Old or young, new to your job, or a 20-year veteran, you've heard of Social Security. But do you know why it was created and how it works today? Understanding Social Security's purpose and how it works can help you better understand your current and future benefits.
Let's take a look at the past and present of the Social Security Administration (SSA) and the programs it manages, and then we'll look at this year's projections for the future.
When Was Social Security Invented?
When Social Security was created, the U.S. was just beginning to recover from the Great Depression. Millions of people were still out of work, and there was alarming concern for the elderly and retired Americans who'd lost everything.
The original Social Security Act was signed into law by President Franklin D. Roosevelt on August 14, 1935. The Act created a new federal agency (the Social Security Board) to ensure that American workers would continue to have income after retirement.
Why Was Social Security Originally Created?
The Social Security program was intended to be—and still is today—a social insurance program. The government-run program was designed to provide economic security to people in the United States.
The original 1935 Social Security Act provided for:
- "old age" or retirement benefits
- aid to dependent children, and
- unemployment insurance.
Payments were made in lump sums until 1940, when a monthly payment system was put into place. And it was paid for by workers. Workers made contributions to a "trust fund" from their paychecks to pay for the retirement and other benefits they'd need in the future.
In 1946, the Social Security Board (SSB) was renamed the Social Security Administration (SSA).
How Has Social Security Changed?
Over the years, the Social Security Act has been changed or "amended" in several ways, but the basic principles are still the same. Under today's Social Security Act, the SSA still manages the program, workers still make contributions from their paychecks, and monthly payments are still made to those who are eligible for benefits.
Most notably, in 1956, Congress amended the Social Security Act to create the disability insurance program. The new program, Social Security Disability Insurance (SSDI), provided for benefits to be paid to disabled, insured workers between 50 and 65 years old as well as insured workers' adult children who had become disabled as children.
What Was the Purpose of the Social Security Administration?
Although the scope of Social Security has changed somewhat over the years, the Social Security Administration's purpose remains the same and still includes the following:
- to protect retired and disabled workers from losing their savings due to illness or injury
- to provide for the basic financial needs of individuals and families
- to help families stay together, and
- to ensure children have the chance to grow up healthy and secure.
What Does Social Security Do Today?
The Social Security Administration manages several programs offering benefits to seniors, disabled workers, and their families.
Retirement benefits. At age 66 or 67 (depending on the year of birth), workers who contributed to the trust fund can apply for Social Security retirement benefits to help with everyday living and expenses and to offset the loss of income from their jobs.
You can retire as early as age 62, but you'll get reduced payments if you collect benefits before reaching full retirement age. The more money you make and the more Social Security tax (FICA and self-employment tax) you've paid in, the higher your retirement benefits will be.
Survivors and death benefits. A worker's spouse and dependent children can receive monthly payments in certain circumstances. Your family might be eligible for Social Security benefits if you die or become disabled or if your dependent child becomes disabled before age 22. The SSA also pays a small lump-sum death benefit to surviving family members to help pay for funeral expenses.
Disability benefits. Disability benefits help disabled workers who've paid into the Social Security trust fund for a certain amount of time. If you've paid enough Social Security tax and you have a serious mental or physical disability that prevents you from working, you should qualify for Social Security disability insurance (SSDI) benefits.
Today, unemployment insurance isn't covered by the Social Security Act. Instead, it's handled by a joint state-federal program. But the Social Security Act now provides for Medicare, a health insurance program for those over 65 who've paid Medicare taxes. Disabled workers receiving SSDI can also get healthcare benefits through Medicare (after a waiting period).
What Else Does the Social Security Act Provide?
In addition to retirement insurance, disability insurance, and survivor's insurance, the Social Security Act and related laws also cover the following programs:
- Supplemental Security Income (SSI)
- special veterans benefits
- public assistance and welfare services, including:
- temporary assistance for needy families (TANF)
- medical assistance
- mother and child health services
- child support enforcement
- family and child welfare services
- food stamps (SNAP), and
- energy assistance.
The Future: Will Social Security Run Out of Money?
Each year, the trustees of the Social Security trust funds make projections about how long the trust funds will last. According to the most recent report from SSA officials (dated July 2022), the benefits paid out by the Social Security retirement program are now more than the amount paid into the trust fund (and the interest created by the trust fund) and will continue to be unless Congress changes the Social Security Act.
The year 2021 was the first year that Social Security paid more out of the trust fund than the total income that came into the trust fund. In other words, 2021 was the first year that the SSA had to use the trust fund to pay retirement benefits.
Social Security Retirement Shortfall
Because of the difference between the money coming in and the money going out of the Old-Age and Survivors Insurance (OASI) Trust Fund (which pays retirement and survivors benefits), the fund will run low on cash. The OASI is expected to continue to pay retirement benefits in full until 2035, when the trust fund is expected to run out. After that, retirement benefits will rely on continuing payroll tax income, which will cover only 77% of the scheduled benefits.
These projections are based on the current Social Security tax rates. The forecast would change if something is changed to increase the money going into the trust fund or to decrease the amounts being paid from the trust fund.
Disability Benefits Fund Projection
The health of the Disability Insurance (DI) trust fund has continued to improve since Congress passed legislation to address shortfalls. The combined effect of that legislation and a decrease in the number of disability applications over the past several years has improved the projections for the DI trust fund. It's currently projected to be able to pay all scheduled benefits for at least the next 75 years (the length of the SSA's projection period).
Addressing Social Security's Deficit
The shortfall in retirement funds Social Security is projected to face could be addressed in one of two ways:
- raise more revenue, or
- pay out less.
Currently, the Social Security payroll tax is 6.2% paid by the employer and 6.2% paid by the worker. But only the first $160,200 in income is taxed—neither you nor your employer pays Social Security tax on anything you earn above that payroll tax limit. While there have been suggestions to raise the payroll tax limit (or to apply the payroll tax to 90% of everyone's earnings), or to raise the retirement age to 70, it might take years before anything is done to shore up the trust fund.