Launched in 1935 as part of Franklin Roosevelt’s New Deal, the term social security refers to a federal social insurance program that seeks to keep retired people and the elderly out of poverty. All employers and workers are automatically taxed a certain portion of their wages—7.5 percent for workers as of 2007. This money is then paid out to people who have retired from the work force or who are unable to work.
Many people erroneously believe that social security functions as a pension system and that retired people withdraw money from an account filled with funds saved from a lifetime of working. In reality, social security money exists in one enormous account, funded by today’s working people. Workers’ taxes pay to support today’s retirees. As a result, the money a person gets from social security is not always the same as the amount he or she has put in: Some people will receive more, and some people will receive less. Social security is an entitlement program, which means that certain people are entitled to benefits from the federal government.
The Worker-to-Retiree Ratio
Because social security relies on current workers to pay for benefits to current retirees, the ratio between workers and retirees is important. Ideally, each retiree is supported by a large number of workers so that each worker only has to pay a small part of the retiree’s benefits. As baby boomers grow older, however, more retirees will be eligible for benefits, which reduces the ratio and increases the amount each worker must contribute to social security. In 1946, the ratio was roughly forty workers per one retiree. Researchers project that by the time the baby boomers have all retired in 2030, the ratio will have shrunk to two workers per one retiree.
The Social Security Crisis
Many people worry about an impending social security crisis of having to fund too many retirees from the salaries of too few workers. Although the program has been running a surplus for many years, eventually people will be drawing social security benefits at a rate faster than workers can contribute. This deficit will force the government to either find money elsewhere to maintain benefits or drastically cut those benefits. Analysts also worry that a social security deficit will hurt the federal budget because many agencies have been borrowing from the current social security surplus. These agencies will eventually have to repay their debts to the social security program, causing massive upheaval in federal finances.
Politicians and political scientists have proposed a number of ways to save social security before the crisis hits:
- Raising taxes: Raising payroll taxes—either by increasing the payroll tax rate or by raising or eliminating the ceiling on income subject to the social security tax—would generate more social security funds.
- Reducing benefits: Cutting benefits would save money.
- Means-testing: Reducing benefits given to the rich would increase the amount of social security money available to the poor.
- Privatizing: Allowing workers to decide how much to invest in Social Security is an extremely controversial program because it forces workers to take responsibility for their contributions.