Explainer: Social Security

17 May 2024 / Article

For most Americans, Social Security is a key, if not the key, pillar of retirement income to provide economic security as they age. Social Security also provides crucial benefits to individuals with disabilities and the spouses and dependents of retired workers. Recent projections for the financial sustainability of Social Security continue to highlight both short-term and long-term challenges, primarily tied to demographic trends. In light of these challenges, Congress must act to consider a comprehensive package of legislative changes to redirect the financial trajectory of the program to preserve Social Security benefits for the millions of Americans that depend on them.

As background for that work, this Explainer provides a history of the establishment of Social Security and subsequent reforms; an overview of the two Social Security Trust Funds, eligibility for retirement benefits, payroll taxes that fund Social Security, and Social Security Disability Insurance; the impact of Social Security; and recent challenges to the solvency of the Trust Funds along with recommendations to improve the fiscal picture for the program and save it for future generations of Americans.

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Approximately 67 million Americans receive monthly Social Security benefits, and the Social Security program provides a vital source of income for retired workers, individuals with disabilities, survivors, and their families.
Congress established Social Security in 1935 as a response to the economic insecurity elder Americans experienced during the Great Depression. The program was subsequently expanded to cover additional workers and provide benefits to spouses, dependents, survivors, and individuals with disabilities.
Social Security has two Trust Funds that receive revenues from payroll taxes on employees and their employers, Federal income taxes on a portion of Social Security benefits, and interest income from investing reserves in Treasury securities.
Social Security retirement benefits are calculated based on when a worker decides to begin collecting benefits using a worker’s historical earnings. The monthly benefit amounts are also adjusted annually to account for cost-of-living increases.
Current projections from the Social Security Trustees show that the Trust Fund for retirement benefits is scheduled to be depleted in 2033, meaning that scheduled benefits will be reduced by 21 percent absent legislative changes. Long-term projections also show that total program costs will exceed total program revenues over the 75-year forecast period.
The long-term demographic trends of increases in life expectancy and declining birth rates and immigration have contributed to this fiscal imbalance, as retirees collect benefits for longer and there are fewer covered workers per beneficiary paying payroll taxes.
While the prospects for reform remain slim before the November 2024 election, the next Congress must summon the political will to negotiate solutions and promptly phase them in to return the program to sound financial footing, give future retirees sufficient time to adjust their financial planning, and preserve benefits for current and future generations.