Members of Congress are once again discussing possible cuts to Social Security as they contemplate increases to the debt limit. Instead of viewing Social Security through the lens of what the American public needs, they are viewing it as a political weapon to be wielded, with arguments that it must be cut now, despite the fact that Social Security does not contribute to the publicly held debt, and despite the existence of a $2.9 trillion reserve of assets as of the end of 2021.1
This report is meant to serve as a primer on the Social Security program, explaining how it works, why it is so essential, and the funding and political challenges it faces going forward. It concludes with a brief outline of a framework for addressing the projected gap between program funding and promised benefits that would not violate the core tenets of this essential social insurance program.
What Is Social Security?
Social Security (also referred to as the Old-Age Survivors and Disability Insurance program, or OASDI) is a social insurance program intended to replace earnings lost due a worker’s retirement, death, or disability. The program provides monthly cash benefits to the insured worker, as well as certain family members. Over 63 million individuals received Social Security benefits in December 2022,2 and approximately 183 million workers are covered by the program in 2023.3
How workers qualify for Social Security retirement benefits.
Individuals need to work in Social Security–covered employment in order to qualify for benefits. Fortunately, Social Security is a nearly universal program, covering approximately 94 percent of workers in the United States.4 Currently, workers must work approximately ten years in Social Security–covered employment (earning forty quarters of coverage) to qualify for benefits.5
How benefits are calculated.
Benefit levels are based on the worker’s Social Security–covered earnings up to a threshold, known as the Social Security contribution and benefit base. This earnings threshold is $160,200 in 2023, meaning that workers earning more than that would not receive higher benefits.6 The Social Security benefit formula is progressive—it pays a higher portion of average pre-retirement earnings to lower earners than to higher earners. (See Table 1.) The progressive benefit was designed to account for the fact that higher earners are more able to save on their own outside of Social Security than are lower earners. Still, as Table 1 shows, higher-earning workers will receive higher benefit levels than lower earners.
The Social Security formula is based on a worker’s covered earnings up to the contribution and benefit base for the year of earnings.7 Those covered earnings for each year are then indexed by the increase in the Average Wage Index (AWI), from the year in which they are earned up to the year the worker reaches age 60 (or two years prior to benefit eligibility).8 This indexation of wages is intended to account for growth in the national economy. Once those wages are indexed, the highest thirty-five years are selected, averaged, and then divided by twelve to convert the annual average of indexed earnings into the average of indexed monthly earnings (AIME).
The Social Security Primary Insurance Amount (PIA), the base benefit the worker receives, is calculated by applying a progressive formula of earnings replacement rates to the AIME. These replacement factors are 90 percent, 32 percent, and 15 percent (see Table 1). The higher a worker’s average of indexed monthly earnings, the lower the replacement factor is for each “bracket” of the AIME. The two bend points ($996 and $6,002), which are also indexed to the AWI, divide the AIME into three brackets. For example, for a worker with an AIME of $996 in 2021, the formula would apply the 90 percent factor to the entire AIME, and their Social Security benefit (PIA) would replace 90 percent of their average pre-retirement earnings. If the worker had an AIME of $2,076 in 2021, the first $996 would still be replaced at the 90 percent rate, and the AIME amount over $996 through $2,076 would be replaced at the 32 percent rate. In total, Social Security would replace 59.83 percent of their average pre-retirement earnings. Only those with AIMEs over $2,076 in 2021 would have earnings replaced at the 15 percent rate—the lowest replacement rate.9
|SOCIAL SECURITY MONTHLY BENEFIT FORMULA EXAMPLES FOR LOW, MEDIUM, AND HIGH EARNERS
|Earnings Replacement Factor
|Brackets of Average Indexed Monthly Earnings (AIME)
|Low Earner (Average Lifetime Earnings of $2,076 per month or $24,922 per year in 2021)
|Medium Earner (Average Lifetime Earnings of $4,615 per month or $55,381 per year in 2021)
|High Earner (Average Lifetime Earnings of $7,384 per month or $88,610 per year in 2021)
|of the first $0 through $996 of AIME plus
|of AIME over $996 through $6,002
|of AIME over $6,002
|Total Monthly Benefit
|Total Monthly Benefit (rounded down to nearest $0.10)
|Percentage of Pre-Retirement Earnings Replaced by Social Security
|Source: “Scaled factors For Hypothetical Earnings Examples under the 2022 Trustees Report Assumptions,” Actuarial Note Number 2022.3, Office of the Chief Actuary, Social Security Administration, June 2022, https://www.ssa.gov/oact/NOTES/ran3/an2022-3.pdf.
How Social Security is funded.
The Social Security program is self-funded. Most of Social Security’s revenue comes from the Federal Insurance Contributions Act (FICA) tax, which is a tax on Social Security–covered earnings.10 Workers and their employers both contribute to the program through the Social Security payroll tax (a total of 12.4 percent of earnings, split equally between the worker and employer) on earnings up to the $160,200 contribution and benefit base in 2023.11 However, Social Security also receives a portion of funding from the income taxation of Social Security benefits paid to retired or disabled workers and family members.12 A third source of funding is the interest earned by the Social Security Trust Funds. (See Figure 1.) By law, any revenues received in excess of benefit payments must be invested in special government securities, which earn interest. The effective interest rate earned on all securities held by the Trust Funds in 2021 was 2.5 percent.13
Why Is Social Security So Essential?
Social Security is a nearly universal program that protects covered workers from the “vicissitudes of life”14 and the damage these events—disability or death of a worker, or the worker’s retirement—can have on a household’s income. The social insurance structure—by which all covered workers contribute to the program to pool their risks against these income losses, and earn a level of financial protection from them—was a foundational program element and remains so today. As an insurance program, the triggering event for benefit payments is the retirement, disability, or death of the worker. Unlike the Supplemental Security Income program (SSI), which flowed from the original federal grants to the states that were established at the same time the Social Security program was enacted, payment of benefits is not means-tested and benefit payments are not connected to the poverty threshold. Nonetheless, partly due to meager SSI benefit levels and low income and asset tests to receive SSI benefits, Social Security has become the predominant source of income for low-income households and a critical anti-poverty program. The program’s social insurance role moves far beyond the area of retirement, and provides critical disability insurance and life insurance to covered workers and their survivors.
Almost all older Americans benefit from Social Security.
Nearly nine out of ten people age 65 and older were receiving a Social Security benefit in June 2022.15 According to a Congressional Research Service (CRS) analysis, more than half of Americans age 65 and older had no pension income in their household in 2017.16 It is therefore not surprising that Social Security is the largest single source of income for most older adults. As seen in Figure 2, Social Security is the largest portion of income for 60 percent of households age 65 and older. However, Social Security is particularly critical for individuals in the bottom-fifth of the income distribution, for whom Social Security provides about 83 percent of their income, and for whom pensions comprise only 4 percent of annual income. Figure 2 also shows that higher-income households have earnings that comprise as much as 33 percent of their household income, meaning these households still have active workers contributing to their financial security in old age.17
Social Security has greatly reduced poverty among older Americans.
Though official poverty measures did not exist in 1935, when Social Security was enacted, it is estimated that prior to Social Security, 50 percent of older Americans lived in poverty,18 compared to 10.3 percent in 2021.19 The average Social Security benefit was just over $20,000 per year in December 2022,20 when the poverty threshold for a single-person household was $13,590.21 Further, unlike many other sources of income, Social Security benefits are inflation-protected to maintain their purchasing power for beneficiaries.
It is estimated that prior to Social Security, 50 percent of older Americans lived in poverty, compared to 10.3 percent in 2021.
Social Security is more than just a retirement program.
Beyond replacing income during retirement, Social Security also provides a financial lifeline for widows or widowers and children, who on top of losing a loved one, may have also lost a major contributor to their household’s income. As of December 2022, 8.9 percent of Social Security beneficiaries were survivors.22 Social Security is also a critical resource for those who are unable to continue working due to a severe disability. In December 2022, 13.4 percent of Social Security beneficiaries were receiving disability benefits (see Figure 3).23
What Would Beneficiaries Do Without Social Security?
With so many people dependent on Social Security benefits—accessing a program that many of them have been paying into for decades—it is important to give serious consideration to how benefit reductions would affect them. One approach is to evaluate what the poverty rate among the elderly would be if Social Security benefits were not paid. The Center on Budget and Policy Priorities conducted a study that showed 37.8 percent of older adults would have incomes that fall below the official poverty line if they did not receive Social Security benefits.24 In the absence of Social Security, certainly some individuals may seek alternative forms of income. Those retirees who are physically and mentally able may attempt to re-enter the workforce, if they can find an employer willing to hire them. Some beneficiaries, whether disabled or over age 65, may qualify for Supplemental Security Income (SSI) benefits if their income and resources fall low enough to meet the eligibility thresholds.25 In the longer run, some might find alternative ways to make ends meet, such as living with their adult children (if they have any).
The Center on Budget and Policy Priorities conducted a study that showed 37.8 percent of older adults would have incomes that fall below the official poverty line if they did not receive Social Security benefits.
Why Are Some Members of Congress Suggesting Cuts to an Essential Program?
While the Social Security program has sufficient assets to operate for years to come, the longer-term financial picture will require Congress to make adjustments to ensure that the program has the resources it needs to be fully funded in the decades ahead.
Under current law, it is projected that Social Security will have depleted its surplus of assets from the Trust Funds in 2035.26 At that time, enough revenues will still be available from the Social Security payroll tax and the taxation of Social Security benefits to fund approximately 75 percent of benefits owed.27 However, that leaves a gap of approximately 25 percent in scheduled benefits that needs to be closed in 2035.28 There are numerous ways to close the gap. But for illustrative purposes, if the Social Security payroll tax were to be used to close this gap, it would need to be increased from 12.4 percent of wages to 16.47 percent of wages (an increase of 4.07 percentage points), if started in 2035. Some combination of changes to benefits and revenues could also close this gap, though as noted above, the high dependence of middle and lower earners on Social Security makes benefit reductions for that group unappealing.
What is driving this funding gap? Social Security is facing three primary challenges: (1) demographic, (2) economic, and (3) political.
The aging of America has created a demographic challenge to the program’s long-term sustainability.
Social Security is primarily a ‘“pay-as-you-go’” (PAYGO) system. The contributions of today’s workers fund the benefits of today’s retirees. So long as there are enough workers to contribute to the system to cover the benefits of current retirees, the system is stable. Unfortunately, America’s population of retirees currently is growing faster than its population of working-age individuals. As a result, the ratio of retirees receiving Social Security benefits to workers contributing payroll taxes has grown, creating a demographic challenge to the program.
America’s population of retirees currently is growing faster than its population of working-age individuals.
According to the Social Security Trustees, “demographic factors by themselves cause the projected cost rate to rise rapidly for the next two decades.”29 The aging of the American population—where we have gone from 4.1 percent of Americans being age 65 or older in 1900 to 16.5 percent being age 65 or older in 201930—means that fewer individuals are working and contributing to Social Security, and more are now at the point in their lives where they are collecting the benefits they contributed to during their working years. However, a portion of this demographic issue is largely a temporary one, primarily hitting Social Security from 2008 to 2033 with the aging of the large baby boom generation.31 The longer-term demographic challenge results from the decline in birth rates following the baby boom generation. Subsequent generations, now in their working years, are smaller than the generation of current retirees that these workers can support through payroll tax contributions alone.32
When Social Security was enacted, the typical 65 year-old could expect to live another 14 years. As of 2022, the typical 65 year-old can expect to live more than 20 years.
Not only is the portion of older Americans in the population rising, but older Americans are also living longer. When Social Security was enacted, the typical 65 year-old could expect to live another 14 years. As of 2022, the typical 65 year-old can expect to live more than 20 years.33 Due to this increased longevity, Social Security is paying retirement benefits to today’s retirees for a longer period of time, approximately 40 percent longer on average, than it did to prior retirees, increasing outlays. The Social Security retirement age for receiving full benefits has increased from age 65 to age 67, to partly account for increased longevity. Some argue it should be raised further. However, increased longevity on average does not mean that all individuals age 65 and older are capable of working those additional years, or that there are companies willing to hire them.34 Furthermore, increases in longevity have not been equally distributed across the population; the gains have gone primarily to higher-income individuals than to other portions of the population.35 These groups will be able to benefit even more from Social Security as they will claim benefits for a longer period of time. In addition, these longer-lived, higher-income individuals tend to have the resources to delay claiming Social Security, and thus benefit from “delayed retirement credit” increases in Social Security benefits that permanently increase their monthly benefits by up to 24 percent. Meanwhile, those lower-income workers, who are also less likely to have other pension or retirement savings resources to draw upon to take advantage of these delayed retirement credits, are more likely to have to claim Social Security benefits early, and can face permanent monthly benefit reductions of up to 30 percent.
Early policy decisions and recent wage trends have created economic challenges.
While demographics are the greatest overall challenge to the Social Security program, certain historic policy choices and more recent economic trends also present a funding challenge. Due to the high unemployment, particularly among the aged, and extreme poverty brought on by the Great Depression, along with shifts in the composition of the American labor force from agrarian to industrial labor, and the decline of the family farm and extended family as an economic backstop, a policy choice was made to pay benefits from Social Security to individuals that had contributed very little to the program. This aspect of Social Security’s funding structure—paying certain cohorts of retirees significantly more in benefits than they had contributed in payroll taxes as workers—has long been recognized; many of the earliest Social Security beneficiaries, for example, contributed little to the program relative to the benefits they ultimately received.36 This gap between payments into the program and benefits paid out represents a certain type of debt, referred to as “legacy debt,” that has been carried forward since the inception of the program.37 This legacy debt should be viewed both as the price of preventing early generations of elderly Social Security beneficiaries from experiencing crushing poverty during some of our nation’s worst moments, as well as in economic context, weighed against overall government spending.
This legacy debt should be viewed both as the price of preventing early generations of elderly Social Security beneficiaries from experiencing crushing poverty during some of our nation’s worst moments, as well as in economic context, weighed against overall government spending.
In actuarial terms, this legacy debt has been estimated at between approximately $11 trillion and $21 trillion, for estimates done in 2001 and 2014, respectively.38 Another way to measure this debt is how it compares in size to the payroll tax that is the primary source of funding for the PAYGO program. Estimates for the percent of payroll that would be required to eliminate this legacy debt over the seventy-five-year projection period range from 5 percent to 5.7 percent of taxable payroll.39 This increase in taxable payroll is larger than the 4.07 percentage point increase that the Trustees estimate would be needed to fully cover Social Security’s benefit payments for the next seventy-five years if implemented in 2035. It should be acknowledged that, were it not for the Social Security program’s existence and early benefit payments, these beneficiaries may have been eligible for general welfare benefits, which are funded by general revenues and not from Social Security’s Trust Funds. In essence, by paying Social Security benefits immediately, the Social Security program reduced costs for other government welfare programs, and so perhaps a portion of this legacy debt should be met by general revenues. The general revenues of the government are a much larger base over which these historic costs could have been spread. So while it’s not possible to go back in time and alter how payments to the first generations were funded, it is possible to examine alternatives to replacing the legacy debt that continues to form part of the shortfall to the Social Security program.
Other economic factors presenting a challenge to the program have to do with trends in employment (that is, the portion of the possible working population that participates in paid work that would be subject to the payroll tax), the level of real earnings received by Social Security–covered workers, the hours of work compensated, and the portion of total compensation that is paid as wages, as they drive program revenues under the payroll tax. The shrinking workforce, wage stagnation, decline in hours of compensated work, and increased portion of total compensation paid in benefits instead of wages have all meant the Social Security program has received fewer payroll tax revenues than it could have.
The primary ways to increase employment are to increase the size of the working age population covered by Social Security, or to increase the number of workers in the national economy who could be included in Social Security–covered employment. Currently, 94 percent of American workers participate in Social Security.40 The largest group of individuals not participating in Social Security is among state and local government workers. However, about 72 percent of state and local government workers already participate in Social Security, leaving about 28 percent of state and local government workers that could potentially be incorporated into Social Security.41 Another way to increase the Social Security–covered worker population is to increase net immigration. However, barring changes to current law, the Trustees do not project a large increase in total net immigration to contribute to the population of workers.42
Wage stagnation among lower-income workers over the past forty years means that the wage base subject to the payroll tax, the primary source of funding for Social Security, is not as large as it should be. Because the American economy has increased incomes mostly at the top of the ladder, above the contribution and benefit base, the program’s payroll tax has been capturing an increasingly smaller portion of the nation’s wages since 1983, the last time major Social Security program amendments were passed. At that time, the contribution and benefit base captured approximately 90 percent of wages in the national economy.43 However, due to increasing wage disparity between higher earners and lower earners, the Social Security contribution and benefit base now captures only approximately 83 percent of aggregate national wages.44
Wage stagnation among lower-income workers over the past forty years means that the wage base subject to the payroll tax, the primary source of funding for Social Security, is not as large as it should be.
Real wage stagnation for those in the lower income brackets has a number of root causes—one being the frozen federal minimum wage, which has not been increased since 2009 and remains at $7.25 per hour. Due to the rise of inflation since then, which reduces the purchasing power of the minimum wage, the real wage equivalent of the federal minimum wage as of December 2022 is $5.57 per hour.45 Another root cause of wage stagnation is that increases in worker productivity since the 1970s, which should permit companies to both increase profits and employee wages, has not led to comparable real wage increases.46 As Figure 4 shows, there is a widening gap between productivity and wage growth.47 While much of the difference from the 1970s through 2000 can be attributed to technical differences in how productivity and real wage growth are indexed, since 2000, workers have experienced a genuine loss in real wage growth.48 Returning to the earlier example of the federal minimum wage, if it had kept pace with the growth in labor productivity (and after accounting for technical differences in indexing), the federal minimum wage in 2021 would have been $23.00 per hour instead of $7.25 per hour.49 Lower real wages reduce the revenues to the Social Security Trust Funds as well as future benefit levels earned by workers.
Another economic factor is the number of compensated hours worked. As the Congressional Research Service notes, the increase of employment in the service sector has coincided with a decline in compensated hours worked.50 However, as The Century Foundation has recently noted, many salaried workers making less than $40,000 are not compensated for overtime.51 Due to the intentional misclassification of hourly wage workers as “manager” in title, despite having no actual supervisory duties, many hourly workers are automatically prohibited from receiving overtime pay. Some of these workers put in enough hours beyond the forty hours per week many consider to be full-time that companies are able to avoid hiring another employee to do the work required. As a result, these hourly wage workers are being underpaid by employers for the extra hours, which means a reduction in the payroll tax they could pay into Social Security. One study found that firms avoid roughly 13.5 percent in overtime expenses for each strategic “manager” hired.52
Finally, the Trustees project a continued decline in the ratio of wages covered by Social Security to total compensation (including health care benefits, pension benefits, and other nonmonetary compensation).53 As a result, barring an increase in total compensation and a commensurate increase in wages, the portion of compensation that is comprised of wages and contributes to the Social Security Trust Funds is declining.
The environment in Washington, D.C. is creating political challenges.
Social Security is a very popular program, and rightly so. Due to its success in providing guaranteed income for the elderly, disabled, and survivors of deceased workers, it is often labeled as the “third rail” of politics—anyone who dares to touch it will pay political consequences. Unfortunately, as a result, even well-intended efforts to strengthen the program while preserving benefits can be met with resistance, so the tendency has been to kick the can down the road to a point where future political leaders will be forced to make the politically unpopular and difficult choices required to ensure the long-term sustainability of the program. This political challenge is why the last time major Social Security amendments were enacted was in 1983 following the Greenspan Commission.54 The 1983 amendments took a balanced approach to the financial problem by expanding the pool of Social Security–covered employees, increasing revenues, and decreasing benefits, with provisions such as the increased full retirement age delayed in effect by decades to avoid harming those close to retirement. Similarly, even if modest changes were enacted today to either reduce benefits or increase the payroll tax, considerations would be required for those who, due to their age, are unable to alter their work or retirement plans to account for these changes—which would certainly have spillover effects into other government programs and increase those programs’ costs as more Social Security beneficiaries would qualify for welfare programs.
A regular political threat is the attempt to link the Social Security program to the federal debt limit fights, as some are doing at this very moment. This tactic is extremely disingenuous, because the Social Security program has always paid for itself without contributing to publicly held federal debt (the only type of federal debt that raises economic concerns). In fact, the Social Security program does not have the legal authority to borrow funds (which is why in 2035, barring changes, the program will only be able to pay 75 percent of promised benefits instead of 100 percent), so it is prohibited from contributing to the publicly held debt.55 Instead, Social Security, by having run program surpluses every year from 1983 through 2021—amounting to some $2.9 trillion—has actually permitted the rest of the U.S. government to have lower publicly held debt than it otherwise would have. For thirty-nine years, Social Security has been serving as the bank, providing loans at very low interest rates to the rest of the U.S. government. Now that those loans are coming due, people argue that there is an immediate crisis and a need to cut benefits. In reality, we need to look at the rest of the government to consider what the level of taxes or other spending would have been were it not for the thirty-nine-year Social Security loan. What would the tax rate or tax base be, and what items would the federal government not have spent on were it not for this $2.9 trillion cushion?56
Social Security, by having run program surpluses every year from 1983 through 2021—amounting to some $2.9 trillion—has actually permitted the rest of the U.S. government to have lower publicly held debt than it otherwise would have.
Another political threat is the intent by some to eliminate some of the core tenets of the program: (1) horizontal equity (ensuring those who earn approximately equal amounts over their lifetimes under Social Security should receive approximately equal benefits); (2) vertical equity (those that have earned and contributed more to Social Security should receive higher dollar amount benefits); (3) that the system should be progressive, intentionally redistributing income from the higher earners to lower earners and replacing a higher portion of pre-retirement earnings for lower earners than higher earners; (4) that benefits should not be means tested as if it were a welfare program because it is intended to be a social insurance program to prevent dependency on welfare—not a “safety net” like the Supplemental Security Income (SSI) program; (5) that the growth in the national economy that individuals contributed to throughout their working lives should be reflected in their Social Security benefits; and (6) that the insurance elements integral to the program remain. The political support behind Social Security is due in part to these tenets and proposals that would undermine these tenets would, in the long run, weaken public support for the program.
What Is the Solution?
Because Social Security is a critical source of income for the vast majority of older Americans, survivors, and the disabled, we need to ensure the program is financially secure. Adopting policies to fill the gap between promised benefits and those that can be financed under current law requires a framework that:
- recognizes the tradeoffs made at the start of the program that resulted in the actuarial legacy debt;
- acknowledges that increases in life expectancy are not shared equally;
- accounts for the ongoing real wage growth inequities between higher and lower earners that affects the program’s revenues and the regressivity of the payroll tax;
- addresses the decreasing portion of total compensation that is subject to the payroll tax; and
- recognizes the artificially low tax rates and base or higher spending in other parts of government that Social Security surpluses, built on the backs of payroll tax increases and benefit cuts since 1983, have allowed.
In the long run, we need to fill in the holes in the rest of the American retirement security structure, so that those who have worked their entire lives do not have to worry about living out their older years in poverty. But, Social Security is the foundation for most Americans, upon which other layers of retirement savings may be built. Just like a house, if the foundation is not strong, the rest of the structure eventually fails. We need to ensure Social Security remains the strong foundation it was intended to be.
- The Board of Trustees, Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, “The 2022 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds,” Social Security Admininstration, June 2, 2022, 7, https://www.ssa.gov/OACT/TR/2022/tr2022.pdf. (Hereafter referred to as “2022 Trustees Report.”)
- “Monthly Statistical Snapshot, December 2022,” Social Security Administration, Table 1, https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/2022-12.pdf.
- “Fact Sheet on the Old-Age, Survivors, and Disability Insurance Program,” Social Security Administration, Office of the Chief Actuary, January 24, 2023, https://www.ssa.gov/OACT/FACTS/fs2022_12.pdf.
- “2022 Social Security/SSI/Medicare Information,” Social Security Administration, https://www.ssa.gov/legislation/2022factsheet.pdf. The largest groups of individuals not covered by Social Security are Federal employees hired prior to 1983 and approximately 25 percent of state and local government employees.
- The amount of earnings required to earn a quarter of coverage (QC) is $1,640 in 2023. QCs are not based on quarters of the year, but on the worker’s earnings in the year. If a worker earns $6,560 or more in 2023 they will have earned the maximum four QCs permitted. A worker cannot earn more than four QCs per year, no matter their level of earnings. The dollar amount required to earn a QC increases each year in line with the growth of average wages in the national economy. See “Quarter of Coverage,” Social Security Administration, https://www.ssa.gov/oact/cola/QC.html.
- Office of the Chief Actuary, Social Security Administration, https://www.ssa.gov/OACT/COLA/cbb.html.
- The contribution and benefit base is increased each year with the increase in national average wage index (AWI), so long as a cost of living adjustment (COLA) was payable that year.
- The two-year gap between eligibility age and the indexation to AWI is due to the lag time between when wages are earned and when those wages are reported and thus able to be used to calculate the AWI.
- For additional details on the formula calculation, including increases and decreases to the PIA for early or delayed benefit claiming, or due to cost of living adjustments, please see CRS Report, Social Security: Benefit Calculation, updated November 17, 2022, at https://crsreports.congress.gov/product/pdf/R/R46658.
- 2022 Trustees Report, 7, https://www.ssa.gov/OACT/TR/2022/tr2022.pdf.
- Self-employed workers pay both the employee and employer portion of the payroll tax. It is important to note that while there is a cap on the earnings subject to the Social Security portion of the payroll tax, there is no cap on earnings subject to the Medicare Health Insurance (HI) portion of the payroll tax. Thus, unlike the progressive Social Security benefit formula, the Social Security payroll tax is regressive – applying to a larger portion of earnings for lower earners than for higher earners, who have more earnings above the contribution and benefit base.
- While the Social Security Trust Funds receive revenues from the federal income taxation of up to 50 percent of a Social Security benefit, the Medicare Health Insurance Trust Funds receive the revenues from the federal income taxation of up to 85 percent of a Social Security benefit.
- Barry F. Huston, “Social Security Trust Fund Investment Practices,” Congressional Research Service, Updated June 23, 2022, 1, https://crsreports.congress.gov/product/pdf/IF/IF10564.
- Franklin Roosevelt’s Statement on Signing the Social Security Act, August 14 , 1935, http://docs.fdrlibrary.marist.edu/odssast.html .
- “Fact Sheet, Social Security,” https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
- Approximately 44.9 percent of Americans age 65 and older were receiving pension income in 2017. Zhe Li and Paul Davies, “Income for the Population Aged 65 and Older: Evidence from the Health Retirement Study (HRS),” Congressional Research Service, December 16, 2022, Table A.1, https://crsreports.congress.gov/product/pdf/R/R47341.
- For figure 2, asset income includes business income, interest, dividends, and rents. Public assistance includes Supplemental Security Income (SSI), dollar value of SNAP benefits, and other welfare income. Other income includes workers’ compensation, unemployment compensation, alimony, child support, and financial assistance from friends or relatives not living in the same household. Household income quintile limits are $21,840, $39,700, $64,295, and $110,897 for all individuals; $36,895, $58,548, $84,592, and $142,590 for married individuals; and $13,680, $21,034, $32,545, and $56,996 for single persons. All values have been adjusted for population weights provided by the Health and Retirement Study. See Zhe Li and Paul Davies, “Income for the Population Aged 65 and Older: Evidence from the Health Retirement Study (HRS),” Congressional Research Service, Table A.3, https://crsreports.congress.gov/product/pdf/R/R47341.
- Benjamin Veghte, “Social Security’s Past, Present and Future,” National Academy of Social Insurance, August 13,2015, https://www.nasi.org/discussion/social-securitys-past-present-and-future/.
- “Poverty in the United States: 2021,” U.S. Census Bureau, Figure 2, https://www.census.gov/content/dam/Census/library/publications/2022/demo/p60-277.pdf.
- “Monthly Statistical Snapshot, December 2022,” Table 2, Social Security Administration, https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/#table2.
- “2022 Poverty Guidelines: 48 Contiguous States (all states except Alaska and Hawaii),” U.S. Department of Health and Human Services, https://aspe.hhs.gov/sites/default/files/documents/4b515876c4674466423975826ac57583/Guidelines-2022.pdf.
- “Monthly Statistical Snapshot, December 2022,” Social Security Administration, Table 2, https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/2022-12.pdf.
- “Monthly Statistical Snapshot, December 2022,” Social Security Administration, Table 2, https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/2022-12.pdf.
- Kathleen Romig, “Social Security Lifts More People Above the Poverty Line Than Any Other Program,” Center on Budget and Policy Priorities, April 19,2022, https://www.cbpp.org/research/social-security/social-security-lifts-more-people-above-the-poverty-line-than-any-other.
- For more on the SSI program, including income and asset limits, please see work by Rebecca Vallas at The Century Foundation, in particular, “‘Building Back Better’ Must Include Strengthening Supplemental Security Income,” April 27, 2021, https://tcf.org/content/commentary/building-back-better-must-include-strengthening-supplemental-security-income/.
- As of 2022, the Social Security Trustees project the Disability Insurance (DI) Trust Fund will be able to continue paying benefits past the seventy-five-year projection window. The OASI Trust Fund will be exhausted (redeemed all of its government securities to pay benefits) by 2034.
- 2022 Trustees Report, 6, https://www.ssa.gov/OACT/TR/2022/tr2022.pdf.
- 2022 Trustees Report, 5–6, https://www.ssa.gov/OACT/TR/2022/tr2022.pdf.
- 2022 Trustees Report, 13, https://www.ssa.gov/OACT/TR/2022/tr2022.pdf.
- “2020 Profile of Older Americans,” U.S. Census Bureau, May 2021, 4, https://acl.gov/sites/default/files/aging%20and%20Disability%20In%20America/2020Profileolderamericans.final_.pdf. See also, Luke Rogers and Kristie Wilder, “Working-Age Population Not Keeping Pace With Growth in Older Americans,” U.S. Census Bureau, June 25, 2020, https://www.census.gov/library/stories/2020/06/working-age-population-not-keeping-pace-with-growth-in-older-americans.html .
- 2022 Trustees Report, 14. https://www.ssa.gov/OACT/TR/2022/tr2022.pdf.
- 2022 Trustees Report, 63. https://www.ssa.gov/OACT/TR/2022/tr2022.pdf.
- The 2022 Social Security Board of Trustees indicate that individuals attaining age 65 in 2022 will live for an average of 19.1 years for men and 21.7 years for women.
- Richard W. Johnson, “Delayed Retirement and the Growth in Income Inequality at Older Ages,” The Urban Institute, February 2018, https://www.urban.org/sites/default/files/publication/96241/delayed_retirement_and_the_growth_in_income_inequality_at_older_ages.pdf.
- Gopal K. Singh and Hyunjung Lee,” Marked Disparities in Life Expectancy by Education, Poverty Level, Occupation, and Housing Tenure in the United States, 1997–2014,” International Journal of Maternal and Child Health and AIDS 10, no. 1 (2021): 7–18, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7792745/. See also Barry Bosworth, Gary Burtless, and Kan Zhang, “Later Retirement, Inequality in Old Age, and the Growing Gap in Longevity Between Rich and Poor,” Brookings Institution, and, National Academies of Sciences, Engineering, and Medicine, 2015, https://www.brookings.edu/wp-content/uploads/2016/02/BosworthBurtlessZhang_retirementinequalitylongevity_012815.pdf, and The Growing Gap in Life Expectancy by Income: Implications for Federal Programs and Policy Responses (Washington, D.C.: The National Academies Press, 2015), https://doi.org/10.17226/19015.
- For example, the very first Social Security Old-Age Insurance monthly benefit recipient, Ida May Fuller, worked for three years under the Social Security program and contributed $24.75. She received her first monthly check, worth $22.54, at age 65 in January 1940 and continued receiving benefits until her death in 1975. She received $22,888.92 in lifetime benefits from Social Security. See the section on “Monthly Benefits” on the Social Security Administration’s website on the history and development of the Social Security program, https://www.ssa.gov/history/briefhistory3.html.
- Peter A. Diamond and Peter R. Orszag, “Saving Social Security,” Journal of Economic Perspectives 19, no. 2 (Spring 2005): 16, https://www.brookings.edu/wp-content/uploads/2016/06/200506diamondorszag.pdf.
- Peter A. Diamond and Peter R. Orszag, “Saving Social Security,” Journal of Economic Perspectives 19, no. 2 (Spring 2005): 16, https://www.brookings.edu/wp-content/uploads/2016/06/200506diamondorszag.pdf; Dean R. Leimer, “The Legacy Debt Associated with Past Social Security Transfers,” Social Security Bulletin 76, no. 3 (2016): 3, https://www.ssa.gov/policy/docs/ssb/v76n3/v76n3p1.pdf.
- Dean R. Leimer, “The Legacy Debt Associated with Past Social Security Transfers,” Social Security Bulletin 76, no. 3 (2016): 3, https://www.ssa.gov/policy/docs/ssb/v76n3/v76n3p1.pdf.
- “2022 Social Security/SSI/Medicare Information,” Social Security Administration, updated April 2022, https://www.ssa.gov/legislation/2022factsheet.pdf.
- Paul Davies, “ Social Security: Who Is Covered Under the Program?” Congressional Research Service, updated January 18, 2022, https://crsreports.congress.gov/product/pdf/IF/IF11824.
- 2022 Trustees Report, 93–94, https://www.ssa.gov/OACT/TR/2022/tr2022.pdf.
- Kevin Whitman and Dave Shoffner, “The Evolution of Social Security’s Taxable Maximum,” Social Security Administration Policy Brief No. 2011-02, September 2011, https://www.ssa.gov/policy/docs/policybriefs/pb2011-02.html.
- Zhe Li, “Social Security: Raising or Eliminating the Taxable Earnings Base,” Congressional Research Service, December 22, 2021, https://crsreports.congress.gov/product/pdf/IN/IN11789.
- Bureau of Labor Statistics, CPI Inflation Calculator, accessed on February 3, 2023 at https://www.bls.gov/data/inflation_calculator.htm.
- Susan Fleck, John Glaser, and Shawn Sprague, “The compensation-productivity gap: A visual essay,” Monthly Labor Review, January 2011, 57–69, https://www.bls.gov/opub/mlr/2011/01/art3full.pdf.
- Importantly, as Fleck, Glaser, and Sprague note, because hours worked are included in both measures of real hourly compensation and labor productivity, this gap cannot be attributed to a decline in hours worked.
- Michael Brill, Corey Holman, Chris Morris, Ronjoy Raichoudhary, and Noah Yosif, “Understanding the labor productivity and compensation gap,” Beyond the Numbers: Productivity 6, no. 6 (June 2017), https://www.bls.gov/opub/btn/volume-6/understanding-the-labor-productivity-and-compensation-gap.htm.
- Dean Baker, “CORRECTION: This is What Minimum Wage Would Be If It Kept Pace with Productivity,” Corrected on March 16, 2022, https://cepr.net/this-is-what-minimum-wage-would-be-if-it-kept-pace-with-productivity/.
- Barry Huston, “Social Security: Economic Growth and the Funding Shortfall,” Congressional Research Service, August 6, 2020, 7, https://crsreports.congress.gov/product/pdf/R/R46479.
- “A 2023 Plan for Economic Equity and Progress,” The Century Foundation, February 15, 2023, https://tcf.org/content/report/a-2023-plan-for-economic-equity-and-progress/.
- Cohen, Lauren and Gurun, Umit G. and Ozel, N. Bugra, Too Many Managers: Strategic Use of Titles to Avoid Overtime Payments (November 16, 2020). Available at SSRN: https://ssrn.com/abstract=3731176 or http://dx.doi.org/10.2139/ssrn.3731176
- 2022 Trustees Report, 106–07, https://www.ssa.gov/OACT/TR/2022/tr2022.pdf.
- For additional details on the Greenspan Commission, and what lessons may or may not be applicable today, see Barry Huston, “Social Security: Trust Fund Status in the Early 1980s and Today and the 1980s Greenspan Commission,” Congressional Research Service, March 4, 2022, https://crsreports.congress.gov/product/pdf/R/R47040.
- According to the Congressional Budget Office, “Gross federal debt consists of debt held by the public and debt issued to government accounts (for example, the Social Security trust funds). The latter type of debt does not directly affect the economy and has no net effect on the budget.” “The Budget and Economic Outlook: 2017 to 2027,” Congressional Budget Office, January 2017, 30, https://www.cbo.gov/system/files?file=2019-04/52370-outlookonecolumn_1.pdf.
- Barry Huston, “Social Security: The Trust Funds,” Congressional Research Service, updated June 29, 2022, 15, https://crsreports.congress.gov/product/pdf/RL/RL33028.