Social Security POLS 21: The American Political System

A Brief History of Social Security The Industrial Revolution The urbanization of America The disappearance of the “extended” family A marked increase in life expectancy Beginning in the mid-19 th century, four important demographic changes occurred that rendered the traditional system of economic security unworkable:

Male and Female Life Expectancy,

How Does Social Security Work? Today, about 54 million Americans receive over $701 billion in Social Security benefits every year. The current age for full retirement benefits is 65, but that is being gradually increased to 67. Those benefits are paid for by over 140 million workers who are taxed at 7.65% of their earnings (the familiar FICA on your pay stub, which stands for the Federal Insurance Contributions Act), up to a maximum of $110,100 to fund the system.

How Much is a Social Security Benefit? How much time you spent in the workforce (you typically need 40 “credits,” or about 10 years in the workforce to qualify for benefits); How much money you made (although there are both minimum and maximum benefits); Your age when you start receiving benefits (62 is “early”, is full retirement; bonuses are paid if you wait until you’re 70); A monthly Social Security check is based on a worker's level of earnings over his/her working life. Thirty-five years of earnings are used in calculating a retirement benefit. The amount of a Social Security retirement benefit is based on several things:

How Much is a Social Security Benefit? How much time you spent in the workforce; How much money you made while working; Your age when you start receiving benefits; The amount of a Social Security retirement benefit is based on several things:

An Impending Crisis? Quite simply, we’re living longer and healthier lives. When the Social Security program was created in 1935, a 65-year-old had an average life expectancy of 12 years after retirement. Today, someone retiring from work at the same age can expect to live another 17 years. In addition, 76 million “Baby Boomers”—those born after World War II, between 1946 and 1964—will begin retiring beginning in the year In about 30 years, there will be twice as many older Americans as there are today. At the same time, the number of workers paying into Social Security per beneficiary will drop from 3.3 to less than 2. These changes will strain our retirement system. The main reason for Social Security’s long-range problems is demographic, based on trends we predict over the next 75 years:

An Impending Crisis? We are living longer and healthier lives. 76 million “Baby Boomers”— those born after World War II, between 1946 and 1964—will begin retiring beginning in the year 2010.

Key Dates According to the Social Security Trustee’s Annual Report, here is a summary of key dates to keep in mind: 2010 Payroll taxes coming into Social Security were be insufficient to cover all promised benefits. The SSA began to draw on the interest earned by the Social Security Trust Fund to help pay full benefits Incoming payroll taxes plus interest income from the Trust Fund will be insufficient to pay all benefits. The principal will be tapped. 2035Principal will be exhausted, but revenues will cover a proportion of promised benefits.

Key Dates According to the Social Security Trustee’s Annual Report, here is a summary of key dates to keep in mind: 2009 The Social Security trust fund has over $500 billion (1/2 trillion) in reserves and growing Payroll taxes coming into Social Security will be insufficient to cover all promised benefits. The SSA will begin to draw on the interest earned by the Social Security Trust Fund to help pay full benefits Incoming payroll taxes plus interest income from the Trust Fund will be insufficient to pay all benefits. The principal will be tapped. 2041Principal will be exhausted, but revenues will cover 74-78% of promised benefits.

Options for Reform Raise the payroll tax across the board, or just for the wealthy. Raise or eliminate the maximum amount of taxable earnings. Raise the age at which retirees become eligible for full benefits. Raise the rate of return by investing the trust fund more aggressively. Add to the trust fund by diverting funds from other areas. Privatize Social Security so that individual workers can contribute to (and manage) their own accounts. Grow the economy. Which—if any—of these proposals is politically viable? Cut benefits across the board, or just for the wealthy. Which—if any—of these proposals is politically viable?

Options for Reform Raise the payroll tax across the board, or just for the wealthy. Raise or eliminate the maximum amount of taxable earnings. Raise the age at which retirees become eligible for full benefits. Raise the rate of return by investing the trust fund more aggressively. Add to the trust fund by diverting funds from other areas. Privatize Social Security so that individual workers can contribute to (and manage) their own accounts. Grow the economy. Which—if any—of these proposals is politically viable? Cut benefits across the board, or just for the wealthy.