Social Security Primer
Released: 2019-05-07T00:00:00

Introduction

Social Security is a self-financing program that provides monthly cash benefits to retired or disabled workers and their family members and to the family members of deceased workers. As of March 2019, there were approximately 63.3 million Social Security beneficiaries. Of those, 47.2 million (74.6%) were retired workers and family members, 10.1 million (16.0%) were disabled workers and family members, and 6.0 million (9.4%) were survivors of deceased workers.

Social Security is financed primarily by payroll taxes paid by covered workers and their employers. An estimated 176 million workers are covered by Social Security. Employers and employees each pay 6.2% of covered earnings, up to an annual limit; self-employed individuals pay 12.4% of net self-employment income, up to an annual limit. The annual limit on taxable earnings is $132,900 in 2019. Social Security is also credited with tax revenues from the federal income taxes paid by some beneficiaries on a portion of their benefits. In addition, Social Security receives interest income from Social Security trust fund investments. Social Security income and outgo are accounted for in two separate trust funds authorized under Title II of the Social Security Act: the Federal Old-Age and Survivors Insurance (OASI) Trust Fund and the Federal Disability Insurance (DI) Trust Fund. This report refers to the separate OASI and DI trust funds on a combined basis as the Social Security trust funds. In 2018, the combined Social Security trust funds (OASDI) had total receipts of $1,003 billion, total expenditures of $1,000 billion, and accumulated holdings (assets) of more than $2.9 trillion.

Origins and Brief History of Social Security

Title II of the original Social Security Act of 1935 established a national plan designed to provide economic security for the nation's workers. The system of Old-Age Insurance it created provided benefits to individuals who were aged 65 or older and who had "earned" retirement benefits through work in jobs covered by the system. Benefits were to be financed by a payroll tax paid by employees and their employers on wages up to a base amount ($3,000 per year at the time). Monthly benefits were to be based on cumulative wages in covered jobs. The law related the amount of the benefit to the amount of a worker's wages covered by the program, but the formula was progressive. That is, the formula was weighted to replace a larger share of the earnings of low-wage workers compared with those of higher-wage workers. Before the Old-Age Insurance program was in full operation, the Social Security Amendments of 1939 shifted the emphasis of Social Security from protection of the individual worker to protection of the family by extending monthly cash benefits to the dependents and survivors of workers. The program now provided OASI.

During the decades that followed, changes to the Social Security program were mainly ones of expansion. Coverage of workers became nearly universal (the largest groups remaining outside the system are state and local government employees who have not chosen to join the system and federal employees who were hired before 1984). In 1956, Congress established the Disability Insurance (DI) program. Over the years, there were increases in the payroll tax rate, which increased from 2.0% of pay (1.0% each for employees and employers) in the 1937-1949 period to its current level of 12.4%. In addition, there were increases in the amount of wages subject to the payroll tax (the taxable wage base), which increased from $3,000 in the 1937-1950 period to $132,900 in 2019. The types of individuals eligible for benefits were expanded over the years, and benefit levels were increased periodically. In 1972, legislation provided for automatic cost-of-living adjustments, starting in 1975, indexed to the change in consumer prices as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) published by the Department of Labor's Bureau of Labor Statistics.

Beginning in the late 1970s, legislative action regarding Social Security became more concentrated on solving persistent financing problems. Legislation enacted in 1977 raised taxes and curtailed future benefit growth in an effort to shore up the system's finances. Still, in 1982, the OASI trust fund needed to borrow assets from the DI trust fund and the Medicare Hospital Insurance (HI) trust fund (borrowed amounts were fully repaid by 1986). In 1983, Congress passed additional major legislation that was projected to restore solvency to the Social Security system on average over the 75-year projection period at that time.

Current projections by the Social Security Board of Trustees show that the Social Security system has a long-range funding shortfall, and that the system will operate with annual cash-flow deficits each year through the end of the 75-year projection period (2093). These projections, and other factors, have focused attention on potential Social Security program changes.

Social Security Financing

The Social Security program is financed primarily by revenues from Federal Insurance Contributions Act (FICA) taxes and Self-Employment Contributions Act (SECA) taxes. FICA taxes are paid by both employers and employees, however, it is employers who remit the taxes to the U.S. Treasury. Employers remit FICA taxes on a regular basis throughout the year (e.g., weekly, monthly, quarterly, or annually), depending on the employer's level of total employment taxes (Social Security, Medicare, and federal individual income tax withholding).

The FICA tax rate of 7.65% each for employers and employees has two components: 6.20% for Social Security and 1.45% for Medicare HI. Under current law, employers and employees each pay 6.2% of covered wages, up to the taxable wage base, in Social Security payroll taxes. The SECA tax rate is 15.3% for self-employed individuals, with 12.4% for Social Security and 2.9% for Medicare HI. Self-employed individuals pay 12.4% of net self-employment income, up to the taxable wage base, in Social Security payroll taxes. One-half of the SECA taxes are allowed as a deduction for federal income tax purposes. SECA taxes are normally paid once a year as part of filing an annual individual income tax return.

In addition to Social Security payroll taxes, the Social Security program has two other sources of income. First, certain Social Security beneficiaries must include a portion of Social Security benefits in taxable income for the federal income tax, and the Social Security program receives part of those federal tax revenues. Second, the Social Security program receives interest from the U.S. Treasury on its investments in special U.S. government obligations.

As the Managing Trustee of the Social Security trust funds, the Secretary of the Treasury is required by law to invest Social Security revenues in interest-bearing federal government securities held by the trust funds. The revenues exchanged for the federal government securities are deposited into the general fund of the U.S. Treasury and are indistinguishable from revenues in the general fund that come from other sources. Because the assets held by the trust funds are federal government securities, the trust fund balance represents the amount of money owed to the Social Security trust funds by the general fund of the U.S. Treasury. Funds needed to pay Social Security benefits and administrative expenses come from the redemption of federal government securities held by the trust funds.

Taxation of Social Security Benefits

Since 1984, Social Security benefits have been subject to the federal income tax. As part of the Social Security Amendments of 1983 ( P.L. 98-21 ), Congress made up to 50% of a person's Social Security benefits subject to the federal income tax if he or she has provisional income above a specified threshold ($25,000 for an individual tax filer; $32,000 for a married couple filing jointly). Provisional income is defined as total income from all sources recognized for tax purposes plus certain otherwise tax-exempt income, including half of Social Security benefits. Revenues from this "first tier" of taxation are credited to the Social Security trust funds. In 2018, the trust funds received $35.0 billion (3.5% of total trust fund income) from this provision.

Next, as part of the Omnibus Budget Reconciliation Act of 1993 ( P.L. 103-66 ), Congress made up to 85% of a person's Social Security benefits subject to the federal income tax if he or she has provisional income above a second higher threshold ($34,000 for an individual tax filer; $44,000 for a married couple filing jointly). Revenues from this "second tier" of taxation are credited to the Medicare HI trust fund. In 2018, the HI trust fund received $24.2 billion (7.9% of total trust fund income) from this provision.

Under current law, the income thresholds are fixed (i.e., they are not adjusted for inflation or wage growth). Over time an increasing number of beneficiaries will be subject to the federal income tax on benefits. The Congressional Budget Office (CBO) estimates that about half of current Social Security beneficiaries are affected by the taxation of benefits.

Status of the Social Security Trust Funds

Projections by the Social Security Board of Trustees (the trustees) show that Social Security expenditures will exceed tax revenues each year through the end of the 75-year valuation period (2093). That is, Social Security will operate with annual cash-flow deficits . With interest income taken into account, Social Security maintained a total surplus (tax revenues plus interest income exceeded expenditures) from 2010 through 2018. Total revenues in 2019 are projected to exceed total costs by $1 billion; the last instance of costs exceeding revenues was in 1982. The trustees project that the trust funds will have a positive balance (asset reserves) until 2035, allowing Social Security benefits scheduled under current law to be paid in full and on time until then.

Over the long run, the trustees project that the 75-year actuarial deficit for the trust funds is equal to 2.78% of taxable payroll. Stated a different way, the trustees project that Social Security expenditures will exceed income by at least 20% over the next 75 years. For illustration purposes, the trustees point out that the following cha nges would be needed for the trust funds to remain solvent throughout the 75-year projection period: (1) an immediate 2.70-percentage-point increase in the payroll tax rate (from 12.40% to 15.10%); or (2) an immediate 17% reduction in benefits for all current and future beneficiaries; or (3) some combination of these approaches. Social Security's projected long-range funding shortfall is attributed primarily to demographic factors (such as lower fertility rates and increasing life expectancy) as well as program design features (such as a wage-indexed benefit formula and annual COLAs).

At the end of 2018, the trust funds were credited with asset reserves of more than $2.9 trillion. With the projection that the program's total costs will begin to exceed total revenue in 2020, the trustees project the trust funds to peak at the end of 2019. Beginning in 2020, the trustees project that the trust fund balance will begin to decline, until the asset reserves are depleted in 2035. The trust fund ratio can be used to put the size of the trust fund balance into perspective. This ratio represents trust fund assets at the beginning of a year as a percentage of cost for the year. In 2019, for example, the projected trust fund ratio is 273%. (Assets held by the trust funds at the beginning of 2019 are projected to be 2.73 times greater than the cost of the program in 2019.) The trustees project that the trust fund ratio will decline to 130% in 2028 and reach zero at the point of trust fund reserve depletion in 2035.

After depletion of trust fund reserves, the program would continue to operate with incoming Social Security receipts; those receipts are projected to be sufficient to pay 80% of benefits scheduled under current law in 2035, declining to 75% of scheduled benefits in 2093. Under current law, Social Security does not have authority to borrow from the general fund of the Treasury. Therefore, the program cannot draw upon general revenues to make up the difference between incoming receipts and benefit payments when the program no longer has asset reserves to draw upon. The Social Security Act does not specify what would happen to the payment of benefits scheduled under current law in the event of Social Security trust fund depletion. Two possible scenarios are (1) the payment of full monthly benefits on a delayed basis or (2) the payment of partial (reduced) monthly benefits on time.

Social Security Cash-Flow Surpluses and Deficits

From 1984 to 2009, Social Security generated surplus tax revenues (i.e., the program operated with annual cash-flow surpluses). Surplus tax revenues and interest income credited to the trust funds in the form of federal government securities contributed to a growing trust fund balance. Beginning in 2010, however, the program began operating with annual cash-flow deficits, and the trustees project that Social Security tax revenues will remain below program expenditures each year throughout the 75-year projection period (2019-2093).

When Social Security operates with a cash-flow deficit, the trust funds redeem more federal securities than the amount of current Social Security tax revenues, relying in part on trust fund asset reserves to pay benefits and administrative expenses. Because the federal securities held by the trust funds are redeemed with general revenues, this results in increased spending for Social Security from the general fund. When there are no surplus governmental receipts, the federal government must raise the necessary funds by increasing taxes or other income; reducing other spending; borrowing from the public; or some combination of these measures.

With respect to the program's reliance on general revenues, it is important to note that Social Security does not have authority to borrow from the general fund of the Treasury under current law. Rather, the program relies on revenues collected for Social Security purposes in previous years that were used by the federal government at the time for other (non-Social Security) spending needs and interest income earned on trust fund investments. The program draws on those previously collected Social Security tax revenues and interest income (trust fund asset reserves) when current Social Security tax revenues fall below current program expenditures.

Social Security Reform Debate

Social Security reform is an issue of ongoing interest to lawmakers. For some advocates of reform, the focus is on restoring long-range solvency to the trust funds. For others, the focus is on constraining the projected growth in spending for entitlement programs—including Social Security, Medicare, and Medicaid—in the context of broader efforts to reduce growing federal budget deficits. The Social Security reform debate reflects other policy objectives as well, such as improving the adequacy and equity of benefits, and different philosophical views about the role of the Social Security program and the federal government in providing retirement income. Over the years, the debate has reflected two fundamentally different approaches to reform. The traditional approach would maintain the current structure of the program (i.e., a defined benefit system funded on a pay-as-you-go basis) by making relatively modest changes, such as an increase in the retirement age or an increase in the taxable wage base. In general, the goal of this approach is to preserve the social insurance nature of the program. In contrast, the personal savings and investment approach would redesign the 1930s-era program to create a prefunded system in which benefits would be based partially or entirely on personal savings and investments. More recently, the Social Security debate has reflected a shift in focus among some lawmakers away from efforts to scale back the program toward proposals that would expand Social Security benefits to address concerns about the adequacy of benefits and, more broadly, retirement income security.

Social Security Benefit Rules

Social Security provides monthly cash benefits to retired or disabled workers and to the family members of retired, disabled, or deceased workers. Benefits are designed to replace part of a worker's earnings. As such, a worker's benefit is based on his or her career-average earnings in covered employment (i.e., earnings up to the annual taxable limit) and a progressive benefit formula that is intended to provide adequate benefit levels for workers with low career-average earnings. This section explains how the worker's primary insurance amount (PIA) is computed. The worker's PIA is his or her monthly benefit amount payable at the full retirement age (FRA); it also determines the amount of monthly benefits payable to family members based on the worker's record. This section also covers the basic eligibility requirements for different types of Social Security benefits.

Full Retirement Age

Social Security retirement benefits are first payable to retired workers at the age of 62, subject to a permanent reduction for "early retirement." The age at which full (unreduced) retirement benefits are first payable is the FRA. For most of the program's history, the FRA was 65. As part of the Social Security Amendments of 1983 ( P.L. 98-21 ), Congress raised the FRA from 65 to 67. The 1983 law established a gradual phase-in from 65 to 67 over a 22-year period (2000 to 2022).

Specifically, workers born in 1938 or later are affected by the increase in the FRA (i.e., workers who become eligible for retirement benefits at age 62 in 2000 or later). The increase in the FRA will be fully phased in for workers born in 1960 or later (i.e., workers who become eligible for retirement benefits at age 62 in 2022 or later). Table 1 shows the scheduled increase in the FRA being phased in under current law.

Computation of a Social Security Retired-Worker Benefit

Among other requirements, a worker generally needs 40 earnings credits (10 years of Social Security-covered employment) to be eligible for a Social Security retired-worker benefit. A worker's initial monthly benefit is based on his or her highest 35 years of earnings in covered employment, which are indexed to historical wage growth. The highest 35 years of indexed earnings are summed, and the total is divided by 420 months (35 years x 12 months). The resulting amount is the worker's average indexed monthly earnings (AIME). If a worker has fewer than 35 years of earnings in covered employment, years with no earnings are entered as zeroes in the computation, resulting in a lower AIME and therefore a lower monthly benefit.

The worker's PIA is determined by applying a formula to the AIME as shown in Table 2 . First, the AIME is sectioned into three brackets (or segments) of earnings, which are divided by dollar amounts known as bend points. In 2019, the bend points are $926 and $5,583. Three different replacement factors—90%, 32%, and 15%—are applied to the three brackets of AIME. The three products derived from multiplying each replacement factor and bracket of AIME are added together. For workers who become eligible for retirement benefits (i.e., those who attain age 62), become disabled, or die in 2019, the PIA is determined as shown in the example in Table 2 .

Generally, a worker's PIA increases each year from the year of eligibility (at age 62) to the year of benefit receipt based on the Social Security COLA. In addition, Social Security benefits already in payment generally increase each year based on the COLA.

Adjustments to Benefits Claimed Before or After the FRA

A worker's initial monthly benefit is equal to his or her PIA if he or she begins receiving benefits at the FRA. A worker's initial monthly benefit will be less than his or her PIA if he or she begins receiving benefits before the FRA, and it will be greater than his or her PIA if he or she begins receiving benefits after the FRA.

A retired-worker benefit is payable as early as the age of 62, however, the benefit will be permanently reduced to reflect the longer expected period of benefit receipt. Retired-worker benefits are reduced by five-ninths of 1% (or 0.0056) of the worker's PIA for each month of entitlement before the FRA up to 36 months, for a reduction of about 6.7% per year. For each month of benefit entitlement before the FRA in excess of 36 months, retirement benefits are reduced by five-twelfths of 1% (or 0.0042), for a reduction of 5% per year.

Workers who delay filing for benefits until after the FRA receive a delayed retirement credit (DRC). The DRC applies to the period that begins with the month the worker attains the FRA and ends with the month before he or she attains the age of 70. The DRC is 8% per year for workers born in 1943 or later (i.e., workers who attain the age of 62 in 2005 or later).

The actuarial adjustment to benefits based on claiming age is intended to provide the worker with roughly the same total lifetime benefits, regardless of the age at which he or she begins receiving benefits (based on average life expectancy). Therefore, if a worker claims benefits before the FRA, his or her monthly benefit is reduced to take into account the longer expected period of benefit receipt. For a worker whose FRA is 66, the decision to claim benefits at the age of 62 results in a 25% reduction in his or her PIA. For a worker whose FRA is 67, the decision to claim benefits at the age of 62 results in a 30% reduction in his or her PIA. Similarly, if a worker claims benefits after the FRA, his or her monthly benefit is increased to take into account the shorter expected period of benefit receipt.

Other Adjustments to Benefits (Including GPO and WEP)

Other benefit adjustments may apply, such as those related to simultaneous entitlement to more than one type of Social Security benefit. Under the dual entitlement rule, for example, a Social Security spousal benefit is reduced if the person also receives a Social Security benefit based on his or her own work in covered employment (i.e., a retired-worker or disabled-worker benefit). Similarly, under the government pension offset (GPO), a Social Security spousal benefit is reduced if the person also receives a pension based on his or her own work in non covered employment.

Under the windfall elimination provision (WEP), a modified benefit formula is used to compute a worker's Social Security benefit when he or she also receives a pension from non covered employment. The modified formula results in a lower initial monthly benefit compared to the regular benefit formula. Under the retirement earnings test (RET), a person's Social Security benefit is subject to withholding when he or she is below the FRA and has wage or salary income above an annual dollar threshold (i.e., above an annual exempt amount). Under the Social Security maximum family benefit rules, benefits payable to each family member (with the exception of the worker) are subject to reduction when total benefits payable to the family based on the worker's record exceed a specified limit.

Disabled-Worker Benefit

For Social Security disability benefits, "disability" is defined as the inability to engage in substantial gainful activity (SGA) by reason of a medically determinable physical or mental impairment that is expected to last for at least 12 months or result in death. Generally, the worker must be unable to do any kind of substantial work that exists in the national economy, taking into account age, education, and work experience. As noted previously, a worker generally needs 40 earnings credits to qualify for a Social Security retired-worker benefit. A worker under the age of 62 can qualify for a Social Security disabled-worker benefit with fewer earnings credits. The number of earnings credits needed varies, depending on the age of the worker when he or she became disabled; however, a minimum of six earnings credits is needed. Similarly, while the worker's highest 35 years of earnings are used to compute a retired-worker benefit, fewer years of earnings may be used to compute a disabled-worker benefit. Because a disabled worker's benefit is not reduced for entitlement before the FRA, a disabled worker's benefit is equal to his or her PIA.

Benefits for the Worker's Family Members

Although the majority of Social Security beneficiaries are retired or disabled workers, nearly 10.7 million beneficiaries (16.9% of the total) are the dependents and survivors of retired, disabled, or deceased workers.

Social Security benefits are payable to the spouse, divorced spouse, or child of a retired or disabled worker. Benefits are also payable to the widow(er), divorced widow(er), child, or parent of a deceased worker. In addition, mother's or father's benefits are payable to a young widow(er) who is caring for a deceased worker's child; the child must be under the age of 16 or disabled, and the child must be entitled to benefits. Benefits payable to family members are equal to a specified percentage of the worker's PIA, subject to a maximum family benefit. For example, the spouse of a retired worker may receive up to 50% of the retired worker's PIA, and the widow(er) of a deceased worker may receive up to 100% of the deceased worker's PIA. Benefits payable to family members may be subject to adjustments based on the person's age at entitlement, receipt of a Social Security benefit based on his or her own work record, and other factors.

Table 3 provides a summary of Social Security benefits payable to the family members of a retired, disabled, or deceased worker. It includes the basic eligibility requirements and basic benefit amounts before any applicable adjustments (such as for the maximum family benefit).

Maximum Family Benefit

The total amount of Social Security benefits payable to a family based on a retired, disabled, or deceased worker's record is capped by the maximum family benefit. The family maximum cannot be exceeded, regardless of the number of beneficiaries entitled to benefits on the worker's record. If the sum of all benefits payable on the worker's record exceeds the family maximum, the benefit payable to each dependent or survivor is reduced in equal proportion to bring the total amount of benefits payable to the family within the limit. In the case of a retired or deceased worker , the maximum family benefit is determined by a formula and varies from 150% to 188% of the worker's PIA. For the family of a worker who attains the age of 62 in 2019, or dies in 2019 before attaining the age of 62, the total amount of benefits payable to the family is limited to

150% of the first $1,184 of the worker's PIA, plus 272% of the worker's PIA over $1,184 and through $1,708, plus 134% of the worker's PIA over $1,708 and through $2,228, plus 175% of the worker's PIA over $2,228.

The dollar amounts in the maximum family benefit formula ($1,184 / $1,708 / $2,228 in 2019) are indexed to average wage growth, as in the regular benefit formula. In the case of a disabled worker , the maximum family benefit is equal to 85% of the worker's AIME; however, the family maximum cannot be less than 100% or more than 150% of the worker's PIA.

Social Security Beneficiaries

In March 2019, there were approximately 63.3 million Social Security beneficiaries. As shown in Table 4 , retired-worker and disabled-worker beneficiaries accounted for 83.1% of the beneficiary population. The largest single category of beneficiaries was retired workers (69.7%), with an average monthly benefit of $1,467. The second-largest category was disabled workers (13.4%), with an average monthly benefit of $1,235. Family members of retired, disabled, or deceased workers accounted for the remainder of the beneficiary population (16.9%). Table 4 provides a breakdown of the Social Security beneficiary population in March 2019.