Post what stood out to you in the articles – you can combine the ones on the overview and facts if you like but please specifically respond to the articles on minorities and social security. Also what did you learn about the history of social security in the video that stood out to you. Next I would like you to think about if there are changes that could/should be made to social security – you can add your own critique as well as what the government could do to improve the sustainability of social security, ensure that more people benefit from it or what ever else you would like to add.
POLICY PAPER
This report addresses how
individuals from various
racial and ethnic groups
fare under the current
Social Security system.
It examines the relative
importance of Social
Security for these individuals and how several aspects
of the system affect them.
Acknowledgments: The authors
would like to thank the Office
of Retirement Policy staff as
well as Dan Durham, Ben
Bridges, Jan Olson, Sharmilla
Choudhury, Harriet Duleep,
and Alicia Cackley for their
assistance and comments on
this paper and earlier drafts.
Minorities and Social Security: An Analysis of Racial and
Ethnic Differences in the Current Program
by Alexa A. Hendley and Natasha F. Bilimoria,
Office of Retirement Policy, Office of Policy,
Social Security Administration
Executive Summary
In recent articles, some commentators
have criticized the Social Security system as
being unfair to minorities. This criticism has
generated discussions about how minority
groups fare under the current Social Security
system and how they might be affected as
the system undergoes changes in the future.1
To understand the policy implications of any
changes for these groups, it is important to
understand the current system. This paper
addresses how minorities fare under the
current system and sets the stage for a later
discussion on how various changes to the
Social Security system may affect them.
The Social Security program is raceneutral. That is, people in identical economic
and family situations are treated identically.
Rarely, however, are individuals in identical
situations; minority2 groups, on average,
have different earnings and life expectancies
than whites, which affect the benefits that
minorities receive under the Social Security
system. They also have less retirement
income from other sources, on average, than
whites.
This paper shows that:
· Social Security plays a larger role in
retirement income for minorities than
for whites because minorities have
fewer other resources such as
pensions and assets.
· Several aspects of the Social Security
system work to the advantage of
minority groups. For example,
minorities who tend to have lower
earnings (blacks and Hispanics)
benefit from the progressive benefit
formula, and those with shorter life
expectancies (blacks) benefit from the
disability and survivors benefits.
· Minorities will become a greater
percentage of the U.S. population.
Minorities are expected to increase
from 25 percent of the population in
1990 to 47 percent in 2050, with most
of that growth due to an increase in
the Hispanic, Asian, and black
populations.
I. Social Security Plays a
Large Role for Minorities
Social Security is the nations largest
family protection program. Because Social
Security spreads risk among almost the entire
population and provides nearly universal
coverage, relatively few older individuals are
forced into situations where they are wholly
dependent on family members for retirement
income support.
The importance of Social Security for
minorities in retirement can be demonstrated
in a couple of ways. First, minorities rely on
Social Security Bulletin Vol. 62 No. 2 1999
59
Social Security for most of their retirement
income because they lack other sources of
income and have fewer income-producing
assets than whites. Second, Social Security
benefits are particularly important to blacks
(aged 65 or older) who would have poverty
rates as high as 60 percent without Social
Security, while the poverty rate for whites
would increase to near 50 percent.3
Minorities Rely on Social Security
for More of Their Retirement Income
While Social Security is expected to be
only one part of a persons retirement
income, many minorities rely on it for more
of their income than do whites. As chart 1
shows for those aged 65 or older in 1996:
Percent of beneficiaries
80
70
White
60
Black
50
Hispanic origin
40
30
20
10
90% or more
50% or more
100%
Proportion of income
1
Hispanics may be of any race.
· About three-fourths of minority
Source: Income of the Population 55 and Older, 1996, Social Security Administration, table
VI.B.1 and table VI.B.4.
·
100
beneficiaries rely on Social Security
for at least half their income, while
only two-thirds of whites rely on it
to the same extent.
Almost half of the minority beneficiaries (45 percent of blacks and 44
percent of Hispanics) relied on
Social Security for 90 percent or
more of their income, compared
with 29 percent of whites.
A much higher percentage of
minorities relied on Social Security
for all of their income; 33 percent
of blacks and 33 percent of Hispanics, compared with only 16 percent
of whites.
Fewer minorities have other income
sources.Minorities rely more heavily on
Social Security due to a lack of other
income in retirement. Fewer elderly
minorities receive income from pensions
and assets than elderly whites. The
greatest difference, as shown in chart 2, is
in the receipt of income from assets; less
than 40 percent of blacks and Hispanics
have asset income, compared with more
than 60 percent of whites.
The differences in pension receipt are
likely to continue. Among current private
sector workers aged 21 to 61, fewer
minorities have pension coverage. In 1993
(the most recent data available), only 34
percent of black workers and 25 percent of
Hispanic workers had pension coverage,
compared with 45 percent of white
workers. In fact, the pension coverage
rate has dropped for white, black, and
·
60
Percent receiving any income from source
White
80
Black
Hispanic origin
60
40
20
Asset income
Earnings
Pensions
Social Security
Source: Income of the Population 55 and Older, 1996, Social Security Administration,
table I.3.
Percent
80
In poverty with
Social Security
70
60
In poverty without
Social Security
50
40
30
20
10
White
Black
Native American
Asian
Hispanic origin
Source: Office of Policy, Social Security Administration, tabulations of March 1998 Current
Population Survey data.
Social Security Bulletin Vol. 62 No. 2 1999
Hispanic workers since the late seventies, but the decline has
been greater for minorities.4
Progressive Benefit Formula
Social Security payments are based on a workers average
indexed monthly earnings (AIME). Workers who had higher
Social Security Reduces
earnings will receive higher benefits. The program, however, is
progressive in nature so that the system returns a greater
Minority Poverty
percentage of pre-retirement earnings to low-wage workers than
The importance of Social Security to minorities is emphato high-wage workers. Chart 4 shows the estimated levels of
sized by their current and potential poverty rates. Nine percent replacement (or replacement rates)5 for workers who retire at
of all Social Security beneficiaries aged 65 or older were in
age 65 in 2000,6 with steady low, average, and high earnings.
poverty in 1997 (compared with 10.5 percent of all elderly).
Minority groups, who have a disproportionate share of lowWithout Social Security, 49 percent would have been in poverty. wage workers, receive more benefits in relation to past earnings
The poverty rates for elderly minorities are even higher than for than groups that include more high-wage earners.
whites. In particular, chart 3 shows that in 1997, elderly black
However, while the benefit formula is progressive, the Social
beneficiaries had the highest poverty rate (24 percent) of the
Security payroll tax is regressive when it is compared with the
five racial/ethnic groups shown, while whites and Asians had
earnings subject to the payroll tax. Although 94 percent of
the lowest rates (8 percent). If these groups did not have their
workers have earnings below the taxable limit, the average
Social Security benefits in 1997, around 60 percent of blacks,
earnings of blacks are lower than those of whites. Therefore,
Native Americans, and Hispanics would have been in poverty,
black workers are more likely to have all of their earnings
compared with slightly less than half of whites.
subjected to this tax. One feature of the tax system that
While the poverty rates vary among racial and ethnic
alleviates some of the payroll tax burden is the Earned Income
groups, they also vary within these groups. Women, on
Tax Credit (EITC). This tax credit was originally designed to
average, have higher poverty rates than men. The greatest
offset the regressive payroll tax for families with children.
difference in poverty rates between men and women is among
Minorities have lower earnings.Social Security benefits
blacks and whites. For example, as shown in table 1, the
are dependent on an individuals earnings. However, there are
poverty rate for white women was 9.9 percent in 1997, while it
substantial differences in earnings among blacks and whites.
was 9.4 percent for Asians, 21.8 percent for Hispanics, and 26.2 Blacks median earnings in Social Security covered employment
percent for blacks.
were about $11,991, while whites median earnings were $16,360
in 1995.7
Although the Social Security benefit formula is progressive
and provides low earners with a higher proportion of their preTable 1.—Poverty rates for groups with and without Social
retirement earnings, workers with lower earnings still receive
Security, by race/ethnicity and sex, 19971
lower dollar benefits. The actual dollar amount minorities
In poverty with
In poverty without
receive in benefits is lower than for whites because of their
Social Security
Social Security
lower earnings, as shown in chart 5.
Lifetime work patterns affect benefits.Lifetime work
Race/ethnicity
Men
Women
Men
Women
patterns affect Social Security benefits and other sources of
White……………
4.4
9.9
41.7
53.2
retirement income. Years out of the work force directly affect
Black……………
19.6
26.2
55.7
65
Social Security benefits. The number of years in covered
Asian……………
5.3
9.4
32.6
35.8
employment is important in the calculation of Social Security
Hispanic origin..
17.3
21.8
56.1
56.1
benefits. An individuals benefits are based on the average of
1
the highest 35 years of earnings. Periods out of the work force
The sample size for Native Americans is too small to present poverty
or with reduced earnings will add zero years or more years of
data by gender.
Source: Office of Policy, Social Security Administration, tabulations of
lower earnings into a workers benefit calculation.
March 1998 Current Population Survey data.
There are differences by race and gender in the number of
years with no earnings in covered employment (zero years). In
1995, women who were age 61 (and fully insured for retirement
II. Program Aspects of
benefits) averaged 7 years out of the work force, out of 35
Importance to Minorities
years, while men age 61 averaged about 3 years. This difference is, in part, because women more frequently take time out to
Although the Social Security system is race-neutral, several
care for their children or elderly relatives.
features of the program are especially important to some
Chart 6 shows that out of 35 years, black women had just
minority groups. The progressive benefit formula helps low
slightly fewer zero years out of the work force than white
earners, many of whom are members of minority groups. The
women, but other minorities had many more. Part of the reason
survivors and disability insurance programs are also important
for this difference may be that the other minority category
to minorities since they tend to have shorter life expectancies
includes many immigrants who would not have had earnings
than whites.
under Social Security for 35 years.8
Social Security Bulletin Vol. 62 No. 2 1999
61
Social Security Survivors
and Disability Insurance
Protection
Percent of earnings replaced
60
50
While Social Security retirement benefits
are important to all elderly groups, chart 7
demonstrates that a greater proportion of
white beneficiaries receive retired worker
benefits than minority beneficiaries. A
larger percentage of minority groups,
however, receive disability and survivor
benefits than do whites. Disability rates are
strongly correlated to socioeconomic
factors, with low-income workers having
much higher rates of disability than workers
with higher incomes.9
40
30
20
10
Low
Source: 1999 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors
Insurance and Disability Trust Funds, table III.B5.
· Only 53 percent of black and 51
percent of other minority beneficiaries
receive retirement benefits (including
worker, spouse and childrens benefits), compared with 72 percent of
white beneficiaries.
· Minority beneficiaries are more likely
to receive disability and survivors
benefits than are whites. Twenty-five
percent of all black beneficiaries and
32 percent of all other minority
beneficiaries receive disability
benefits, compared with only 12
percent of whites. In addition, while
blacks comprised
11 percent of the population aged 18
64 in 1996, 18 percent of all disability
awards were made to blacks.
· Twenty-two percent of black and 17
percent of other minority beneficiaries
receive benefits from the
survivors program, compared with 16
percent of white beneficiaries. Also, 25
percent of surviving children benefits
were awarded to blacks, but blacks
make up only
15 percent of the population under
age 18.
Life expectancy.Life expectancy varies
according to race and ethnicity. All else equal,
persons with higher life expectancies will
receive retirement benefits for a longer period
and therefore receive higher lifetime benefits.
On the other hand, those with lower life
expectancies and their dependents may
benefit more from the survivors and disability
aspects of the program.
62
High
Average
Earnings
Benefit amount in dollars
800
700
White
600
Black
500
Other minorities
400
300
200
100
Retired
workers
Disabled
workers
Spouses
& children
of retired
workers
Spouses
& children
of disabled
workers
Children of
deceased
workers
Widows,
widowers,
& parents
1
Social Security data on race are collected when an individual applies for a Social Security card,
not at the time of application for benefits. Data collected before 1980 are limited to “black,” “white,”
and “other.” Other minorities may include Hispanics, Asian and Pacific Islanders, and other racial
groups not specified. Hispanics, however, can also be classified as white or black.
Source: Annual Statistical Supplement 1997 to the Social Security Bulletin, Social Security
Administration, table 5.A.1.
Number of zero years
12
10
8
6
White
Black
Other
4
2
Women
Men
Social Security data on race collected before 1980 is limited to “black,” “white,” and “other.”
Other minorities may include Hispanics, Asian and Pacific Islanders, and other racial groups
not specified. Hispanics, however, can also be classified as white or black.
Source: 1937-95 1-percent active Continuous Work History Sample, for living nondisabled
workers at age 61 and fully insured for retirement benefits at the end of 1995.
1
Social Security Bulletin Vol. 62 No. 2 1999
;
;;
;
;
;;
;;;
;;
;;
;;
;;
In 1995, Asians and Pacific Islanders had the highest life
expectancy rates at birth and at age 65, while blacks had the
lowest (table 2). While whites, on average, had lower life
expectancy rates than Asians and Hispanics, they consistently remain well above blacks.
3% 3%
8%
White beneficiaries
Retired workers
9%
Table 2.—Life expectancy rate at age 65, by sex and
race/ethnicity
13%
Widows, widowers,
and parents
Disabled workers
5%
Spouses/children
of disabled workers
Children of
deceased workers
8%
Total
White
Black
Asian
Hispanic
origin
Both sexes…
Men…………
Women………
17.4
15.6
18.9
17.6
15.7
19.1
15.6
13.6
17.1
21.2
18.8
22.9
21.2
18.5
21.8
Sources: (1) Health United States, 1996-1997 and Injury Chartbook , table 29
National Center for Health Statistics, 1997; and (2) Population Projections for
the United States by Age, Sex, Race, and Hispanic Origin: 1995-2050,
Current Population Reports, P-25-1130, 1996, tables B-1 and B-2.
64%
Spouses/children
of retired workers
Sex
48%
10%
Black beneficiaries
12%
17%
8%
43%
8%
Life expectancy trends show increases for all racial
groups, but whites are increasing faster. The difference in
life expectancy rates between blacks and whites has become
smaller in the past 50 years because of improved education,
health care, and working conditions. If these trends continue, life expectancy for blacks should continue to increase
in the future. However, the U.S. Bureau of the Census
projections10 for 1995 to 2050 show that although life
expectancy is increasing for all racial groups, it is increasing
most for whites. The gap in life expectancy between blacks
and whites is expected to grow while that between whites
and Asians and Hispanics is expected to narrow. These
expected trends emphasize the need to examine various
subgroups separately and the possibility of differences in
the types of benefits and reliance on the Social Security
system in the future.
9%
“Other” beneficiaries
11%
21%
1
Social Security data on race are collected when an individual applies for
a Social Security card, not at the time of application for benefits. Data
collected before 1980 are limited to “black,” “white,” and “other.” Other
minorities may include Hispanics, Asian and Pacific Islanders, and other
racial groups not specified. Hispanics, however, can also be classified as
white or black.
Source: Annual Statistical Supplement,1997 to the Social Security Bulletin,
Social Security Administration, table 5A1.
III. Minority Population Increase
Minority populations continue to make up an increasingly
larger proportion of the U.S. population.11 In 1997, the
majority of the U.S. population was white (72 percent), and
minorities made up only 28 percent of the population
(chart 8).
Due to high immigration and fertility rates, minority
populations will grow significantly so that by 2050, the
Census Bureau projects that the white population will decline
to 53 percent of the total population.
The increase in the proportion of various minority
populations will change the composition of the U.S. work
force and the face of the nations elderly. The great diversity
among minority populations is important to consider in the
analysis of the current and future Social Security system.
Social Security Bulletin Vol. 62 No. 2 1999
63
In the future, Social Security will continue to play an
important role in the retirement security of our nations elderly
as well as to protect families against the total loss of income
due to the disability or death of a worker. While the composition of the nation may change, the need for economic security
will not. Minorities today rely on the retirement, disability, and
survivors benefits. Retirement benefits are especially important
to low-income workers, many of whom are minorities, who
depend on them as a secure source of income in retirement.
The progressive benefit formula also helps minorities who may
have had low earnings throughout their lives. In addition,
minorities depend on the disability and survivors benefits more
than whites. As these populations grow in the future, the
importance of Social Security most likely will also grow.
;
;
;;
;
Yung-Ping Chen and Thomas D. Leavitt, The Widening Gap
Between White and Minority Pension Coverage, The Public Policy
and Aging Report (Winter), 1997.
4
72%
7
Unpublished Social Security Administration data, 1995.
See Harriet Orcutt Duleep, Measuring the Effect of Income
on Adult Mortality Using Longitudinal Administrative Record Data,
Journal of Human Resources, Vol. 21, No. 2 (Spring), 1986, pp. 238251 and Gary Burtless, Occupational Effects on the Health and
Work Capacity of Older Men, in Work, Health, and Income Among
the Elderly, Gary Burtless (ed.), Washington, DC: The Brookings
Institution, 1987, pp. 103-142.
8
White
Black
Hispanic
8%
Replacement rate refers to the benefit as a percentage of
earnings in the 12-month period preceding retirement.
5
6
Low earnings are equal to 45 percent of average, and high
earnings are equal to 160 percent of average. For 1997, low earnings
equal $12,342; average earnings equal $27,426; and high earnings
equal $43,882.
12%
American Indian,
Eskimo, or Aleut
2
The data used are from various sources and the race and
ethnicity classifications may not always be consistent across sources.
Due to data limitations, we do not have comprehensive data on all
minority groups, but we have included information where available.
The increase in the poverty rate assumes the Social Security
benefit is taken away and there is no other change in behavior (such
as increased savings) to compensate for this reduction.
1997
Asian
See for example, William J. Beach and Gareth G. Davis, Social
Securitys Rate of Return, and Social Securitys Rate of Return for
Hispanic Americans, The Heritage Center Foundation; Kilolo
Kijakazi, Flaws in the Heritage Foundations Assessment of Social
Securitys Rate of Return, The Center for Budget and Policy
Priorities; and General Accounting Office testimony before the
Subcommittee on Social Security, Committee on Ways and Means,
House of Representatives (February 10, 1999), Social Security and
Minorities: Current Benefits and Implications of Reform.
1
3
4% 1%
11%
Notes
1%
53%
9
See Jennifer Cheeseman Day, Population Projections of the
United States by Age, Sex, Race, and Hispanic Origin: 1995 to 2050,
U.S. Bureau of the Census, Current Population Reports, P25-1130,
U.S. Government Printing Office, Washington, DC, 1996.
10
14%
data.
Population estimates are based on 1990 U.S. Census Bureau
11
High attribution rates (self-identification with a specific racial
or ethnic group) also contribute to the increase in the black and
Hispanic populations.
2050
24%
1
White, black, Asian, and “other” classifications are not of hispanic origin.
Source: Statistical Abstract of the United States, 1998, table no. 19.
64
Social Security Bulletin Vol. 62 No. 2 1999
Fact Sheet
AARP Public Policy Institute
Social Security: A Brief Overview
Mikki D. Waid
AARP Public Policy Institute
9 Social Security protects individuals and their families from loss of earnings
due to retirement, disability, or death.
9 Social Security has been effective at keeping Americans of all ages out of poverty.
9 Social Security will be able to pay full benefits until 2036, after which it can pay
about three-quarters of scheduled benefits.
What Is Social Security?
Social Security is a federal program
designed to protect individuals and their
families from loss of earnings due to
retirement, disability, or death. When
signed into law in 1935, Social Security
covered only retired workers. However,
in 1939 Social Security became a family
benefit by expanding benefits to include
the spouses and minor children of
retired and deceased workers. In 1956,
Social Security was further expanded by
including benefits for disabled workers.
Since its inception, Social Security has
been a vital tool for promoting the wellbeing of those who can no longer work.
Serving as the major source of income
for half of the U.S. population aged
65 and older, Social Security enables
older Americans to live independently.
In addition, Social Security has been
effective at keeping Americans of all
ages out of poverty.1 For example,
Social Security income keeps more than
1 million children under age 182 and
14 million older Americans3 (roughly
35 percent) out of poverty.
Key Features of Social Security
For more than 75 years, Social Security
has ensured that the basic protections
that were important when the program
first began continue for present and
future beneficiaries. Moreover, by
its design, Social Security provides a
lifeline for low-income retirees, disabled
workers, and survivors of a deceased
worker and is the basis for a secure
retirement for countless others. These
characteristics are reflected in three key
features of the Social Security program:
1. The benefit formula is progressive,
which means that Social Security
benefits replace a higher proportion
of the preretirement earnings of lowlifetime earners than higher lifetime
earners. This feature is important
because low-lifetime earners are
less likely to have other sources of
retirement income (such as pensions,
savings, and assets) in addition to
Social Security. The progressivity of
the Social Security benefit formula
ensures that that the income of low
earners will not be significantly
diminished by their loss of earnings.
2. Social Security provides a
guaranteed source of income that
is protected against inflation. Since
1975, Social Security benefits have
been automatically adjusted to reflect
Social Security: A Brief Overview
increases in prices (as measured by
the Consumer Price Index for Urban
Wage Earners and Clerical Workers,
or CPI-W). In 2012, beneficiaries
received a 3.6 percent increase in
benefits to account for inflation.4
enough to receive disability benefits so
that they and their families are protected
in the event of a long-term disability.9
About 97 percent of individuals age 20
to 49 in covered employment (almost
98 million) have worked enough to
receive survivors insurance protection
for their families in the event of death of
the Social Security-covered worker.10
3. Social Security benefits reflect current
living standards. The proportion of
preretirement earnings replaced by
Social Security is approximately
stable across generations. For
example, Social Security benefits
replaced more than 42 percent of
past earnings for an average earner
in 2011. Twenty years later, in 2031,
benefits will replace almost 41 percent
of past earnings for an average earner
and are projected to replace about
the same amount in 2051. Thus,
Social Security benefits will be just
as valuable to current workers as their
parent’s, grandparents’, and children’s
benefits5.
Who Receives Social Security
Benefits?
In February 2012, more than 55 million
Americans received monthly Old Age,
Survivors, and Disability Insurance
(OASDI) benefits. About 90 percent of
those age 65 and older received Social
Security benefits.11
Retired Workers
More than two-thirds (64 percent) of
Social Security beneficiaries (almost
36 million) are retired workers, of whom
more than half (51 percent) are men.
The average monthly benefit for retired
workers was $1,231 in February 2012.12
Who Is Covered under Social
Security?
The majority of workers (94 percent) in
paid employment and self-employment
are covered under the Social Security
program. Workers not covered include
some state and local government
workers and federal workers under the
Civil Service Retirement System.6 In
2011, about 158 million people worked
in Social Security-covered employment.7
Figure 1
Who Benefits from Social Security,
February 2012
Spouses
4%
Generally, to receive retirement
benefits, a person must have worked for
about 10 years.8 The number of years
necessary to be eligible for disability
benefits or benefits for surviving family
members depends on the age at which
the disability or death occurred but is
generally less than 10 years.
Children
8%
8%
Retired
Workers
64%
About 91 percent of workers age 21
to 64 in covered employment (about
128 million workers) have worked
Widow(er)s
and
Parents
Disabled
Workers
16%
Source: The Social Security Administration. Beneficiary Data.
Accessed from http://www.ssa.gov/cgi-bin/currentpay.cgi
2
Social Security: A Brief Overview
Most child beneficiaries are under
age 18.
Disabled Workers
Approximately 16 percent of Social
Security beneficiaries (almost
9 million)—52 percent of them men—
are disabled. At the end of 2011, more
than half of disabled workers were age
55 or younger.13 The average monthly
benefit for a disabled worker was $1,111
in February 2012.14
Seventy-four percent are under
age 18.18
Three percent are students age 18
or 19.
Twenty-two percent are disabled
children age 18 or over.
Most child beneficiaries qualify either
as survivors or children of disabled
workers.
Spouses
More than 4 percent of beneficiaries
(almost 2.5 million) received spouse
benefits in February 2012. The vast
majority (97 percent) of these spouse
beneficiaries were women. Of those
receiving spouse benefits, more than
93 percent were the spouses of retired
workers and 3 percent were the spouses
of disabled workers. The average
monthly benefit for a spouse was $588 in
February 2012.15
Thirteen percent are the children of
retired workers.19
Forty-four percent are the children of
deceased workers.
Forty-three percent are the children
of disabled workers.
The average monthly child benefit in
February 2012 was $566.20
Survivors
What Are the Social Security Trust
Funds?
Almost 8 percent of Social Security
beneficiaries (more than 4 million)
received Adult Widow(er), Young
Widow(er), Disabled Widow(er), or
Parent16 benefits. The vast majority of
these beneficiaries (91 percent) were
aged widows or widowers. Due to the
longer life expectancies of women,
98 percent of survivor beneficiaries were
women. The average monthly benefit
for a survivor in February 2012 was
$1,148.17
The income and expenses of the Social
Security program are accounted for
through Social Security’s Old-Age
and Survivor’s Insurance (OASI)
Trust Fund and Disability Insurance
(DI) Trust Fund. The Social Security
Administration credits each trust fund
for revenue received and debits them for
expenditures.
The OASI Trust Fund pays monthly
benefits to retired workers and their
spouses and children and to the survivors
of deceased workers. The DI Trust
Fund pays monthly benefits to disabled
workers and their spouses and children.
At the end of 2010, the combined
OASDI Trust Funds held more than $2.6
trillion in assets. The trust fund assets
resulted from surpluses between 1984
and 2009, during which total noninterest
revenues exceeded total expenditures.
These assets are held as special issue
Children
The children of retired, disabled, and
deceased workers can receive Social
Security benefits as long as they are
under age 18 (or 19 and a high school
student) or can be any age provided the
child was disabled before the age of 22.
Children make up almost 8 percent of
Social Security beneficiaries (more than
4 million).
3
Social Security: A Brief Overview
Figure 2
Average Annual Benefits, February 2012
$16,000
$14,773
$14,000
$13,776
$13,328
$12,000
$10,000
$8,000
$6,789
$7,052
Children
Spouses
$6,000
$4,000
$2,000
$0
Retired Workers
Disabled
Workers
Widow(er)s and
Parents
Source: Social Security Administration, http://www.ssa.gov/cgi-bin/currentpay.cgi
government securities, which are
available only to the trust funds. The
special securities earn guaranteed
interest (by the federal government),
which is used to pay for benefits and
administrative costs.
Security payroll tax (6.2 percent each,
for a total of 12.4 percent), while the
self-employed pay the full 12.4 percent.
In 2012, workers and employers paid
payroll taxes on up to the first $110,000
of earnings (known as the “taxable
maximum”). The taxable maximum is
increased each year based on increases
in average wages in the economy. The
Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of
2010 temporarily reduced the employee
share of the payroll tax from 6.2 percent
to 4.2 percent (employers continue to pay
6.2 percent) for 2011. This payroll tax
rate reduction later was extended through
2012. Thus, the combined total payroll
tax rate for 2011 and 2012 is 10.4 percent
rather than the normal 12.4 percent.
The payroll tax is scheduled to return to
12.4 percent in 2013.
The primary expense to the OASDI
Trust Funds is the payment of Social
Security benefits. The Congressional
Budget Office (CBO) estimates that
$720 billion (98 percent of total outgo)
was paid in benefits in 2011.21 The
remainder of the trust fund expenses
consisted of administrative costs (less
than 1 percent) and miscellaneous
transfers.22
How Is Social Security Financed?
Social Security is primarily financed
through payroll taxes on workers’
earnings.23 CBO estimates that
in 2011 Social Security received
about $581 billion in payroll tax
contributions,24 accounting for
71 percent of total income received by
Social Security.
In addition to payroll taxes, there are
two other major sources of income for
the trust funds: (1) interest from trust
fund assets and (2) the taxation of Social
Security benefits.
The Social Security trust funds are
invested in special issued interest-
Workers and employees are each
responsible for paying half of the Social
4
Social Security: A Brief Overview
bearing U.S. securities. CBO estimates
that in 2011, the trust funds earned
$116 billion (15 percent of total income)
in interest from the U.S. securities.
income will rise from 12.5 percent of
taxable payroll in 2011 to 13.3 percent
in 2036.27 Meanwhile, total expenditures
are expected to rise more quickly—from
13.4 percent of taxable payroll in 2011 to
17.0 percent in 2036. The gap between
income and expenditures is expected to
stabilize around 2035.28
A smaller proportion of income comes
from the taxation of Social Security
benefits.25 The taxation of benefits
accounted for another $23 billion
(3 percent) of total income in 2011.
Despite this gap between income and
total expenditures, Social Security will
be able to pay full benefits until 2036
by relying on Trust Fund assets and the
interest income they generate.
As previously mentioned, legislation in
2010 decreased the share of employees’
payroll taxes from 6.2 percent to
4.2 percent for 2011. By law, this lost
payroll tax revenue to the system must
be made up by transfers from general
revenues. The estimated amount of
these transfers in 2011was $79 billion
(10 percent of total income). In years
without the payroll tax rate cut, this
transfer would be payroll tax revenue,
thereby increasing the portion of total
income accounted for by the payroll tax
in a typical year.
Key Dates for the Trust Funds
Beginning in 2010, Social Security
paid out more money in benefits than
it received from payroll taxes and the
taxation of benefits. To make up for the
shortfall, the Social Security system
relied on part of the interest earned
by the trust fund assets to finance full
benefits. The rest of the interest earned
that was not used to pay benefits resulted
in additional trust fund assets.
Financial Condition of the Program
Demographic changes will put a strain
on the Social Security system. In
particular, the U.S. population is aging
as a result of the decline in fertility
rates from the highs in the decades after
the end of World War II (Baby Boom
Generation) and increasing longevity.26
These changes result in fewer workers
(taxpayers) supporting each beneficiary.
In the 1960s, there were approximately
4 workers per beneficiary. Today, there
are about 2.9 workers per beneficiary,
and by 2036, the number of workers per
beneficiary will reach a low of 2.1 before
stabilizing around this ratio.
As more baby boomers begin receiving
benefits (and for longer periods of
time), the amount of interest required
to make up for the shortfall will grow.
Eventually, the amount of benefits that
have to be paid will be greater than the
amount of income received from payroll
taxes and interest from the assets. The
first year that the amount of benefits is
projected to exceed income from payroll
taxes and interest is 2023.
After 2023, the Social Security system
will have to depend on the principal
from the securities (thus, the U.S.
securities will have to be redeemed) to
make up for the difference between the
income from the payroll tax (and the
taxation of benefits) and the benefits that
must be paid. Eventually, all of the U.S.
securities held in the trust funds will
be redeemed and the trust funds will be
exhausted.
As a result of these demographic
changes, the Social Security
Administration projects benefits to
increase much faster than revenue.
One way to make this comparison is in
relation to earnings subject to Social
Security payroll taxes. The Social
Security Trustees project that annual
5
Social Security: A Brief Overview
The Social Security Trustees project that
the OASDI trust funds will be exhausted
in 2036. After 2036, the only income
will come from payroll taxes and the
taxation of benefits, at which time it
will be possible to pay only about threequarters (77 percent) of scheduled Social
Security benefits.
Reducing the cost-of-living adjustment
(for example, by using an alternative
such as the Chained CPI29) is an example
of a plan that does not alter a person’s
initial benefit but rather alters future
benefits by slowing the growth of
benefits in response to inflation.
The timing of changes to the system
will help to determine the magnitude
of revenue increases and/or cost
reductions. The sooner changes are
made, the less severe they will have
to be. For example, if action is taken
immediately, the Social Security system
could be balanced30 by (1) increasing
the payroll tax rate from 12.4 percent to
14.6 percent, (2) reducing benefits by
13.8 percent, or (3) a combination of
the two. On the other hand, if nothing is
done until 2036, then the payroll tax will
have to be further increased or benefits
further decreased. In 2036, the Social
Security system could be balanced
by (1) increasing the payroll tax rate
from 12.4 percent to 16.4 percent,
(2) reducing benefits by 23 percent, or
(3) a combination of the two.
Balancing the Social Security
System
Despite the fiscal challenges, the Social
Security system could be balanced
through an increase in revenues, a
decrease in costs, or a combination of
the two. Revenue-increasing options
include increasing the payroll tax,
expanding the tax base by increasing
the taxable maximum, and expanding
covered earnings to include contributions
to voluntary salary and reduction plans
(such as Cafeteria 125 plans and Flexible
Spending Accounts).
Cost reduction plans generally entail
reducing initial benefits or the growth
of benefits over time. Such plans
include reducing benefits to account
for increases in longevity, decreasing
benefits for high earners while keeping
the benefits of low earners the same,
including more years of earnings in the
benefit computation, and raising the full
retirement age.
Regardless of when action is taken,
lawmakers will have to make changes
to bring the system back into balance.
It is important that these changes keep
Social Security on a sustainable path
without sacrificing the key features of
the program.
Endnotes
Selena Caldera, Social Security: Who’s Counting on It? (AARP Public Policy Institute, April 10, 2011).
Accessed March 9, 2012, at http://assets.aarp.org/rgcenter/ppi/econ-sec/fs178-socsec.pdf.
1
2
Statistic is for the year 2009. U.S. Census Bureau, “Income, Poverty, and Health Insurance Coverage:
2009.” Accessed March 9, 2012, at http://www.census.gov/newsroom/releases/pdf/09-16-10_slides.pdf.
3
Statistic is for the year 2010. Selena Caldera, AARP Public Policy Institute, unpublished tables using
U.S. Bureau of the Census, March 2011, Current Population Survey.
4
Because of a steep drop in overall prices during the last quarter of 2008 and low inflation thereafter, no costof-living adjustment to benefits was made in 2010 and 2011. Social Security Administration, “Latest Cost-ofLiving Adjustment.” Accessed March 9, 2012, at http://www.ssa.gov/OACT/COLA/latestCOLA.html.
5
Social Security Administration, “Annual Scheduled Benefit Amounts for Retired Workers With Various
Pre-Retirement Earnings Patterns Based on Intermediate Assumptions.” Accessed March 15, 2012, at
http://www.ssa.gov/OACT/TR/2011/lr6f10.html.
6
Social Security: A Brief Overview
6
In 1984, the federal government introduced a new retirement system—the Federal Employees Retirement
System (FERS), which is covered under Social Security. All new federal employees hired in 1984 and later are
covered under FERS. The federal government allowed workers the option of switching from the Civil Service
Retirement System, which does not include Social Security benefits, to FERS. Nationally, approximately
27 percent of state and local government employees are not covered under Social Security. Alison M. Shelton,
“Social Security: The Government Pension Offset (GPO)” (Congressional Research Service, RL32453, 2011).
An older (2010) version of the paper is available at http://aging.senate.gov/crs/ss12.pdf.
7
Social Security Administration, “Social Security Basic Facts.” Accessed March 9, 2012, at
http://www.ssa.gov/pressoffice/basicfact.htm.
8
To be eligible for Social Security benefits, individuals must earn a certain number of quarters of coverage
or “credits.” In 2012, a person receives a quarter of coverage for each $1,130 in annual covered earnings
up to a maximum of four quarters ($4,520) in a year. To qualify for retirement benefits, individuals need
to earn 40 quarters. Since up to four quarters can be earned in a year, for most individuals, this translates
to 10 years of covered employment. The number of quarters needed to qualify for disability and survivor
benefits depends upon age but is less than 40 for those who die or become disabled at younger ages.
9
Social Security Administration, “Social Security Basic Facts.”
10
Ibid.
11
Social Security Administration, “Benefits Paid by Type of Beneficiary.”Accessed March 9, 2012, at
http://www.ssa.gov/OACT/ProgData/icp.html; Social Security Administration, “Social Security Basic Facts.”
12
Social Security Administration, “Benefits Paid by Type of Beneficiary.”
13
Social Security Administration, “Disabled worker beneficiaries in current payment status at the end
of December 2011, distributed by age and sex.” Accessed March 9, 2012, at http://www.ssa.gov/OACT/
ProgData/benefits/da_age201112.html.
14
Social Security Administration, “Benefits Paid by Type of Beneficiary.”
15
Ibid.
16
The parents of a deceased retired or disabled worker can receive Social Security benefits provided they
can prove that they were financially dependent on the worker and are at least age 62.
17
The average benefits were $1,186.60 for aged widow(er)s, $873.55 for young widow(er)s, $703.02 for
disabled widow(er)s, and $1,053.87 for parents. Social Security Administration, “Benefits Paid by Type of
Beneficiary.”
18
Social Security Administration, “Number of Beneficiaries by Age.”
19
Social Security Administration, “Benefits Paid by Type of Beneficiary.”
20
Ibid.
21
The Congressional Budget Office estimates that almost $600 billion in benefits was paid out of the OASI
Trust Fund and almost $130 billion in benefits was paid out of the DI Trust Fund. Accessed March 14,
2012, at http://www.cbo.gov/sites/default/files/cbofiles/attachments/43062_Old-AgeSurvivorsInsurance.pdf
and http://www.cbo.gov/sites/default/files/cbofiles/attachments/43061_DisabilityInsurance.pdf.
22
Congressional Budget Office, “Combined OASDI Trust Funds, January 2012 Baseline.” Accessed March
9, 2012, at http://www.cbo.gov/sites/default/files/cbofiles/attachments/OASDI.pdf.
23
The formal names for the payroll taxes are the Federal Insurance Contributions Act (FICA) and the SelfEmployment Contributions Act (SECA) for the self-employed.
24
Congressional Budget Office, “Combined OASDI Trust Funds, January 2012 Baseline.”
25
The Social Security Amendments of 1983 established the taxation of Social Security benefits. Up to
50 percent of Social Security benefits can be subject to the federal income tax for individual taxpayers with
combined income greater than $25,000 or for taxpayers filing a joint return with combined income greater
than $32,000. Accessed March 15, 2012, at http://www.ssa.gov/planners/taxes.htm.
26
For example, the life expectancies of 65-year-olds (men and women) increased 5 years (from 12.8 to
17.7 years for men and 15.1 to 20.0 years for women) between 1950 and 2011. Life expectancies are
7
Social Security: A Brief Overview
projected to increase approximately another 2 years between 2011 and 2036. Accessed March 14, 2012, at
http://www.ssa.gov/OACT/TR/2011/lr5a3.html.
27
Board of Trustees, Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust
Funds, The 2011 Annual Report of the Board of
Trustees of the Federal Old-Age and Survivors
Insurance and Disability Insurance Trust Funds
Fact Sheet 253, March, 2012
(Washington, DC, May 2011). Accessed March 9,
2012, at
AARP Public Policy Institute
http://www.ssa.gov/OACT/TR/2011/tr2011.pdf.
Ibid.
29
Experts predict that the increase in Social Security
benefits would be an average of 0.3 percentage points
lower, per year, under the Chained CPI.
30
601 E Street, NW, Washington, DC 20049
www.aarp.org/ppi
202-434-3846, ppi@aarp.org
© 2012, AARP.
Reprinting with permission only.
Ibid.
8
Fact Sheet
28