The Social Security Act was designed as a contributory insurance old-age scheme that offered limitations and phasing-in benefits for retirement-age people; SS extended benefits to the survivors of beneficiaries as early as 1939 and to domestic and farm workers who were self-employed in 1950. It also finally extended benefits to disabled people in 1957. Additionally, Congress postponed planned payroll tax increases in the program's early days.

Putting political expediency first over the system's long-term stability continues. Since payroll taxes are insufficient to pay for the benefits that are paid out, Social Security's reserves of cash are set to be exhausted by 2034, exposing beneficiaries in 2034 to a reduction in their benefits by more than 20% without any legislative solution.

Understanding Social Security

The Social Security program is funded by taxation under the Federal Insurance Contributions Act (FICA), dedicated payroll taxes. Social Security taxes total 12.4 percent of wages, maximum of the annual taxable income set at 147,000$ in 2022. Employers and employees split the tax burden 50/50, with employees contributing 6.2 percent of their income and employers contributing the other 6.2 percent.

Receipts go to the Social Security trust funds, which are then used to pay out benefits. The funds are used to invest all excess in U.S. government debt. The payroll taxes you pay towards Social Security are not used to fund your benefits. The Social Security system is not saved to pay benefits after you've reached the age of eligibility. Instead, it pays for payments to the current beneficiary or is kept to be used as part of a surplus system. This means that the future benefits of everyone depend on the stability of the Social Security system rather than on the number of their contributions.

The Problem With Social Security

Americans are experiencing fewer children and are getting older, causing an increase in the age of the population. The huge Generation that is the Baby Boomers (those who were born between 1946 to 1964) is retiring at a rapid rate which is further reducing the share of the populace working. In 2020 17 percent of the population was aged 65 or over. The proportion is projected to rise to 24 percent in 2060. The proportion of working-age people is set to decrease from around 62 percent in 2020 to around 57 percent in 2060.

This means that there will be fewer people to provide support for each retiree in the near future. The proportion of people who pay SS tax per beneficiary is expected to decrease from 2.8 in 2021 to 2.3 in 2035. The trust fund of Social Security to pay retirement benefits is expected to be depleted in 2034. At this point, the tax revenues are projected to be sufficient to pay 77% of scheduled benefits.

Possible Solutions

Fortunately, a massive, all-encompassing benefit cut is not the most likely scenario. Congress is more than 10 years old to stabilize Social Security's finances, and law makers continue developing ideas for how to do so. The increasing number of retirees will grow into a more powerful segment with the financial incentive to fight for Social Security benefits and assure the program's future. Despite its resistance to increasing Social Security payroll taxes in the program's early days, Congress has subsequently approved many of these increases to safeguard the program.

Plans to mean-test benefits and to eliminate the annual income limit subject to SS taxes have fewer historical precedents but could garner more support from the public. Social Security's long-term projected funding deficit of 1.2 percent of the gross domestic product (GDP) is feasible; however, the longer it takes to fix the problem, the more costly it will be to everyone involved.

What Is The Significance Of Social Security?

Social Security is vital for many retired people and is among the few programs widely accepted across all political spectrums. In 2020, an AARP survey revealed it was favored by most Democrats, Republicans, and independents. Although Social Security is intended to help people save for retirement, many retirees rely on Social Security benefits as their main revenue source. Based on the Center on Budget and Policy Priorities, half of the senior citizens receive 50% (or greater) of their income through Social Security. NIRS defines retirement benefits as a "three-legged stool" made up of Social Security, a pension plan, and an individual's savings through accounts such as an IRA and 401(k).