Back in 1940, there were 222,000 Social Security beneficiaries who received an average monthly benefit of $22.71 (in case you’re wondering, Ida Fuller was the first person to receive a Social Security check that same year). Today, over 71 million Americans receive a Social Security check with an average monthly benefit of approximately $1,706.98.

As you can see, the program has not only grown significantly but also evolved to a large degree since its inception. In this post, we’ll cover some important facts—many of which you may not be familiar with—as well as the program's impact on Americans.

Social Security is the largest source of income for many retirees

Signed into law on August 14, 1935, the Social Security Act was designed to address high poverty rates among senior citizens that were estimated to exceed 50 percent during the Great Depression. While these numbers have significantly improved over the years (10.3% in 2021, for example, per the latest U.S. Census Bureau data), a significant number of seniors still rely on Social Security as a form of income.

The most recent Social Security Administration data reveals that nine out of ten people ages 65 and older were receiving a Social Security benefit as of December 31, 2022. Among this group of beneficiaries, Social Security income represents 50% or more of total income for 37% of men and 42% of women. For 12% of men and 15% of women ages 65 or older, meanwhile, Social Security income represents 90% or more of their total income.

Poverty would be much higher if it weren’t for Social Security

The Center on Budget and Policy Priorities, a nonpartisan research and policy organization, estimates an additional 21.7 million adults and children would fall below the poverty line in the absence of Social Security (with over 70% of those impacted ages 65 and older).

Social Security benefits should keep up with the cost of living but in fact lag

The Social Security Administration (SSA) is required by law to prevent inflation from eroding the purchasing power of benefits paid to recipients, doing so by making cost-of-living adjustments (COLA): meaning automatic increases to benefit amounts.

Cost-of-living adjustments are based on the Consumer Price Index (CPI-W), which tracks retail prices as they affect urban hourly wage earners and clerical workers. The Bureau of Labor Statistics calculates these adjustments on a monthly basis, with the Social Security Administration announcing the same every October. Recipients typically see the corresponding benefit beginning in January of the following year.

While COLA may sound great on paper, the purchasing power of Social Security has actually eroded over time. That’s because the CPI-W underweights specific sectors that experience very steep prices: including prescription drugs, homeowners insurance, property taxes, and fresh fruits and vegetables. What’s more, different indexes that measure Medicare and Social Security adjustments lead to Medicare premium increases that occur at a faster rate.

According to the Senior Citizens League—one of the nation’s largest nonpartisan seniors groups—Social Security benefits have lost 36% of their buying power since 2000. The League states that while COLAs boosted Social Security benefits by 73% between January 2000 and February 2023, the cost of goods and services purchased by typical retirees skyrocketed over 141.4% during that same period.

Social Security provides more than just retirement benefits

Almost 67 million Americans (on average) receive a monthly Social Security benefit, meaning over 1.3 trillion dollars are spent annually on this effort. While the majority (78.16%) of recipients are retired workers and their dependents, disabled workers and their dependents most recently accounted for 13.07% of total benefits. In comparison, survivors of deceased workers accounted for 8.76% of benefits as of June 30, 2023.

Hover over the pie chart below to see data.

The payroll tax finances Social Security

The federal government charges a payroll tax—FICA (Federal Insurance Contributions Act)—to fund Social Security and Medicare programs. This tax is levied on employees and employers, who each contribute 7.65% and 6.2% (currently) toward Social Security. Self-employed workers pay the full 15.3%, of which 12.4% is allocated towards Social Security, however, they can generally deduct half this rate (7.65%) when filing their tax returns.

An income cap for the Social Security portion of FICA ($160,200 in 2023) means any earnings beyond this threshold are not subject to Social Security tax. While Medicare taxes don’t have a wage limit, higher-income employees do pay more into Medicare as they are assessed an additional Medicare tax of 0.9%. In 2023, higher income earners are defined as single filers earning over $200,000 and married couples filing jointly/earning over $250,000. This additional tax—which applies to employees and the self-employed—was enacted in January 2013 as part of the Affordable Care Act.

The current payroll tax rate was established in 1990, although the government has modified this twice in response to economic downturns: first in 2010 (as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act) and again in 2012 when the tax cut was extended for an additional year.

Future retirees may face a strain

Stats don’t lie: America is aging. In 1920, about 1 in 6 people in the United States were age 65 or older (according to the U.S. Census Bureau). Today, approximately 16.8% of America falls within this demographic, based on the most recent census. With the Bureau projecting that about 20% of Americans will be older than age 64 by 2040, the federal government will thus need to pay out additional benefits. Exacerbating this problem is a glaring issue outlined in a recent Social Security Administration report: we’re living longer and having fewer kids, meaning less money paid into the system over time and a subsequent funding gap for future retirees. Congress has tossed around possible solutions to help bridge this gap, including an increase in the full retirement age or reducing benefits to wealthier recipients; time will tell as to which solution(s) are eventually passed into law.

Social Security benefits aren’t guaranteed

Although you might hear otherwise, know that Social Security benefits are not guaranteed: meaning no contracts or special rights exist to promise such benefits. That said, it’s better to think of Social Security as a government spending program: one that Congress and the president may change, reduce, or even—although highly unlikely—eliminate at any time. This is yet another reason why it’s more critical than ever to seek out additional income streams during retirement.

Your Social Security benefits can be taxed

Unfortunately, Uncle Sam doesn’t retire when you do. In fact, your Social Security benefits are liable to federal taxes depending on the earnings listed on your income tax return. If your total income is more than $25,000 (for an individual) or $32,000 (for a married couple filing jointly) in 2023, you must pay taxes on your Social Security income—knowing the amount of your benefits subject to taxation varies based on income level. Some states also levy taxes on Social Security income. That said, it’s critical to consider taxes when calculating your cash flow needs during retirement.

States that currently tax Social Security include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montanta, Nebraska, New Mexico, Rhode Island, Utah, and Vermont.

In sum: Social Security facts

Now armed with a macro-level picture of Social Security, you can further advance your knowledge of program specifics (which are a bit complex, akin to most government programs) by clicking here to access our library of Social Security articles.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.