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Social Security

The most successful anti-poverty program in American history is routinely described as being in crisis — and the actual math is considerably less alarming than the political rhetoric.

The short version

  • Social Security is a federal insurance program funded by payroll taxes that provides retirement, disability, and survivor benefits to more than 70 million Americans; it is the single largest anti-poverty program in U.S. history, lifting roughly 22 million people out of poverty annually.
  • The program faces a real funding shortfall: the Social Security Trust Fund is projected to be depleted around 2033–2035, at which point incoming payroll taxes would cover approximately 83% of scheduled benefits — a significant problem, but not the 'bankruptcy' politicians often describe.
  • The shortfall is primarily a product of demographic change — the large Baby Boom generation retiring and fewer workers per retiree — and has entirely known, if politically difficult, solutions: raising the payroll tax rate, lifting the income cap on taxable wages, adjusting the full retirement age, or some combination.
  • Social Security is not a savings account — benefits are not drawn from a fund of individual contributions but are paid by current workers to current retirees, a design that reflects its nature as social insurance rather than a personal investment.

What it is

Social Security — formally the Old-Age, Survivors, and Disability Insurance program — is a federal social insurance program established by the Social Security Act of 1935 under President Franklin Roosevelt. It provides monthly cash benefits to retired workers and their dependents, to survivors of deceased workers, and to disabled workers and their families. In 2024, approximately 70 million Americans received Social Security benefits, and the program paid out approximately $1.4 trillion in total benefits — making it the single largest item in the federal budget. The average retired worker receives approximately $1,900 per month; the average disability beneficiary receives approximately $1,530. For the majority of retirees, Social Security is their primary source of income.

The program is financed primarily through payroll taxes under the Federal Insurance Contributions Act (FICA). Workers and employers each pay 6.2% of wages — 12.4% total — on earnings up to the Social Security taxable maximum, which is adjusted annually for wage growth and stood at $168,600 in 2024. Above that cap, no Social Security tax is paid, which means a worker earning $500,000 pays the same total Social Security tax as a worker earning $168,600. Self-employed workers pay the full 12.4%. These contributions flow into two trust funds — the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund — which are invested in special-issue Treasury bonds and earn interest. When annual benefits exceed annual contributions and interest, the trust funds draw down to cover the difference.

Social Security is not a savings account, despite widespread public belief that individuals receive back what they personally contributed. Benefits are calculated based on a worker's earnings history — specifically the average of their highest 35 earning years, indexed for wage growth — but they are paid from current payroll tax revenues, not from an individual account holding the worker's past contributions. This 'pay-as-you-go' or 'defined benefit' structure means that current workers fund current retirees, just as current workers will eventually be funded by the workers who follow them. The design is social insurance: the risk of outliving one's resources, of disability, and of surviving a breadwinner's death is pooled across the entire working population. Benefits are not strictly proportional to contributions — they are tilted toward lower-wage workers through the progressive benefit formula, which replaces a higher percentage of pre-retirement income for workers who earned less.

The Social Security program is also the nation's largest disability insurer and largest life insurance program. The Disability Insurance component provides benefits to workers who have worked long enough to be insured and who have a medical condition that meets the program's strict definition of disability — unable to engage in any substantial gainful activity for at least 12 months or with a condition expected to result in death. Approximately 8.5 million disabled workers and 1.4 million of their family members receive DI benefits. The survivor benefit function — which provides income to the spouses and children of deceased workers — insures more children than any private insurer in the country. These non-retirement functions are often absent from political discussions of Social Security that treat it purely as a retirement savings program.

Why it matters

Social Security's anti-poverty effect is the most important and least appreciated fact about the program. Before Social Security, poverty among the elderly was the norm rather than the exception: in the 1930s, roughly half of elderly Americans lived in poverty. Today, the elderly poverty rate is approximately 9–10% — still too high, but dramatically lower than any pre-Social Security baseline, and lower than the poverty rate for children. The Census Bureau's Supplemental Poverty Measure, which accounts for government transfers, estimates that Social Security alone lifts approximately 22 million Americans above the poverty line annually — more than any other government program. For the oldest Americans (those 80 and above), who have the least capacity to supplement income through work and the most depleted savings, Social Security is often the difference between poverty and not-poverty.

The program's financial situation is serious but not catastrophic — and the gap between the actual problem and the political rhetoric around it is significant. The 2024 Social Security Trustees Report projects that the combined trust funds will be exhausted around 2035. At that point, incoming payroll tax revenues would be sufficient to pay approximately 83% of scheduled benefits — not zero, not bankrupt, but a meaningful 17% cut to all beneficiaries unless Congress acts. This outcome is not a secret or a surprise: the shortfall has been visible on Trustees projections for decades, growing as the demographic math of Baby Boom retirement became clear. The problem is real; the solution is not mysterious. The Social Security actuaries have modeled dozens of reform combinations that would close the gap — ranging from a modest increase in the payroll tax rate to eliminating or raising the taxable wage cap (which would significantly improve solvency by capturing more high-income earnings) to modest benefit adjustments to some combination of all three.

The politics of Social Security reform are frozen in a specific way that prevents solutions that polling suggests the public would accept. Benefit cuts are extremely unpopular across party lines — Social Security is often described as the 'third rail of American politics.' Tax increases on payroll or high incomes are also opposed by the Republican coalition. The result is that Congress has not enacted significant Social Security reform since 1983, when a bipartisan commission chaired by Alan Greenspan produced a package of benefit adjustments and revenue increases that extended solvency for decades. The political logic of that moment — a Democratic House, a Republican Senate and president, and a crisis that was literally weeks away — has not recurred, and each year of delay reduces the range of available adjustments and requires more dramatic eventual action. The longer the shortfall goes unaddressed, the larger and more sudden the eventual fix must be.

The privatization debate — periodically revived by conservative politicians who propose allowing workers to invest some portion of their payroll taxes in private accounts — misunderstands Social Security's fundamental nature in a way that illuminates what the program actually does. Social Security is not a bad investment strategy; it is an insurance program, and comparing its 'return' to stock market returns conflates two different things. Private accounts cannot provide the longevity insurance, disability insurance, and survivor insurance that Social Security provides, cannot guarantee income that doesn't run out regardless of how long you live, and cannot pool mortality risk across the population. They also create an enormous transition cost: if current workers redirect contributions to private accounts, the money to pay current retirees (who paid into the system their entire working lives expecting it to fund their retirement) must come from somewhere else. The George W. Bush administration's 2005 push for partial privatization failed even with a Republican Congress once the transition costs and risk shifts became clear.

Sources & Further Reading

  1. The 2024 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds Social Security Administration (2024)
  2. Social Security: What Would Happen If the Trust Funds Ran Out? Congressional Research Service (2023)
  3. How Social Security Keeps 22 Million Americans Out of Poverty Center on Budget and Policy Priorities (2023)
  4. Social Security Benefits, Finances, and Policy Options Congressional Budget Office (2024)
  5. Social Security: A History Social Security Administration (2024)