against them” mentality (taxpayers may ask, “Why should we have to support other
people?”), Social Security does not pit citizens from different classes or ethnic groups
against each other. Social Security is also popular because it works. It is more efficient
than most privately managed pensions, with about 0.8 percent going to administrative
expenses, compared with the average mutual fund that spends more than 1 percent.
More important, Social Security has accomplished its central goal of helping most
Americans have an adequate retirement income: fewer than 10 percent of the elderly
are in poverty today (8.8 percent), which is a lower rate than for the general public (see
What Do the Facts Say?) and significantly lower than the 35 percent of the elderly who
were in poverty in 1960. Census data also show that 40 percent of the elderly would be
in poverty today without their Social Security payments.^42How Social Security Works Before we examine the various proposals to change
Social Security, it is important to understand how the program works. Social Security is
funded by a payroll tax of 6.2 percent on income up to $128,400 (in 2018) with an equal
6.2 percent that is paid by employers. (The self-employed have to pay both halves.) The
payroll tax has an additional 1.45 percent on all income for Medicare (which we will
discuss later). This is considered a regressive tax because poor and middle-income
people put a higher percentage of their income toward the Social Security tax than
wealthy people do. The maximum Social Security tax you can pay is $7,961 a year,
which is 6.2 percent of $128,400. So a millionaire would pay less than 1 percent of his
or her income in the Social Security payroll tax (0.796 percent, to be exact) compared
with the 6.2 percent that everyone earning less than $128,400 pays. Although the
taxes are regressive, the benefits are progressive; that is, poorer people receive back
in benefits a larger share of their lifetime payroll taxes than wealthy people receive
(see Nuts & Bolts 16.2).
In 1983 several changes were made to Social Security to strengthen its long-term
finances. One significant change was a gradual increase in the retirement age from
65 to 67. People born in 1937 or earlier could retire in 2002 at age 65 and receive full
benefits. Between 2003 and 2027 the retirement age increases gradually to 67 forSocial Security
Number of Recipients for Old-Age, Survivors, and Disability Insurance
Old-Age Insurance (the basic retirement program) 46,1004,000Survivors Insurance (retirement program for widows, widowers, and the children of deceased primary
wage earners)6,010,000
Disability Insurance (payments for people and their families who cannot work because of a disability
and are not yet retired)10,345,000
Monthly Retirement Benefits
Individual Average: $1,372 Maximum: $2,788Couple Average: $2,283 Maximum: $4,879Sources: Figures on the number of recipients are from the U.S. Social Security Administration Office of Policy, “Monthly Statistical Snapshot, May 2018,”
Table 2, http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/index.html; figures on monthly benefits are from Social Security Administration, 2018 OASDI
Trustees Report, June 5, 2018, Table V.C7, p. 150, http://www.ssa.gov/OACT/TR/2018/tr2018.pdf (both accessed 7/5/18).NUTS
& B O LT S
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