Understanding Social Security

The past, present, and future of this vital safety-net program.

Social Security is probably one of the most misunderstood federal programs. Some believe it’s an endless savings account that will be available to Americans forever. Others believe that it’s an illegal, bankrupt Ponzi scheme. What I will discuss here is the history of Social Security, how that led to the way the program is run today, and what the future holds.

Social Security was started in 1935 during the throes of the Great Depression. The program was built to provide a minimum amount of financial security for retired elderly and their survivors. In the 1950s, the disability insurance (DI) benefit was added.

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The program is the largest federal budget item, making up approximately 25 percent of all federal spending.

The program is the largest federal budget item, making up approximately 25 percent of all federal spending. It currently provides benefits to more than 20 percent of Americans, 86 percent of whom are retirees or beneficiaries of deceased workers. The remaining 14 percent receive disability benefits through the DI program.


In order to qualify for Social Security benefits, a worker needs to be employed and have paid Social Security taxes for 10 years. Currently, individuals pay 6.2 percent of their wages into a Social Security trust fund, and their employers match with an equal percentage. This amount is applied to up to $132,900 of annual income.

Individuals can start receiving Social Security benefits as early as age 62. In order to receive full benefits, an individual would need to begin distributions no earlier than age 66 (or their full retirement age). However, 90 percent of Social Security recipients take their benefits before reaching their full retirement age. The average Social Security payment is $1,418 a month; the maximum possible Social Security monthly payment for a person retiring at full retirement age is $2,861 for 2019.


Currently, the Social Security combined trust funds contain approximately $2.9 trillion, and for many years they were running a surplus. However, since 2010, they’ve been running a deficit, which will continue as long as the current funding mechanisms are in place. The two primary factors for this are:

  1. Two decades ago, 3.5 workers paid into the system for every retiree. In 10 years, there will be 2.2 workers for every retiree.
  2. Increased life expectancy.

The trust funds are scheduled to become insolvent around 2034. At that point in time, the projected payout will be 77 cents on the dollar.

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In 1983, Social Security was months away from insolvency. An agreement was made that gradually increased both the revenue and the retirement age. This agreement created enough revenue and pushed out expected payments, making the program whole for a while, and it did not affect payments being received by current recipients, which made it politically feasible.

We will soon face a similar situation. There are only two ways to make sure that future and current recipients get 100 cents on the dollar:

  1. Increase taxes.
  2. Push out the eligibility date for recipients.

In 1983, this was the compromise solution that the government reached to prolong the life of Social Security. Personally, I suspect we’ll see a similar compromise made in the near future.