History of Social Security

How Social Security Works

History of Social Security

Social Security began in 1935 as part of the New Deal package of strategies put forth by President Franklin D Roosevelt. The government uses the money paid in by workers and employers to pay back benefits to those workers for retirement, disability, survivorship, and death. TSocial Security Cardhe first lump-sum payout was a whopping seventeen cents, paid to Emest Ackerman who retired one day after Social Security began! He had paid in five cents. The first monthly payment went to Ida May Fuller in 1940. Hers is an interesting story. Ida worked from 1937 to 1939. Her total payment into the system was $24.75. Her first check paid $22.54. By her second payment, Ida was 'in the money' by having received more than she paid in. Ida lived to the ripe age of 100 and collected a total of $22,888.92. No THAT $24.75 was invested well!

From Whence the Money Cometh

How Social Security Works

Today Social Security revenues come from a payroll tax, the Federal Insurance Contributions Act, FICA, paid by employers and employees. Both entities pay in 6.2% for a total of 12.4%. Money is also raised through interest earned on monies in the reserve and by income taxes paid on benefits by higher-income retirees.

Taxpayer Paying Uncle SamSocial Security Status in 2011

A shortage is looming ahead. Money put in verses money taken out tells the story. Predictions exist for funds depletion by 2036 unless the government reforms the system. Currently, the funds are growing. In other words, more is coming in than going out. The Trust Fund, which is where the 'dollars in' go, will peak in 2022 with a worth about $3.7 trillion at that time. The outlook heads down from there. Why is that so?

As the years tick on, birthrates are lower and life spans are longer. Longer life spans mean larger payouts. Fewer people born ultimately tell a tale of fewer people paying in. Unemployment rates, which have been high, means less money paid into the system.  No  raises have occurred in the payroll tax  system since 1990.

Solving any money crises involves looking at money put in verses money taken out. The Social Security system is no different. To close the dollar gap, costs will need lowering and more revenue raised. How can that be done? Fancy talk travels the airwaves about a solution. There are two primary ways to do this.

  1. Raise more money to increase dollars paid in.
  2. Adjust benefits to control dollars paid out.

The Options to Raise Revenue Coming In

  1. Institute an increase for employers and employees of the payroll-tax. An increase to 6.7% from the current 6.2% would cut the shortage by half.
  2. Raise the ceiling on income that is subject to FICA taxes. This is an interesting concept. Currently, that income cap is at $106, 800. With the cap removed altogether, almost 100% of the gap would be eliminated.
  3. Increase the base of income for FICA taxes. This option, which would lessen the shortfall by 11%, affects benefits now not subject to tax, such as flexible-spending accounts.

The Options for Adjusting Benefits Going Out

  1. Boost retirement age from 67 to 70 years. This action would lessen the shortage by 65%.
  2. Adjust benefits paid out for increased life expectancies. Lower annual benefits pay out in this plan. An interesting side note on this one is that lower-income Americans have shorter life spans. Therefore this solution would hit them the hardest.
  3. Adjust the formula for determining the annual cost-of-living adjustment. A commission has recommended this. Using a slower rising index than the one now used would save dollars.

Elimination of Social Security

Chatter always exists about eliminating the Social Security system and going to a privatized plan like IRAs.

Social Security begs for attention as taxpayers look at retirement and investment strategies. To examine how Social Security works is to see both the benefits of the system and simultaneously realize the need for investments beyond  system.