit-reduction legislation that Congress would have to vote “up” or “down,” without any opportunity to amend.

Although the so-called “Conrad–Gregg Commission” was not enacted, a series of budget and debt-ceiling negotiations resulted in a February 18, 2010, Executive Order by President Obama, creating the National Commission on Fiscal Responsibility and Reform, popularly known as the Bowles–Simpson Commission after its co-chairs, former Wyoming senator Alan Simpson and former Clinton chief of staff Erskine Bowles. An informal agreement between the president and key House and Senate leaders allowed for a fast-track vote—that is, a quick up or down vote for the whole package without any amendments—if this commission reached sufficient agreement. Ultimately, the commission failed to generate a proposal that could receive enough votes by its members to formally report recommendations. However, the two co-chairs recommended a package of changes that relied heavily on cuts to Social Security and Medicare, proposals to close tax loopholes, and spending cuts (National Commission on Fiscal Responsibility and Reform, 2010).

Ironically, although Social Security does not and cannot, by law, contribute to federal deficits, many among Washington’s policy elites have seen the focus on federal deficits as an opportunity to address Social Security’s modest projected shortfall, primarily by cutting benefits.

Another attempt to tackle the deficit came to a head in the summer of 2011 over the traditionally routine practice of voting in Congress to raise the statutory limit on the public debt. In a final attempt to prevent the United States from defaulting on its obligations, Congress passed legislation to organize a Joint Select Committee on Deficit Reduction (known colloquially as the “super committee”). The legislation also laid out deep cuts to domestic discretionary spending and defense spending that would automatically go into effect on January 1, 2013, if the Committee did not reach agreement. When the Committee did not reach agreement, yet another fight ensued, which resulted in a small end-of-year decision that put off the effective deadline to March 1, 2013; this date also came and went without Congress and the administration reaching an agreement.

At the time of this writing in the spring of 2013, the sequester’s automatic and deeply harmful cuts have just gone into effect. Some organizations, including the American Federation of Labor and Congress of Industrial Organizations, are calling to cancel the sequester and increase investment in the nation’s infrastructure, job development, research, and education. Others, including “Fix the Debt,” composed of major corporate chief executive officers (such as Macy’s and, Honeywell’s), are pushing hard to cut Social Security, Medicare, and Medicaid.

The outcome of the political battles likely to follow are not knowable; however, going forward, it is likely that Social Security will continue to be in danger in a policy environment where the focus has turned to austerity rather than great national needs, such as addressing the jobs and retirement security crises.

Program Structure

Social Security affects virtually all Americans, as taxpayers and as beneficiaries. About 159 million people—94% of all working persons—made payroll tax payments in 2013 (SSA, 2013b). In 2013, 57 million people received benefits—including 3.9 million aged widow(er)s, 3.5 million children under age 19, 8.9 million disabled workers, 37.2 million retired workers, 2.3 million spouses of retired workers, 1 million severely disabled dependent adult children, 160,000 spouses of disabled workers, 256,000 disabled widow(er)s ages 50 to 64 and 148,000 spouses of deceased workers caring for dependent children (SSA, 2013c).

Financing

Retirement, survivor, and disability protection and benefits are earned through payment of payroll tax contributions by workers and their employers, which serve as the basis for future eligibility and benefit decisions. The SSA maintains a record of the earnings on which workers make payroll tax contributions. Current benefits are funded largely from the contributions paid by current workers, with the promise— held together by the taxing power of the federal government—that current workers will themselves receive benefits when they become eligible. Additional revenues come from treating a portion of Social Security benefits as taxable income and from the interest earned from investing the growing OASDI trust fund assets in government bonds. Less than 1% (about 0.9%) of expenditures are spent on administration.

Employed persons contribute 6.2% of their earnings (with an equal employer match) up to a maximum taxable ceiling ($113,700 in 2013) into two trust funds: the Old-Age and Survivors Insurance and the Disability Insurance, or what is more conveniently called the combined OASDI trust fund. Self-employed persons make contributions equivalent to those made by regular employees and their employers. The maximum taxable ceiling is adjusted each year for changes in average wages. The goal is for Social Security to receive a constant share of national earnings. Another 1.45% payroll tax on all earnings goes to Medicare's hospital insurance trust fund.

In calendar year 2013, the combined OASDI trust fund is estimated to receive $855 billion dollars from all sources— including $723 billion from payroll tax revenues, and $25 billion from treating Social Security benefits as taxable income, 103 billion in interest payments for Treasury bonds and other federal securities held by Social Security and $4 billion in reimbursements from general revenues. In turn, it is estimated expend $827 billion— including $816 billion on Social Security benefit payments, $4.3 billion on the portion of the railroad retirement program integrated with Social Security, and $6.5 billion on administrative expenses (see Board of Trustees, 2013).

In 2012, it collected $54 billion more than was paid out in benefits or administrative expenses. This excess—the “surplus”—is deposited in the OASDI trust fund, swelling the fund's assets, $2.76 trillion in 2013. As with other holders of federal obligations, the Treasury makes regular interest payments: as noted, $54 billion in 2012 to the OASDI trust funds (see Board of Trustees, 2013; Reno, Bethell & Walker, 2012).

The Social Security trustees—the Secretaries of the Treasury and departments of Labor and Health and Human Services; the Commissioner of the SSA; and two publicly appointed members—issue an annual report on the program's financial status. Ongoing analysis by the Office of the Actuary, an independent and professional office within the SSA, serves as the basis for the Trustees Report, and as an early warning system and means of assessing the scope and types of adjustments that may be needed periodically.

Benefits

Because Social Security provides substantial protections to children, persons with disabilities, and older Americans, social workers need a basic understanding of its benefits.

It is useful to differentiate between Social Security and Supplemental Security Income (SSI). SSI—an important means-tested program also administered by the SSA—provided cash benefits to roughly 7.9 million low-income, severely disabled, blind, or aged (65 years and older) people in January 2012.

Social Security provides cash benefits to retired and disabled persons and, under certain conditions, to spouses, dependent children, and occasionally financially dependent grandchildren. In 2013, the maximum monthly benefit for persons first retiring at full retirement age is $2,533 (Social Security Administration, 2013a).

Table 1 provides the average monthly benefits in January 2013 for different types of Social Security beneficiaries.

Special rules link employee contributions to benefits they receive. Persons who have worked for 10 years or more in covered employment (that is, earned credit for 40 quarters) are almost always eligible to receive retirement benefits at age 62 or later, and their survivorship protections are in force. In 2013, credits for one quarter of coverage are earned whenever payroll tax contributions are made on $1,160 of earnings, up to a maximum of four quarters (Social Security Administration, 2013b). Additionally, for disability protections, workers usually must have worked 20 quarters of coverage in the 40 quarters that prior to onset of disability. There are exceptions: for example, younger workers are subject to far less restrictive eligibility requirements for survivorship and disability protections.

Table 1 Average Social Security Benefits in April 2013 by Type of Beneficiary

All retired workers

$1,261

Aged couple with both receiving benefits

$2,048

Widowed mother and two children

$2,592

Aged widow(er) alone

$1,214

All disabled workers

$1,132

Disabled worker, spouse, and one or more children

$1,919

Source: Social Security Administration, http://www.ssa.gov/pressoffice/factsheets/colafacts2013.pdf

The benefit formula assures that long-term, low-wage workers receive a proportionately larger benefit relative to their contributions than high-wage workers. The payroll tax contributions of high-wage workers are recognized by a larger monthly benefit, but such workers receive a proportionately smaller benefit. For workers retiring at the full retirement age in January 2012 (66 years). Social Security replaces about 26% of earnings for those with earnings consistently at the maximum taxable earnings ceiling, compared with 41% for average earners, and about 55% for those with earnings at 45% of median wages (National Academy of Social Insurance, 2012).

Covered workers may accept retirement benefits beginning on the first month that they turn 62 years old. However, if accepted at the earliest age, monthly retirement benefit amounts are permanently reduced, for example, by 25% for workers born from 1943 to 1954 and by 30% for workers born in 1960 or later. Workers receive credits that permanently increase the value of their monthly benefits, for each month benefit receipt is postponed past the full retirement age, up to age 70. Because of the increase in the retirement age, Social Security replacement rates will continue to decline so that a worker claiming at 65 years old will see a replacement rate of only 36% (National Academy of Social Insurance, 2012). Nearly all covered workers are eligible for full benefits at the full retirement age. Full retirement age, 66 for workers born from 1943 to 1954, is scheduled to gradually increase to age 67 for workers born in 1960 or later. As a result, regardless of whether these workers accept benefits at age 62, 70, or any age in between, their benefits will have been cut by 12–14% relative to persons not affected by retirement age increases. (Kingson & Morrissey, 2012). The surviving spouses of retired workers may receive reduced survivor benefits at age 60 (or age 50 if severely disabled) or full benefits at full retirement age or later. Severely disabled workers are also eligible to receive monthly benefits if their condition meets disability eligibility criteria. Other dependents of retired, deceased, or disabled workers, including financially dependent grandchildren or adult children who were disabled prior to age 19, may be eligible for monthly benefits (National Academy of Social Insurance, 2012).

When covered workers become severely disabled, they may be eligible, after a 5-month waiting period, to receive monthly disability benefits. After 24 months of entitlement to disability benefits, disabled workers (as well as disabled widow(er)s aged 50 through 64), and adult disabled children are eligible for all Medicare benefits. However, Medicare does not cover other family members, except for an aged spouse (Social Security Administration, 2013c).

Social Security disability and life insurance cover the great majority of the nation’s families, including 73 million children under age 18. In 2003, without Social Security benefits, the poverty rate of families with a disabled worker would have tripled, from 18.5 to 55% for all disabled workers; from 31.1 to 68% for African American families, and from 26.4 to 65.3% for Hispanic families (Beedon & Nawrocki, 2003).

To be considered disabled, in 2012 a person must be unable to earn $1,010 a month ($1,690 for blind people) because of a physical or mental impairment that is expected to last at least a year or result in death. A worker does not actually have to earn this amount; he or she must just be able to earn it. A worker must be unable to do any kind of job that exists in significant numbers in the national economy. The local or regional availability of jobs is not taken into consideration, although age, education, and previous work experience are (Social Security Administration, 2011).

In each state, the SSA contracts with that state's disability determination service to review disability applications and make initial eligibility decisions. If denied, claimants may request that the disability determination service reconsider their application. Claimants have the right to sequentially pursue three other levels of appeal: a hearing before an SSA administrative law judge, a hearing before the SSA Appeals council, and a lawsuit filed in a U.S. district court. Claims initially rejected are often accepted on appeal.

For a young married couple with average earnings and two children under age 4, Social Security is the rough equivalent of a term life insurance policy of $476,000 and a disability policy of $465,000 (Nichols, 2008). Ten million people under age 60 receive Social Security benefits each month. Benefits received by these surviving family members, severely disabled workers, spouses, children, and some adopted grandchildren living in a grandparent or other relative’s home go a long way toward enabling families to maintain their living standards. In addition to the 4.5 million children receiving Social Security checks each month (Social Security Administration, 2013b), another 3.4 million children under 18, although not receiving benefits themselves, live with relatives who do (Lavery & Reno, 2008). Social Security is the largest and most substantial source of public cash benefits going to 2.4 million grandparent-headed households responsible for 4.5 million children under age 18, and Social Security lifts over 1 million children from poverty every year (Cornman et al., 2005).

Contemporary Challenges

Barring highly unusual circumstances, it is almost certain that Social Security will not face a short-term shortfall within the next 15 years as it did in the early 1980s (see Altman, 2005; Board of Trustees, 2013; Diamond & Orszag, 2005; Schulz & Binstock, 2006). However, a modest long-term shortfall exists, which will require legislative action before 2033. At the same time, serious social justice and adequacy concerns should be addressed.

In general, the American people are far more open to revenue increases than to benefit cuts. For example, according to a poll taken by the National Academy of Social Insurance, 77% of Americans support paying more in taxes to preserve Social Security for future generations (National Academy of Social Insurance, 2012).

The Projected Financing Problem

When the actuaries put together the Trustees Report, they calculate three scenarios for the 75-year projections: a low-cost, an intermediate, and a high-cost projection. The intermediate projections are the most widely accepted and in 2012 indicated that the OASDI has sufficient funds to meet all obligations until 2033. Under the high-cost scenario, the trust funds run out by 2027 instead of 2033, largely because of pessimistic assumptions made about the economy. But under the low-cost scenario, the trust fund remains solvent for 75 years and beyond. This is an important reminder that the projections over such a long time period face a significant amount of uncertainty.

The most commonly accepted estimates suggest that OASDI has sufficient funds to meet all obligations until 2033. Outlays are projected to exceed tax revenues (payroll tax receipts and taxes on benefits) in 2010. However, income from all sources, including interest on trust fund investment, is projected to exceed expenditures every year through 2021. After that, timely payment of benefits will require drawing down the OASDI assets, depleting them in 2033. Trust fund depletion does not mean that Social Security will be “bankrupt” or “unsustainable.” It is politically inconceivable that future congresses would not act before 2033. Even if they failed to act, Social Security’s dedicated stream of income after 2033 is sufficient to pay about 74 cents of every dollar promised over the remaining 75-year estimating period. Of course, the size of the actual problem could grow or shrink, depending on economic and demographic changes (Board of Trustees, 2013).

Increasing Revenues

To put this modest shortfall into perspective, consider that it is roughly equivalent to the income that would have been lost to the federal government if the 2001 and 2003 Bush tax cuts had been continued for households receiving more than $250,000 in annual income.

The Adequacy of Benefits

Social Security’s benefits are modest, averaging about $15,000 a year for retired workers. They are also extremely important to beneficiaries’ finances. Sixty percent of households with at least one person aged 65 or older reported that they had less than $32,602 in 2010 income (see Table 2). More than 70% of all income going to those households comes from Social Security (SSA, 2012a). Only the top fifth of elderly households have a source of income that equals (that is, assets) or surpasses (that is, earnings) Social Security in relative contribution to their aggregate household income. Occupational pensions make significant contributions to the aggregate incomes going to households in the three highest quintiles, but fall short of Social Security, which is not surprising when considering that 6 of 10 private-sector employees do not have private pension protections.

Table 2 Importance of Various Sources of Income to Elderly Households (Aged Units), 2010a (All Members Over Age 65)

Percent of total income from:b

All aged units

Quintiles units under $12,554 (Q1)

$12,555– $20,145 (Q2)

$20,146– $32,602 (Q3)

$32,603– $57,957 (Q4)

$57,958 and over (Q5)

Social Security (OASDI)

36.7

84.3

83.3

65.7

43.5

17.3

Railroad retirement

0.4

0.2

0.5

0.5

0.8

0.2

Government employee pension

9.2

0.9

2.3

6.0

12.3

10.3

Private pension/annuity

9.0

1.8

4.1

9.4

12.7

8.6

Income from assets

11.4

1.8

2.6

5.4

7.8

16.1

Earnings

30.2

2.4

4.1

9.6

19.4

44.9

Public assistance (welfare)

0.5

7.0

1.6

0.5

0.2

0.1

Other

2.6

1.6

1.4

2.8

3.3

2.4

Note. From Income of the population 55 and over, by the Social Security Administration, Office of Policy Office of Research, p. 320. Social Security Administration (http://www.ssa.gov/policy/docs/statcomps/income_pop55/2010/incpop10.pdf).

(a) All members of households are 65 years old or older. Aged units are a married couple living together—at least one of whom is 65—and non-married persons 65 or older. Quintile limits are $12,554, $20,145, $32,602, and $57,957 for all units. Each quintile includes roughly 5,928,000 units.

(b) Details may not sum to totals because of rounding error.

The economic status of older Americans is greatly improved relative to the mid-20th century, but even so, many older Americans, even formerly comfortable middle-class persons, remain at significant financial risk. Adjusted for inflation, the median income of elderly households increased from $13,670 in 1960 to $18,819 in 2010. Poverty rates declined precipitously from 35.2% in 1959 to 14.6% in 1974 and have since declined more slowly, to 9% in 2009. (Administration on Aging, 2011). A new and arguably more realistic poverty measure, the Supplemental Poverty Index, estimates that approximately 15.1% of Americans over the age of 65 live in poverty in 2011 (U.S. Census Bureau, 2012).

Health-care costs continue to impose a heavy financial burden on many, and, as a result of changes in occupational pensions, the drop in housing prices, and very low interest rates, the anticipated returns from pensions, savings, and housing assets have diminished considerably.

Without Social Security, the official U.S. poverty rate among the aged would jump from 9% to nearly 50%; from 16 (older Americans living alone) to 58% for unmarried aged beneficiaries, and from 24 to 75% for African American seniors (Administration on Aging, 2011).

Significantly, as retirement ages increase, the permanent reduction in benefits will increase for persons first accepting Social Security benefits before full retirement age. Although not problematic for those who choose to leave work, those compelled to stop working before full retirement age—disproportionately low-income and minority persons—face financial risk. In short, beyond financing reforms, much remains to be done to address Social Security adequacy and equity concerns (see also Kingson & Morrissey, 2012; Tracy & Ozawa, 1995).

Moreover, many Americans in their mid-forties and fifties are not prepared for retirement because they too have seen their 401(k) accounts fluctuate wildly and have lost equity in their homes and, in some cases, their jobs, homes, and pensions during the nation’s Great Recession. The Center for Retirement Research at Boston College estimates that 51% of Americans are at risk of not being able to maintain their standard of living in retirement, not counting health- and long-term care costs (Munnell, Webb, & Golub-Sass, 2009). They also estimate our country is facing a $6.6 trillion retirement savings deficit (Retirement USA, 2010). With changes in the pension plans and the economy, it looks as if the young workers of the early 21st century and those who follow will depend more heavily on Social Security as their core life, disability and retirement insurance.

Some groups experience special risks, including women, and African American and Hispanic elders, who are more likely to be poor or near poor than white elder men. Unmarried elders of all races and ethnicities are also considerably more vulnerable than married couples, especially if they are very old (see Social Security Administration, 2012c). The earnings deficit often comes from historical and structural inequalities that influence lower rates of labor-force participation, earnings histories, and occupational pension coverage of these groups.

Latino Americans and African Americans rely heavily on Social Security, with Social Security providing nearly all the retirement income for more than half of Latino seniors and two fifths of African American seniors (Latinos for a Secure Retirement, 2011; National Committee to Preserve Social Security and Medicare, 2011). Both groups face a shorter life expectancy, larger families, and a greater reliance on disability benefits.

Women, on the other hand, are more likely to face inadequate benefits because of trends in employment history. The wage gap of 23% and intermittent labor-force participation of most women who raise children or care for other family members mean that most women will contribute less to Social Security and therefore receive a lower monthly benefit. Women’s employment histories are more likely to be interrupted by caregiving responsibilities to children and other family members. Women comprise 66% of caregivers and spend an average of 12 years out of the workforce providing these unpaid services (Social Security Administration, 2012c). The economic costs of caregiving— lost opportunity for employment advancement, less wage growth, and fewer years of coverage under Social Security—are not adjusted for in the Social Security benefit calculus (Institute for Women’s Policy Research, 2012).

Of great concern, people in committed gay or lesbian relationships (even if they are legally married) do not receive the same benefits as heterosexual spouses. Even if those partners are legally married in their state, the Defense of Marriage Act prevents the government from recognizing the marriage at a federal level, and the surviving spouse will not qualify for benefits, nor will the spouse of a disabled or retired worker (SAGE, 2010).

Options for Addressing Financing and Adequacy Problems

Two broad approaches exist for addressing the projected shortfall—increasing revenues or reducing benefits. Within Social Security in the early 21st century there is fundamentally just one approach for addressing important income inadequacy problems facing many beneficiaries, working Americans, their family members, and those who follow—improve benefits: if not now, then when the economy improves.

Increasing Revenues

Theoretically, the projected shortfall could be addressed immediately by raising Social Security payroll tax contributions of employers and employees from 6.2 to 7.5% or by immediately reducing all future benefits by about 14% (Board of Trustees, 2013). This provides a rough indication of the size of the financing problem.

Eliminating the cap for persons earning above $250,000 a year as Senator Bernie Sanders (I-VT) proposes, or eliminating it altogether, as Congressman Ted Deutch (D-FL) and Senator Tom Harkin (D-IA) propose, would address roughly between 75 and 85% of the projected shortfall.

More modest changes can also increase revenues (see Reno & Lavery, 2009). For example, traditionally and following the enactment of the 1983 financing amendments, about 90% of national employment earnings were subject to the Social Security payroll tax. Since 1983, income has been unevenly distributed, with much of the growth in income over the past 30 years going to the highest earners and therefore falling outside of the payroll tax base. As a result, in the early 21st century only 83% of earnings are taxed. Returning the ceiling to over 90% of payroll gradually over 10 years would address almost a third of the shortfall.

Covering all newly hired state and local employees would bring the last large group of workers not covered into the program, addressing 9% of the problem. Raising the contribution rate by 1/20 of 1% each year from 2015 to 2034 could cover 69% of the shortfall. Rather than eliminating the estate tax after 2010, as proposed by President Bush, directing revenues into Social Security from taxing estates worth $3.5 million or more would address 26% of the problem. Diversifying trust fund investments by allowing for a small portion of trust fund assets to be invested by an independent board in a broad selection of private equities could help improve rates of return, reducing the projected deficit by an estimated 14% if 15% of the trust fund is so invested (see Reno & Lavery, 2009).

Pros and cons exist for each of the proposed revenue increases. For example, some raise concerns about the federal government investing a portion of the trust fund in private equities, fearing it may lead to an attempt to manipulate markets. Raising the payroll tax contribution ceiling is opposed by those who see it as costly to business and workers. And whereas bringing all new state and local workers into Social Security would make the program universal, some government employee unions see it as undermining their occupational pension systems. It should be noted that public-sector workers brought into the system in 1983 have fared well (Herd & Kingson, 2005).

Robert Ball, who dedicated his life to Social Security (Berkowitz, 2004), offered the wisdom of a long and distinguished career. Ball issued a three-point plan that addresses the financing problem by restoring the maximum taxable ceiling to 90% of earnings, earmarking the estate tax, and investing a portion of the trust fund in private equities. He reasoned that the problem should be addressed through revenue increases, not benefit cuts. Retirement age increases are already resulting in benefit cuts; moreover, reducing benefits is not a good idea because of the uncertain future of private pensions and retiree health-insurance protections (Ball, 2009).

Reducing Expenditures

Program expenditures could be reduced by cutting benefits for today’s and tomorrow’s beneficiaries (see Reno & Lavery, 2009).

Cutting the annual COLA through a technical change called the “chained CPI” would address about one fifth of the projected shortfall, but it would also mean that benefits would be cut. If the chained CPI was used to determine COLAs, for someone who starts receiving benefits at age 65, the purchasing power of the annual Social Security benefit would be cut by $560 (in 2011 dollars) at age 75, $984 at age 85, and $1,392 at age 95, a cumulative loss of $24,019 (Strengthen Social Security Campaign, 2011).

Accelerating the increase in the full retirement age to 67 for persons born in 1949 or later and then gradually increasing it to 68 for those born in 1973 or later would address 23% of the financing problem according to estimates made in 2009 (Reno & Lavery, 2009). This cut would close the solvency gap somewhat less in 2012 because the projected shortfall is now slightly larger. Continuing this increase to age 70 would address about 62%.

Those who advocate for benefit reductions cite an increase in life expectancies as an impetus to increase the age of eligibility for full benefits. This belies the fact that increases in life expectancies are not shared across income groups, with the gains in life expectancy falling disproportionately on the upper-income quintiles. Because of this, retirement age increases and COLA cuts are especially deleterious for low- and moderate-income persons (Kingson & Morrissey, 2012). Additionally, it is important to note that the last increase in the full retirement age, which was legislated in 1983 and is being phased in the early 21st century, has not fully taken effect yet. For that reason, we cannot yet fully know the impact of increasing the retirement age.

Another cost-cutting approach would reduce benefits by changing the Social Security benefit formula, an approach that has the largest impact on younger workers. For example, the so-called Bowles–Simpson proposal includes a benefit formula change, which would address about 45% of the projected shortfall (National Commission on Fiscal Responsibility and Reform, 2010). However, the proposal would eventually result in Social Security more closely resembling a welfare program than the insurance program that it has always been, and benefits for young, middle-income workers would be substantially cut.

Some, from across the political spectrum, have suggested it is preferable to reduce or eliminate the benefits of well-off beneficiaries than to increase taxes of moderate-income workers or cut the benefits of low- and moderate-income persons. Unfortunately, means testing would likely place political support for the program at risk by making it less like an insurance program, where benefits are based on each individual’s contributions, and more like a welfare program, where benefits are given according to need. Means testing potentially moves so far from individual equity that it would segment political support, creating a strong incentive for higher income people—including many opinion leaders—to oppose the program (Kingson & Schulz, 1997). Additionally, means testing saves very little. A means test phased in by taking 20 cents in benefits away for every dollar earned by beneficiaries above $100,000 in annual income would only save about 1.04% of the benefits paid out every year. Even if a similar means test began much lower, at $40,000, it would only reduce program costs by 3.66% of annual benefits (Baker & Rho, 2011).

Benefit Improvements

Much remains to be done to improve the adequacy of Social Security’s benefits for today’s beneficiaries in the early 21st century and those who will follow—middle-aged and young Americans and future generations. The political and economic environment is not conducive to major new initiatives. However, many believe that this can and will change. They say we can afford to do more to protect our citizens, to include family-leave benefits for new parents and for those caring for family members, to provide the same protections to all our citizens regardless of sexual orientation, to address what is likely to become a retirement income crisis as late middle-age workers in the early 21st century reach their retirement years, and to recognize the value of care, given mostly by women, in the context of the family.

Although the next round of Social Security reforms will likely be driven by solvency concerns, it will also provide an opportunity to begin setting the agenda for future improvements and to advance modest benefit improvements for some persons at greatest financial risk. With this in mind, a number of groups—including Latinos for a Secure Retirement, the American Federation of Labor and Congress of Industrial Organizations, Social Security Works, the National Committee to Preserve Social Security and Medicare, Commission to Modernize Social Security, and Social Security: Caring Across Generations—are pushing for modest proposals to strengthen protections, including the following:

  • An improved way of determining the annual COLA, which would take into account the higher cost of health care for persons with disabilities and seniors and result in larger, but more accurate, annual adjustments in benefits.

  • A caregiver credit, which would provide citizens who leave the workforce to care for a child or family member with credit toward their future Security benefits.

  • The restoration of student benefits for children aged 18 to 22 of disabled and deceased workers who are in college or participating in advanced vocational education.

  • An across-the-board benefit increase that would make Social Security benefits more adequate for all who receive them.

Implementing a new special minimum benefit to improve adequacy for the lowest earning workers.

Conclusion

Our Social Security system is an institution that social workers like Harry Hopkins, Francis Perkins, Wilbur Cohen, Eveline Burns, and others helped to build and nurture into the nation's most successful social policy. As policy discussions advance about its future, it will be important for new generations of social workers to have an understanding of the full range of benefits provided and the moral dimensions of the program.

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                                                                                    Further Reading

                                                                                    Alliance for Retired Americans. http://www.retiredamericans.org/issues/social-security

                                                                                    Center for Economic and Policy Research. http://www.cepr.net/index.php/issues/social-security-and-retirement

                                                                                    Center on Budget and Policy Priorities. http://www.cbpp.org/pubs/socsec.htm

                                                                                    Commission to Modernize Social Security. http://modernizesocialsecurity.org/

                                                                                    Economic Policy Institute. http://www.epi.org/research/retirement/

                                                                                    Edwards. K.A., A. Turner & A. Hertel-Fernandez (2012). A young person's guide to Social Security. Economic Policy Institute and National Academy of Social Insurance, Washington, D.C. Retreived from http://www.nasi.org/sites/default/files/research/Young_Person%27s_Guide_to_Social_Security.pdfFind this resource:

                                                                                      Estes, C., O’Neill, T., & Hartmann, H. (2012, May). Breaking the Social Security glass ceiling: A proposal to modernize women’s benefits. http://www.iwpr.org/publications/pubs/breaking-the-social-security-glass-ceiling-a-proposal-to-modernize-womens-benefitsFind this resource:

                                                                                        National Academy of Social Insurance. http://www.nasi.org/research/social-security

                                                                                        National Committee to Preserve Social Security and Medicare. http://www.ncpssm.org; http://www.ncpssm.org/SocialSecurity

                                                                                        Social Security Administration. http://www.ssa.gov

                                                                                        Social Security Works. http://strengthensocialsecurity.org/social-security-works-0

                                                                                        Strengthen Social Security Coalition and Campaign. http://www.strengthensocialsecurity.org