Many people think, when they pay Social Security taxes, the government holds their money in a personal retirement account for them. This is not so. Social Security is a “pay-as-you-go” social insurance program. Payroll taxes paid by today’s workers and their employers are used to pay the people currently receiving benefits. When today’s workers retire, people in the workforce during their retirement will fund their benefits.
Social Security isn’t a pension system. Pensions are pre-funded: the money needed to pay workers in retirement is accumulated in advance so it will be available to the workers when they retire.
Social Security is not a program where workers contribute to their own retirement benefits. Instead of an account in their name containing their contributions, workers have a record of their wages earned and payroll taxes paid. When they retire, their benefits are calculated from their earnings, work history, and other factors.
Social Security is not invested in stocks or bonds or other financial instruments. When the Social Security Administration collects more money than it pays out, the funds go into Social Security trust funds and are converted to special-issue Treasury bonds. Interest from those bonds is credited back to the Social Security trust funds and used to pay benefits as needed.
Social Security is not intended to replace anyone’s pre-retirement income; it is intended to supplement retirees’ own savings, investments, and other sources of money. Social Security was designed to help alleviate poverty. It came into being in 1935 as part of President Franklin D. Roosevelt’s New Deal. At that time, millions of Americans, including retired and elderly people, had lost everything they owned and were destitute.
Social Security still plays a significant role in keeping older Americans, children and people with disabilities out of extreme poverty. When retirees have other sources of money, Social Security is a smaller portion of their incomes. When they have little or no savings, however, Social Security is a significant source of income. According to the National Academy of Social Insurance, Social Security is more than half of total income for 65 percent of Americans aged 65 and older, and the sole source of income for 21 percent of this same age group. The National Academy of Social Insurance says, “Overall, Social Security keeps 21 million Americans out of poverty, including nearly 14.5 million seniors and 1 million children.”
People whose primary source of income is Social Security are not wealthy. Many depend on government assistance for housing, food and medical care.
Social Security was designed to be, and remains, social insurance. A retirement plan it is not.
This article is the second in a series of three on Understanding Social Security. This blog is published to provide you with general information only, and is not intended to provide specific or comprehensive advice. Money Care, LLC encourages individuals to seek advice from competent professionals when appropriate.
Social Security is quite complex with many rules and formulas determining who is eligible for benefits and when. If you have questions on your situation, please contact your local Social Security office or visit www.ssa.gov. If you would like to read an in-depth report on Social Security, how it works, and thoughts on its future, check out “How Social Security Works in 2014” by Romina Boccia at www.heritage.org.
Blog text © 2015 by Money Care, LLC
