- Social Security has a direct effect on the lives of millions of Americans, from seniors who rely on Social Security benefits as the cornerstone of their retirement income to families who draw benefits to help replace critical household income after the death of a working parent or spouse. Nearly every American is currently involved in Social Security, either as a taxpayer or a beneficiary, and sooner or later everyone in the United States expects to receive Social Security benefits.
- The Social Security system is facing serious financial trouble in the near future. As aging baby boomers begin to retire, Social Security will need to provide benefits to more people, but with decreasing resources because fewer workers will be paying into the system.
- Although everyone agrees that Social Security must be fixed, every proposed solution creates widespread anxiety about potential shock waves to the U.S. economy and damage to the social safety net that Americans have been relying on for 70 years.
Today, more than 48 million Americans receive a monthly Social Security check. Social Security is a primary source of income for nearly all American retirees. Without Social Security, up to 50 percent of American seniors would live in poverty.
How Does Social Security Work?
Social Security is a pay-as-you-go system, which means that people working and paying taxes today are financing the benefits for today’s retirees and other beneficiaries. In turn, today’s workers are relying on younger workers to pay for the benefits they expect to receive when they retire.
The government collects 12.4 percent of every worker’s pay to finance Social Security. Half of that is usually paid by an employer, half by the employee. People who are self-employed pay the full amount.
What’s the Problem with Social Security?
The reason the Social Security system is in trouble is that the number of people who are eligible for benefits is increasing rapidly—the population is aging and people are living longer—while the number of people paying into the system is declining. For example, in 1950 the worker-to-beneficiary ratio was 16-to-1. Currently the ratio is just over 3-to-1, and within 40 years it will be 2-to-1.
Without a large infusion of additional revenue, Social Security benefits cannot be sustained at current levels because there simply won’t be enough new workers paying into the system to make it work unless something changes. While this dilemma will not affect current beneficiaries, the status quo will force the government to start spending down the Social Security Trust Funds, which will lead to a massive shortfall over the next 75 years.
