Talking Points Memo: by Joshua Micah Marshall: January 30, 2005 -
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Social Security has been providing benefits to millions of workers for 65 years.

Social Security -- sometimes referred to by its full name, Old-Age, Survivors, and Disability Insurance (OASDI) -- was established in 1935 as a publicly funded retirement insurance system for workers in the United States. It is an earned benefit insurance program, which means that only those who work and
pay taxes are eligible for Social Security benefits.

Social Security is both a retirement and a life insurance program, and not an investment program. Social Security provides retirement benefits to workers, their spouses, and their dependents, as well as providing survivorship benefits to family members of workers who have died and disability benefits to workers who become disabled before retirement.

At the end of December 2001, Social Security provided monthly benefits to 45.9 million beneficiaries (or one in every 6 Americans).

Social Security paid a total of $432 billion to retired workers, disabled workers, and to the surviving family members of deceased workers in 2001 (SSA 2002 Trustees Report).

In 2000, Social Security beneficiaries included about 3 million people under the age of 18.

Social Security benefits are guaranteed to beneficiaries. Because Social Security is not an investment scheme but rather a social insurance program, its benefits will continue to be paid as long as a beneficiary depends on them.

Social Security's finances are not subject to the ups and downs of the stock market, or the luck of individual investors. The promise of Social Security benefits is instead backed by the good faith of the U.S. government, pretty much in the same way that the government backs the value of the dollar.

Thus, there is no uncertainty for beneficiaries -- once they start receiving benefits, they will continue to receive them in the future.

Social Security offers mainly retirement benefits.

Workers can receive four different types of benefits under Social Security: retirement, early retirement, disability, and survivorship benefits.

Workers are entitled to retirement benefits if they have contributed to Social Security for at least 10 years, and if they have reached the normal retirement age, which is currently 65 (and is set to increase to 67 for workers born after 1959).

Early retirement benefits are available to workers if they have contributed to Social Security for at least 10 years, and if they have reached the earliest age at which benefits can be paid, currently 62.

Benefits, however, are reduced by 20% compared to what the retiree would have received at age 65.

Both full and early retirement benefits were paid to 28.5 million beneficiaries in 2000.

Of these 71% or 20.3 million retirees received a reduced benefit payment because they chose the early retirement option. Average monthly retirement benefits for all workers receiving retirement benefits were $844.60 in 2000.

In comparison, workers who had retired early received on average $778.50 per month.

Workers are also insured in case they become disabled.

Social Security provides insurance to workers in case they become disabled and can no longer work. The disability need not be related to an accident at the worker's job. The number of years that are required to receive disability benefits varies with the age of a worker.

Younger workers need fewer years to qualify for disability benefits. In 2000, Social Security paid an average monthly disability benefit of $787 to 5 million beneficiaries.

Social Security offers life-insurance type benefits to workers.

If a worker dies, her family receives benefits from Social Security. Survivorship benefits are paid if the deceased worker has, on average, worked at least one quarter for each year after he or she attained the age of 21.

In 2000, Social Security paid an average monthly survivorship benefit of $810.

Social Security is the most significant source of income for the majority of retirees over 65 years old.

Social Security benefits are the most important source of income for the majority of elderly households. All households, where the head of the household is 65 and older, receive an average of 58% of their income from Social Security.

The bottom 40% of the income distribution among aged workers receive close to 80%, the third quintile receives 64%, and the fourth quintile of the income distribution still receives on average 46% of its income from Social Security.

Only the top 20% receive more income from other sources than from Social Security.

Middle-class seniors, those in the middle 20% of the income distribution, depend largely on Social Security as their main source of income. In 2000, middle-class seniors received 64% of their retirement benefits from Social Security.

In comparison, 9% was income from assets (such as dividends, interest, or rent), 9% was private pensions, 7% from additional earnings, and 5% from government pensions.

Social Security is a successful anti-poverty program for workers 65 and older.

Because Social Security is an insurance program, it includes a number of features that redistribute income to ensure that everybody receives adequate benefits. Without Social Security, an additional 40% of seniors would have lived in poverty in 1999.

Social Security is a social insurance program.

Social Security replaces the source of income a worker has lost due to retirement or disability, or the income a family has lost due to the worker's death. To ensure that Social Security benefits are adequate for every worker who is insured, Social Security - like any other insurance - pays disproportionately more benefits to those who need them most.

Workers with low lifetime earnings receive relatively higher benefits (in relation to their lifetime earnings) than workers with high lifetime earnings. The retirement benefit received by a low earner is smaller in absolute terms, but larger as share of earnings, than the benefits received by high earning workers.

For example, typical low-wage workers will receive annual benefits that are slightly more than half as large (54%) as their average yearly earnings. Benefits for high-wage workers are larger but just one-third (33%) of their annual earnings. This progressive benefit structure boosts the retirement incomes of low- and middle-wage workers.

Social Security also provides higher lifetime benefits to workers who live longer. By the time a worker retires, benefits are granted on the basis of a workers age and earnings history. Because women have significantly higher life expectancies than men, they will receive the same monthly Social Security benefits as men.

Social Security is particularly important to women.

Women have fewer earnings to rely on in retirement. Although only slightly more than half of all workers have a private pension through their employer, women are less likely than men: 40% of women have pensions compared to 47% of men.

Women of color are even less likely to have a pension than are white women.

Furthermore, a woman's pension is typically smaller than a man's because women earn less per hour, and often work part time or spend time out of the labor force.

Because they earn less, women have fewer savings than men to depend upon in retirement - thus they rely more heavily on Social Security.

Since women live in retirement an average of three and a half years more than men, they need more retirement income over the course of their lives, not less. They need a retirement program - like Social Security - that provides more income to people who live longer.

Given their longer life spans, it is especially important for women that Social Security benefits be adjusted each year for inflation. If inflation were 3% per year but benefits were not adjusted accordingly, benefits would buy 25% less after 10 years and 45% less after 20 years.

A woman who never worked but stayed home to care for family is still entitled to a Social Security benefit equal to half that of her working husband.

Widows and divorced women (after a marriage of at least 10 years) are entitled to Social Security benefits even if they never worked, so long as their husbands were eligible for benefits.

FACTS ABOUT SOCIAL SECURITY FINANCES

To pay for benefits, Social Security receives income from three sources.

Most of the money that is needed to pay for benefits comes from payroll taxes. Currently, employees and employer each pay 6.2% to Social Security, for a combined tax rate of 12.4% of wages and salaries.

Self-employed workers pay the full 12.4% (Pak's personal experience was to pay 15%) out of their earnings.

Taxes, however, have to be paid only up to an earnings ceiling, which is $84,900 annually in 2002.

Earnings above the ceiling are not subject to the payroll tax. In 2001, Social Security received a total of $516.4 billion in payroll taxes.

As a result of reforms to Social Security in 1983, a trust fund was specifically set up as a savings account to pay for baby boomers. Since then, Social Security has taken in more money than it has paid out in benefits.

Consequently, it has built up a trust fund over the years. Social Security earns interest on this trust fund. In 2001, the trust fund received 6.6% interest on its assets, earning $72.9 billion in interest.

Finally, some Social Security benefits are subject to taxes, which are then paid to Social Security. In 2001, taxes on Social Security benefits amounted to a total of $12.7 billion.

Social Security is building up a trust fund.

Because income is currently exceeding expenditures, Social Security is building up a trust fund. Total income to Social Security was $602 billion
in 2001.

Its expenditures came to $439 billion, $432 billion of which was benefit payments. Consequently, Social Security managed to increase its trust fund by $163.1 billion in 2001.

As a result, Social Security held a total of $1,213 billion in assets at the end of 2001.

If Social Security faces a shortfall in income, the trust fund assets can be used to pay for the additional benefits.

Trust fund assets are invested in government bonds.

Social Security trust fund assets, currently worth over $1 trillion, are invested in special, non-tradable government bonds. Each year the U.S. Treasury issues these government bonds, up to the amount of the Social Security trust fund surplus, to be added to the account. The bonds earn an interest rate comparable to the market interest rate for tradable government bonds.

During 2001, the effective annual interest rate earned on all bonds held by the trust funds was 6.6%.

Social Security is not going broke.

Each year, in early spring, the trustees of Social Security release their report. As required by law, the trustees present what can be described as their best guesses for three different scenarios for the future of Social Security.

In their annual report for 2002, the trustees project that Social Security will take in more in income than it will pay out in expenditures until 2017.

Between 2017 and 2027, interest income earned on the trust fund assets is forecasted to make up the difference between income and expenditures. After 2027, Social Security is expected to draw down its trust funds to pay for the expenditures that are not covered by income.

Finally, in 2041, the trust fund assets are expected to be gone, and income is projected to be less than expenditures. However, the trustees project that Social Security will still be able to pay for more than 2/3 of its promised benefits from 2041 to 2076.

The trustees instead project a financing shortfall that may happen almost 40 years from now. These projections, however, are based on pessimistic assumptions. Real growth is expected to fall to between 1.7% and 1.8% over the long-run, which has never been the case for an extended period of time during the post-war years.

Similarly, the trustees assume that in the long-run the economy will settle on an average productivity growth rate of 1.6%, which is again too low by historical standards.

Higher productivity and consequently faster real wage growth -- which have both historically been about 2.0% -- would be more realistic and improve Social Security's finances.

One solution to the shortfall would be to increase Social Security's revenues.

It may seem prudent to increase the amounts available in the trust funds as long as the trustees provide a pessimistic outlook for the future.

Eliminating the cap on earnings that are subject to Social Security taxes can cover three quarters of the shortfall. Currently, the cap is $84,900 per year. Earnings above $84,900 are not subject to the Social Security payroll tax.

Eliminating this cap would provide Social Security with sufficient income to cover at least three quarters of the shortfall that Social Security's trustees expect based on their pessimistic assumptions.

Will the President's Plan for Privatization Take the Security Out of Social Security?

Do you support privatizing SS? You may want to read more about this important issue, and ponder the likelihood that Ken Lay could be in charge of your portfolio.

NathanNewman.org - News and Views: SS Privatization: GOP Deceptions

Nathan Newman: Social Security Privatization: GOP Deception
Uncle-scam.SS scam

Will the President's Plan for Privatization Take the Security Out of Social Security?

The Archer-Shaw Social Security Proposal -- 5/5/99

Much Ado About Nothing: The Archer-Shaw Plan Won't Fix Social Security -- Viewpoints | EPI

Network Democracy - Social Security

NathanNewman.org - News and Views: SS Privatization: GOP Deceptions

The Phony Social Security Crisis and "Privatization" Scam

Social Security Privatization

Nathan Newman: Social Security Privatization: GOP Deceptions

Social Security Benefit Info

Sources:

Century Foundation. 1998. Social Security Reform: A Twentieth Century Fund Guide to the Issues, New York, N.Y.: Century Foundation.

Social Security Administration. 2001. Annual Statistical Supplement to the Social Security Bulletin 2001. Washington, D.C.: Social Security Administration.

Social Security Administration, 2002, The 2002 Annual Report of the Board of Trustees of the Federal
 Old-Age and Survivors Insurance and Disability Insurance Trust Funds, Washington, D.C.: Social Security Administration.

Social Security Administration. 2000. Income of the Population 55 or Older. Washington, D.C.: Social Security Administration.

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Issue Guide Social Security