Social Security: What is it, how did it start, and will it last?
by Emily Lucero
Key Takeaways:
- The Past: The Social Security program was introduced in 1935 during the Great Depression to help retired workers support themselves.
- The Present: Since then, Social Security has been expanded to help more and more people– in 2022, 22.5 million workers were kept out of poverty by the program.
- The Future: Without action from Congress, an important trust that helps fund the program will run out of money by 2034.
Retirement may seem far away for some and just around the corner for others. No matter where you’re at, you’re probably asking yourself the same question as everyone else– to what degree will I be able to rely on Social Security as an income source in retirement? Before we dive into the current state of the Social Security system, let’s examine the past.
The Social Security Act was passed in 1935 to reduce poverty levels among older Americans. At the time, the U.S. economy had crumbled under the weight of the Great Depression, and more than half of seniors lacked the means to support themselves financially. The Social Security program replaced many ineffective state-run pension plans, providing retired workers aged 65 and older with a reliable source of income[i].
Social Security has since expanded to cover other types of beneficiaries – the spouses of retired workers, survivors, and disabled workers – and the program has been relatively successful. Benefits kept nearly 22.5 million individuals out of poverty in 2022, according to the Center on Budget Policy and Priorities. There is no question as to the importance of Social Security as it relates to retirees’ reliance on the system for their livelihoods– some would argue it’s relied on a bit too much.
After all, Social Security was only designed to replace a percentage of a person’s pre-retirement income, meaning other retirement assets are critical to maintaining lifestyle in retirement.
Let’s look at how it stands now. Without congressional action, the trust that partially funds Social Security retirement benefits is projected to be depleted by 2034. Keep in mind that the separate FICA payroll taxes working citizens pay fund the majority of the benefit obligation. While Congress is likely to step in before the trust empties, the program as a whole still faces serious challenges, and retirement savers should brace for some degree of benefit cuts, higher taxes, or other changes. Lawmakers could raise taxes to increase inflows, cut benefits to slow outflows, raise the retirement age, or some combination of these options.
They might also look to infuse some general revenue into the program, either through a loan or a one-time transfer that would add to the country’s debt, says Kathleen Romig, director of Social Security and Disability Policy at the Center on Budget and Policy Priorities. “Since benefit cuts and tax increases are usually phased in over time, the longer Congress waits to act, the more likely it will need to add general revenue to raise quick money and plug the shortfall,” Romig says.[ii]
The good news for those currently receiving benefits is that any changes made to the programs benefit likely won’t affect them. Even if Congress waits a decade or so to act, experts think that anyone who is 55 and up probably doesn’t have to fear cuts. Congress will most likely want to give people time to adjust their plans and doesn’t want to face the blowback of making changes too quickly.
While we await Congress’s next move, the best course of action is to make a backup plan to help support yourself and ensure alternative income sources in retirement. Having a financial plan prepared can help determine how best to do so. Through the planning process you can model different outcomes for Social Security benefits and how that will affect your retirement. If you have specific concerns, let us know! We are always happy to discuss this further with you.
Read More:
- Are We In a Baby Boomer Retirement Crisis?
- Older Investors Are Seen as Patient. In Market Downturns, They’re Anything But
- The Five Best Retirement Plans
[i] https://www.fool.com/retirement/2022/10/31/americans-worry-social-security-run-out-of-money/
[ii] https://www.barrons.com/articles/social-security-breaking-point-51662735746