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Understand The Social Security System In 2024

So, let´s dig a little deeper into the basics of it! The Social Security Administration (SSA), headquartered in Woodlawn, Baltimore County, Maryland, is responsible for Social Security in the USA. The SSA also issues a Social Security Number (SSN).

The program’s goal is to partially replace income lost due to old age, the death of a spouse (or qualifying ex-spouse), or disability.

The American pension system is divided into several parts, and these basic parts are generally known as Social Security:

  • Old Age Insurance (OAI) – Old age pension
  • Old Age Survivors Insurance (OASI) – widow’s and orphan’s pension
  • Old Age Survivors Disability Insurance (OASDI) – Disability pension
  • Supplemental Security Income (SSI) – A welfare program that assists disabled, blind, and impoverished seniors
  • Temporary Assistance for Needy Families (TANF) – A services program for low income families with minor children.

Social Security was created in 1935 to provide economic security to the nation’s elderly. It was expanded in the 1950s to include support for the disabled. The program is operated largely on a “pay-as-you-go” basis. Current employers and employees contribute taxes that fund benefits to retired workers and survivors in the Old-Age and Survivors Insurance (OASI) program and disabled workers and their families under the Disability Insurance (DI) program.

social security system

Today, Social Security is the largest program in the federal budget and typically makes up almost one-fifth of total federal spending. The program benefits nearly 70 million, or about 20 percent of Americans. Nearly 9 out of 10 individuals over the age of 65 receive benefits, and those benefits represent about 30 percent of the total income of older Americans.

Who Receives Social Security Benefits?

Retired workers account for 74 percent of the program’s beneficiaries. Disabled workers make up another 11 percent of beneficiaries. The remainder are the survivors of deceased workers as well as spouses and children of retired and disabled workers.

Social Security is a major source of post-retirement income for low-income seniors. For seniors at the bottom of the income distribution, benefits comprise over 80 percent of their yearly income.

However, the benefits received by low-income retirees are modest. Workers who earned an average of $26,400 per year before retirement would receive only $15,575 per year in Social Security benefits if they retired this year at the full retirement age.

  • Workers become eligible for Social Security benefits for themselves and their family members by working and paying Social Security taxes.
  • Generally, a worker must have 10 years of employment to be eligible for retirement benefits. Disability benefits depend on the worker’s earnings before disability and the worker’s age at disability.
  • A worker’s initial monthly benefit under the OASI program is based on their average indexed monthly earnings during the 35 years in which their earnings were highest.
  • Benefits are calculated using a progressive formula that provides a higher replacement rate for workers with lower earnings.
  • In 2022, workers who retired at age 67 with $26,400 in career-average earnings would receive Social Security benefits that replaced 59 percent of their pre-retirement earnings. By contrast, Social Security benefits to workers earning $59,000 would replace only 44 percent of their career-average earnings.
  • Full benefits are payable at the normal retirement age, which is between 65 and 67, depending on one’s birth year.
  • Early retirement is possible at age 55, but benefits would be subject to a permanent reduction. The Social Security program will benefit you by the start of age 62. Similarly, if retirement is delayed, benefits would be higher when they go into effect. However, nearly half of retirees claim their benefits as early as possible, and about 90 percent claim them before their full retirement age.

Disability benefits are paid to people who cannot work due to a medical condition that is expected to persist for at least one year or result in death. Social Security does not grant benefits to individuals with partial or short-term disabilities. The Social Security Administration also benefits disabled adults and children with limited income and resources under the Supplemental Security Income program. That program is reported separately in the budget.

How is Social Security Funded?

Social Security is mainly funded through a dedicated payroll tax created by the Federal Insurance Contributions Act.

Employers and employees each pay 6.2 percent of wages, with a cap on wages subject to the tax ($160,200 for 2023, adjusted annually for growth in economy-wide wages). Self-employed people pay the employee’s and the employer’s share of the tax. Those revenues are credited to the OASI and DI trust funds, which track the programs’ receipts and expenses.

The programs also receive income from a tax on Social Security benefits paid by higher-income beneficiaries and income generated by the investment of the trust fund reserves in non-marketable U.S. Treasury securities. However, from the government’s overall budget perspective, the interest income paid to the trust funds by the Treasury has no effect. Although it is a receipt to the trust funds. It is an equal dollar expense to the Treasury.

Mechanics of Social Security´s Trust Funds

Income is credited to the funds, and disbursements for benefits and administration are counted against the funds’ balances. The Social Security Administration has the legal authority to spend any accumulated balances and incoming revenues. However, spending cannot exceed incoming revenues once a trust fund balance reaches zero.

As with other trust funds, Social Security’s surpluses are credited with securities issued by the Treasury. That excess income reduces the new federal borrowing necessary to finance governmental activities. The reverse happens when the trust funds’ revenues fall short of their expenses.

  • The Social Security system faces major financial challenges. If reforms are not enacted, beneficiaries could face across-the-board benefits cut of 20 percent in 2034 (on average) when the combined trust fund reserves are depleted. Because of the critical importance of this program for ensuring financial security for many retired and disabled people with low incomes.

Reforms are needed to ensure that the program can continue to provide benefits.

Any viable reform package will need to balance two priorities:

  • Adequacy of benefits for recipients and financial sustainability for the federal government.
  • It should be announced and phased in gradually to give people time to prepare and adjust their savings and retirement plans. There are many possible solutions, so talk to a social worker specialising in the topic or a top-vetted advisor to learn more about all your possibilities!

Disclosure: This information is for educational purposes only and should not be construed as financial advice. Please consult with a qualified financial advisor before making any investment decisions.

bill wallace author teacher retirement plans

About Author

Bill Wallace blends his academic background in Literature with his ventures in International Business and finance. His professional journey took him across Europe, especially in Spain, where his passion for writing evolved. Since then, armed with his literary finesse and investment acumen, he has been crafting financial content for teachers worldwide. More about me.

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