When Social Security was enacted in 1935, the nation was in the midst of the Great Depression. About half of the elderly depended on others for their livelihood, and roughly one-sixth received public charity. Many had lost their savings. Social Security was created to help ensure that the elderly would have adequate retirement incomes and would not have to depend on welfare. It would provide benefits that workers had earned because of their contributions and those of their employers. When Social Security started paying benefits, it responded to an immediate need to bolster the income of the elderly. The Social Security benefits that early beneficiaries received significantly exceeded their contributions, but even the very first beneficiaries had made some contributions. Initially, funding Social Security benefits required relatively low payroll taxes because very few of the elderly had earned benefits under the new system. Increases in payroll taxes were always anticipated to keep up with the benefit payments as the system matured and more retirees received benefits. Virtually from the beginning, Social Security was financed on this type of pay-as-you-go basis, with any single year’s revenues collected primarily to fund that year’s benefits. The Congress had rejected the idea of advance funding for the program, or collecting enough revenues to cover future benefit rights as workers accrued them. Many expressed concern that if the federal government amassed huge reserve funds, it would find a way to spend them. Over the years, both the size and scope of the program have changed, and periodic adjustments have been necessary. In 1939, coverage was extended to dependents and survivors. In the 1950s, state and local governments were given the option of covering their employees. The Disability Insurance program was added in 1956. Beginning in 1975, benefits were automatically tied to the Consumer Price Index to ensure that the purchasing power of benefits was not eroded by inflation. These benefit expansions led to higher payroll tax rates in addition to the increases stemming from the maturing of the system. Moreover, the long-term solvency of the program has been reassessed annually. Changes in demographic and economic projections have required benefit and revenue adjustments to maintain solvency, such as the amendments enacted in 1977 and 1983. Profound demographic trends are now contributing to Social Security’s long-term financing shortfall. As a share of the total U.S. population, the elderly population grew from 7 percent in 1940 to 13 percent in 1996; this share is expected to increase further to 20 percent by 2050. As it ages, the baby-boom generation will increase the size of the elderly population. However, other demographic trends are at least as important. Life expectancy has increased continually since the 1930s, and further improvements are expected. Moreover, the fertility rate has declined from 3.6 children per woman in 1960 to around 2 children per woman today and is expected to level off at about 1.9 by 2020. Combined, increasing life expectancy and falling fertility rates mean that fewer workers will be contributing to Social Security for each aged, disabled, dependent, or surviving beneficiary. While 3.3 workers support each Social Security beneficiary today, only 2 workers are expected to be supporting each beneficiary by 2030. As a result of these demographic trends, Social Security revenues are expected to be about 14 percent less than expenditures over the next 75-year period, and demographic trends suggest that this imbalance will grow over time. By 2030, the Social Security trust funds are projected to be depleted. From then on, Social Security revenues are expected to be sufficient to pay only about 70 to 75 percent of currently promised benefits, given currently scheduled tax rates and the Social Security Administration’s (SSA) intermediate assumptions about demographic and economic trends. In 2031, the last members of the baby-boom generation will reach age 67, when they will be eligible for full retirement benefits under current law. Restoring Social Security’s long-term solvency will require some combination of increased revenues and reduced expenditures. A variety of options are available within the current structure of the program, such as raising the retirement age, reducing inflation adjustments, increasing payroll tax rates, and investing trust fund reserves in higher-yielding securities. However, some proposals would go beyond restoring long-term solvency and would fundamentally alter the program structure by setting up individual retirement savings accounts and requiring workers to contribute to them. Retirement income from these accounts would usually replace a portion of Social Security benefits. Some proposals would attempt to produce a net gain in retirement income. The combination of mandated savings deposits and revised Social Security taxes would be greater than current Social Security taxes, in most cases. Helping ensure adequate retirement income has been a fundamental goal of Social Security. While Social Security was never intended to guarantee an adequate income, it provides an income base upon which to build. Virtually all reform proposals also pay some attention to “income adequacy,” but some place a different emphasis on it relative to the goal of “individual equity,” which seeks to ensure that benefits bear some relationship to contributions. Some proponents of reform believe that increasing the role of individual retirement savings could improve individual equity without diminishing income adequacy. The current Social Security program seeks to ensure adequate retirement income in various ways. First, it makes participation mandatory, which guards against the possibility that some people would not otherwise save enough to have even a minimal retirement income. Reform proposals also generally make participation mandatory. Second, the current Social Security benefit formula redistributes income from high earners to low earners to help keep low earners out of poverty. It accomplishes this by replacing a larger share of lifetime earnings for low earners and a smaller share for high earners. In addition, Social Security helps ensure adequate income by providing benefits for dependent and surviving spouses and children who may not have the work history required to earn adequate benefits. Also, it automatically ensures that the purchasing power of benefits keeps pace with inflation, unlike most employer pension plans or individually purchased annuities. While the Social Security benefit formula seeks to ensure adequacy by redistributing income, it also promotes some degree of individual equity by ensuring that benefits are at least somewhat higher for workers with higher lifetime earnings. In helping ensure adequate retirement income, Social Security has contributed to reducing poverty among the elderly. (See fig. 1.) Since 1959, poverty rates for the elderly have dropped by two-thirds, from 35 percent to less than 11 percent in 1996. While they were higher than rates for children and for working-age adults (aged 18 to 64), they are now lower than for either group. For more than half the elderly, income other than Social Security was less than the poverty threshold in 1994. While Social Security provides a strong foundation for retirement income, it is only a foundation. In 1994, it provided an average of roughly $9,200 to all elderly households. Median Social Security benefits have historically been very close to the poverty threshold. Elderly households with below-average income rely heavily on Social Security, which provided 80 percent of income for 40 percent of elderly households in 1994. (See fig. 2.) One in seven elderly Americans has no income other than Social Security. Pockets of poverty remain. Women, minorities, and persons aged 75 and older are much more likely to be poor than other elderly persons. For example, compared with 11 percent for all elderly persons (aged 65 and older) in 1996, poverty rates were 23 percent for all elderly women living alone, roughly 25 percent for elderly blacks and Hispanics, and 31 percent for black women older than 75. Unmarried women make up more than 70 percent of poor elderly households, although they account for only 45 percent of all elderly households. Proposals that would increase the extent to which workers save for their own retirement would reduce income redistribution because any contributions to individual accounts that would otherwise go to Social Security would not be available for redistribution. Still, proponents of individual accounts assert that virtually all retirees would be at least as well off as they are now and that such reforms would improve individual equity. Citing historical investment returns, they argue that the rates of return that workers could earn on their individual retirement savings would be much higher than the returns they implicitly earn under the current system and that their retirement incomes could be higher as a result. Nevertheless, earning such higher returns would require investing in riskier assets such as stocks. Income adequacy under such reforms would depend on how workers invest their savings and whether they actually earn higher returns. It would also depend on what degree of Social Security coverage and its income redistribution would remain after reform. In addition to examining the effects of reform proposals on all retirees generally, attention should be paid to how they affect specific subpopulations, especially those that are most vulnerable to poverty, including women, widows, minorities, and the very old. Reform proposals vary considerably in their effects on such subpopulations. For example, since men and women typically have different earnings histories, life expectancies, and investment behaviors, reforms could exacerbate differences in benefits that already exist. An individual savings approach that permits little redistribution would on average generate smaller savings balances at retirement for women, who tend to have lower earnings from both employment and investments, and these smaller balances would need to last longer because women have longer life expectancies. The balance between income adequacy and individual equity also influences how much risk and responsibility are borne by individuals and the government. Workers face a variety of risks regarding their retirement income security. These include individually based risks, such as how long they will be able to work, how long they will live, whether they will be survived by a spouse or other dependents, how much they will earn and save over their lifetimes, and how much they will earn on retirement savings. Workers also face some collective risks, such as the performance of the economy and the extent of inflation. Different types of retirement income embody different ways of assigning responsibility for these risks. Social Security was based on a social insurance model in which the society as a whole through the government largely takes responsibility for all these risks to help ensure adequate income.