Social Security is the cornerstone of retirement security for American workers and their families; for more than two decades it has provided more than half of the total income for nearly two-thirds of elderly beneficiaries.
For more detailed factual background on the Social Security program - including its benefits, financing, and policy options - please see NASI's recently updated learning tool, Social Security Benefits, Finances, and Policy Options: A Primer.
Social Security is the foundation of economic security for millions of Americans—retirees, disabled persons, and families of retired, disabled or deceased workers. About 157 million Americans pay Social Security taxes and 56 million collect monthly benefits in 2012. About one household in four receives income from Social Security.
Social Security is largely a pay-as-you-go program. This means that today's workers pay Social Security taxes into the program and money flows back out as monthly income to beneficiaries. As a pay-as-you-go system, Social Security differs from company pensions, which are “pre-funded.” In pre-funded retirement programs, the money is accumulated in advance so that it will be available to be paid out to today's workers when they retire. The private plans need to be funded in advance to protect employees in case the company enters bankruptcy or goes out of business.
The average Social Security benefit in January 2012 was:
The maximum Social Security benefit for a worker retiring at the 2012 full retirement age (66) is $2,366 a month.
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* The views of NASI members are their own and not an official position of the National Academy of Social Insurance or its funders.
Workers and employers pay for Social Security. Workers pay 6.2 percent of their earnings up to $110,100 a year in 2012. (The cap on taxable earnings usually rises each year with average wages.) Employers pay a matching amount for a combined contribution of 12.4 percent of earnings. Self-employed persons pay both the employee and employer share for a total 12.4 percent. (Half of this contribution, the employer share, is a deductible business expense for income tax purposes.) Also, higher-income Social Security beneficiaries pay federal income taxes on their benefit income, and these taxes help pay for Social Security.
For 2011 and 2012, the premiums that workers pay for Social Security protection were temporarily reduced from 6.2 percent to 4.2 percent. Employers continue to pay the 6.2 percent rate. This “payroll tax holiday” – enacted in 2010 and then extended through 2012 – is scheduled to end at the end of 2012. The lost revenue to the Social Security program – some $103 billion in 2011, and likely a similar amount in 2012 – is being made up from the government’s general fund.
In 2012 the average worker made $44,644 a year, according to the Social Security Administration. This worker paid $1,875 in Social Security taxes in 2012 (4.2 percent of salary, due to the payroll tax holiday), and the employer paid $2,768 (or 6.2 percent), with their combined taxes being $4,643. The maximum tax for workers is set at $4,485 in 2011, and approximately 5 percent of all workers will earn more than the $110,100 tax cap. Earnings above the cap now account for 16 percent of the aggregate pay of all workers who pay into Social Security.
An additional tax on workers' earnings pays for Medicare hospital insurance. This is a 1.45 percent levy, paid by workers and employers each on all wages, for a total tax of 2.9 percent. Self-employed persons pay 2.9 percent.
Examples: Jon Smith makes $50,000 in 2012, and Jane Doe makes $120,000 for the year. In most years, Jon would pay $3,100 for Social Security (6.2 percent of $50,000) and $725 for Medicare (1.45 percent of $50,000) for a total of $3,825 for the year. His employer would pay an identical amount. Jane would pay $6,826 for Social Security (6.2 percent of the 2012 maximum wage base of $110,100) and $1,740 for Medicare (1.45 percent of $120,000 salary), for a total of $8,566 for 2012. Her employer would pay the same.
In 2012, due to the temporary payroll tax reduction, Jon would contribute $2,100 to the Social Security program (4.2 percent of his salary), and Jane would contribute $4,624. Their employers’ contributions would not change.
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* The views of NASI members are their own and not an official position of the National Academy of Social Insurance or its funders.
About 56 million people collect Social Security benefits each month, and they account for about one in six people in the United States. In about one household in four, someone is receiving Social Security benefits.
About 36 million retired workers receive benefits and another 2.9 million individuals receive benefits as spouses or children of retired workers. A total of 6.3 million people receive benefits as survivors of deceased workers, and these beneficiaries include 4.0 million aged widows and widowers and 1.9 million children. Another 8.7 million people receive benefits as disabled workers, and 2.1 million people receive benefits as the child or spouse of a disabled worker. A total of 3.3 million children under age 18 receive Social Security and another 1.0 million adults who have been disabled since childhood get benefits as dependents of a retired, disabled or deceased parent.
Total Beneficiaries: 56,174,638
| Beneficiaries | Number of Beneficiaries | Average Monthly Benefit |
|---|---|---|
| Retired Workers and their Families | 39,096,606 | |
| Retired workers | 36,202,371 | $1,234 |
| Wives and husbands of retired workers | 2,284,752 | $610 |
| Children of retired workers | 609,483 | $605 |
| Survivors of Deceased Workers | 6,279,346 | |
| Widows and widowers and parents aged 60 and older | 3,960,341 | $1,190 |
| Children of deceased workers | 1,911,337 | $786 |
| Young widows and widowers | 152,091 | $880 |
| Disabled widows and widowers | 254,110 | $702 |
| Disabled Workers and their Families | 10,798,686 | |
| Disabled workers | 8,733,461 | $1,111 |
| Wives and husbands of disabled workers | 165,469 | $299 |
| Children of disabled workers | 1,899,756 | $330 |
Source link: http://www.ssa.gov/cgi-bin/currentpay.cgi
In 2011, Social Security paid $725 billion in benefits to retired workers, disabled persons, and dependents of retired, disabled or deceased workers. Of the total benefit payments, 67 percent was paid to retirees and their families, 15 percent was paid to survivors of deceased workers, and 18 percent was paid to disabled workers and their families.
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* The views of NASI members are their own and not an official position of the National Academy of Social Insurance or its funders.
The Social Security full-benefit retirement age is increasing gradually because of legislation passed by Congress in 1983. Traditionally, the full benefit age was 65, and early retirement benefits were first available at age 62, with a permanent reduction to 80 percent of the full benefit amount. In 2012, the full benefit age is 66 for people born in 1943-1954, and it will gradually rise to 67 for those born in 1960 or later. Early retirement benefits will continue to be available at age 62, but they will be reduced more. When the full-benefit age reaches 67, benefits taken at age 62 will be reduced to 70 percent of the full benefit and benefits first taken at age 65 will be reduced to 86.7 percent of the full benefit.
There is a financial bonus for delayed retirement. An individual reaching the full-benefit age in 2012 (66 years) receives an additional 8 percent benefit for each year he or she delays collecting benefits. If he or she delays taking benefits until age 70, the benefit will be 32 percent higher because of that delay. The maximum retirement benefit for someone who waits until age 70 to collect benefits is $3,266 a month in 2012.
Most people claim Social Security before they reach the age for full benefits. Of people who started getting retired worker benefits in 2010, three out of four (72 percent) received benefits that are reduced for early retirement. Just under half (43 percent of men and 48 percent of women) first received benefits at age 62.
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Social Security retirement benefits are designed to replace part of a worker's earnings from work. The formula used to calculate these benefits takes into account lifetime earnings over 35 years. Social Security benefits replace a larger share of past earnings for low earners. While high earners receive larger benefits, their benefits replace a smaller share of what they had been making.
For example, a 65-year-old who retired in 2012 with a lifetime of “medium” earnings (about $43,000 in 2011) would receive about $17,500 a year, which would replace about 41 percent of past earnings. A “low” earner who made about $19,400 in 2011 would receive about $10,600, which would replace about 55 percent of prior earnings. A worker who always earned the “maximum” taxable amount ($106,800 in 2009-2011) would get benefits that replace about 26 percent of prior earnings.
Source: Annual Trustees' Report, Social Security Administration, 2012; Table V.C7
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Social Security is the major source of income for older Americans. About nine in 10 Americans aged 65 and older receive Social Security. For nearly two out of three of those beneficiaries (65 percent), Social Security was more than half their total income, and for one in three (36 percent), it is all or nearly all of their income. Social Security is a large share of income because many Americans age 65 and older lack significant income from other sources. Pensions (from private or government employment) were received by about half of married couples (from either the husband's or the wife's career). Among the unmarried, 38 percent of men and 34 percent of women had pensions.
Social Security is the sole source of income for about one in five (21 percent) of people aged 65 and older. Certain subgroups are particularly reliant on Social Security. Of those age 65 and older, Social Security is the sole source of income for 36 percent of Hispanics and African Americans, 25 percent of Asian and Pacific Islanders, 19 percent of whites, and 20 percent of unmarried women.
Social Security plays an important role in keeping older Americans out of poverty. The poverty threshold was $10,788 for an aged individual and $13,610 for an aged couple in 2011. About one in 10 Americans age 65 and older is poor, by this measure. If they had to rely only on their income other than Social Security, nearly half would be poor. Overall, Social Security keeps 20 million Americans out of poverty, including nearly 14 million seniors and 1 million children.
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Social Security taxes that workers and employers pay are credited to the Social Security trust funds. The trust funds are defined by law as a way to set aside money that is earmarked for Social Security. A Board of Trustees oversees the trust funds. It is made up of the Secretary of the Treasury, who is the managing trustee, the Secretaries of Labor and of Health and Human Services, the Commissioner of Social Security, and two public trustees from different political parties who are appointed by the President and confirmed by the Senate.
In 2011, the Social Security program received $805 billion in income and spent $736 billion for benefits and administrative costs, leaving a surplus of $69 billion in the trust funds. Total administrative costs amount to less than 1 percent of the funds collected each year.
What happens to the funds that are not used immediately to pay benefits? By law, the funds are invested in special-issue Treasury securities that earn interest. In effect, the funds are loaned to the Treasury, which borrows the money just as it borrows money when it sells Treasury securities to the public. In other words, the surplus money collected by Social Security helps pay for the rest of the government. In return for the funds it loans to the government, the trust funds receive Treasury securities bearing a market rate of interest. The average interest rate on the portfolio held by the Social Security trust fund was about 4.4 percent in 2011.
Because the federal government is spending the cash it borrows from Social Security, “some people see the current increase in the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future,” according to the Social Security Administration website. But, the agency states on its website, “Far from being ‘worthless IOUs,' the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. savings bonds or other financial instruments of the Federal government.”
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The Office of the Chief Actuary of Social Security makes projections about Social Security finances that are used by the Board of Trustees in their annual report to Congress. The report uses assumptions about population growth—including births, deaths, and net immigration—and the performance of the economy with regard to wages, prices, productivity, and unemployment. These projections are educated guesses about an unpredictable future. The Trustees offer three scenarios: high cost, low cost, and intermediate or "best estimate." According to the 2012 “best estimate,” assuming no changes are made in law:
Under the high-cost scenario, the trust funds would be depleted in 2027 instead of 2033. Under the low-cost scenario, Social Security would be fully financed for 75 years and beyond. The difference among estimates shows the great uncertainty about the long-term future.
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* The views of NASI members are their own and not an official position of the National Academy of Social Insurance or its funders.
A wide range of polls have consistently shown that the American public strongly supports Social Security, across party and demographic lines. For instance, a poll sponsored by NASI and the Rockefeller Foundation found that nearly nine in ten Americans (88%) say Social Security is more important than ever as a result of today’s economic crisis. Three-quarters of Americans say it is critical to preserve Social Security even if it means that working Americans have to pay higher taxes to do so.
With 56 million people receiving Social Security benefits, Americans recognize that Social Security is a crucial program. Across party affiliations, the large majority of Americans say they don’t mind paying Social Security taxes because of the stability and support the benefits provide to millions of retired Americans, disabled persons, and children and widowed spouses of deceased workers. 93% of Democrats, 85% of Independents, and 81% of Republicans express this view. Americans are also willing to pay for Social Security because they value it for their own families (75%) and for themselves (72%).
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Table 1 -- Reasons Americans Don’t Mind Paying Social Security Taxes
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Please tell me if you agree, or disagree with the statement. “I don’t mind paying Social Security taxes because:
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Reason don’t mind paying
Social Security taxes |
Total
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Democrats
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Independents
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Republicans
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Percent who strongly or somewhat agree
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I know that I will be receiving the benefits when I retire
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72
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84
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69
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63
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I know that if my parents, grandparents, or other family members did not receive Social Security, I would have to support them in their retirement
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75
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82
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76
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68
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It provides security and stability to millions of retired Americans, the disabled, and children and widowed spouses of deceased workers
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87
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93
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85
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81
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Source: Social Security Survey sponsored by the National Academy of Social Insurance and the Rockefeller Foundation, July-August 2009. N=1488.
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For more information, see:
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* The views of NASI members are their own and not an official position of the National Academy of Social Insurance or its funders.
Social Security faces a financial challenge from the impending retirement of the largest generation in American history, the 76 million persons born in the “baby boom” years, from 1946 through 1964. Boomers will begin to reach age 62 in 2008. The cost of Social Security will rise faster than tax income because the population over age 65 will grow faster than the working-age population. Both the baby boom generation and increasing life expectancy after age 65 contribute to an aging population. When Social Security began in 1935, life expectancy at age 65 was 12½ years. In 2011, it was 20.0 years for women and 17.7 years for men. By 2030, it is projected to be 21.1 for women and 19.2 years for men. But these gains in life expectancy are not shared evenly throughout the population, with less-advantaged groups generally seeing smaller increases in life expectancy. While the number of beneficiaries will grow, tax rates remain unchanged in current law.
By 2032, when the youngest boomers will have reached 67, Americans age 65 and older are projected to number 75 million, nearly doubled from 39 million in 2007. The beneficiary-to-worker ratio, which compares the number of people drawing benefits to the number of workers paying into Social Security, will rise from 35 per 100 in 2011 to 49 per 100 in 2035.
A broader measure, a consumer-to-worker ratio, portrays a smaller increase in the support burden on workers. The consumer-to-worker ratio compares everyone workers support – themselves, children, retirees, and other adults out of the workforce – to the number of workers. When baby boomers were children in 1960, every 100 workers supported 262 people in total. After the baby boomers grew up and were in the workforce by 1995, the total support burden declined to 200 persons for every 100 workers. By 2030, when the boomers are age 65 and older, the support burden is expected to rise to 221 persons per 100 workers. This would be a smaller support burden than when baby boomers were children.
Consumer-to-Worker Ratio Over Time
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Because more people will receive benefits, Social Security will grow faster than the total economy, or gross domestic product (GDP). How much faster will it grow as a share of the economy?
Social Security benefits now amount to 4.9 percent of GDP in 2012. By 2035, when the youngest baby boomers will have turned age 70, Social Security benefits in current law are projected to be 6.4 percent of GDP. That is an increase of 1.5 percentage points over what we are paying today in taxes.
How does that 1.5 percentage point increase compare with past changes in national spending when the baby boomers were children? Public spending for education grew about twice as much as the projected increase in Social Security. Public education spending – by local, state and federal governments – grew from 2.3 percent of GDP in 1950, just before boomers began to enter kindergarten, to 5.2 percent of GDP by 1975. This was an increase of 2.9 percentage points.
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While Social Security is projected to run surpluses through 2020, the 2012 Trustees Report estimates that the program will be able to pay only 75 percent of benefits by 2033. To fully finance benefits over 75 years, policymakers will need to choose between increasing revenues or reducing spending, or a combination of both steps.
Social Security has a long-run actuarial deficit equal to 2.67 percent of taxable payroll, according to the 2012 Trustees Report. This means that the deficit could be closed immediately if tax rates were raised from the 6.2 percent paid by both workers and employer (a total of 12.4 percent) to 7.6 percent each (or 15.2 percent in total). In other words, the deficit would be eliminated if workers and employers each paid 1.4 percent of wages more in Social Security taxes.
Options for increasing the system's revenues include:
Options for lowering benefits include:
For a discussion of various solvency options, see:
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* The views of NASI members are their own and not an official position of the National Academy of Social Insurance or its funders.
Various proposals call for prefunding Social Security by shifting a portion of Social Security taxes into individually held accounts. The debate about private accounts in Social Security is separate from the issue of how to close Social Security's financing gap. Individual accounts, by themselves, make no independent contribution to the long-term solvency of Social Security. In fact, shifting Social Security taxes out of the traditional system to fund personal accounts hastens the day when funds will be insufficient to pay scheduled benefits. All scheduled Social Security taxes are needed to pay benefits for current and future beneficiaries.
Plans to shift Social Security taxes to individual accounts change the form of Social Security. Creating individual accounts would change Social Security from a social insurance system, which pools risks broadly and defines benefits in law, to a system of personal accounts in which people get out what they put in, plus investment gains, and minus investment losses and administrative expenses. Individual accounts are based on a property, or ownership concept, while the traditional system is based on insurance concepts and risk pooling.
Supporters of traditional Social Security point to its long record of success in providing basic income security for older Americans, disabled workers and their families, and families of deceased workers. They say that the current form of Social Security works well and is essential to ensure a secure foundation for workers and their families. Private accounts introduce risks that should not be a part of the basic foundation of income security. Rather, they argue that private retirement savings are an important supplement to Social Security, but are poor substitute for any part of it. Proponents of traditional Social Security believe that its finances can be balanced through incremental changes.
How Would Money Be Paid Out of Individual Accounts?
Discussions of private accounts in Social Security have focused on how money would build up in the accounts. Yet questions about how money would be paid out of the accounts have been largely neglected. A 2005 NASI report, Uncharted Waters: Paying Benefits from Individual Accounts in Federal Retirement Policy, represents two and a half years of work by a non-partisan panel of 27 experts on retirement accounts and Social Security. It addresses such questions as:
The questions are explored in depth in the Panel's final report.
For more information, see:
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* The views of NASI members are their own and not an official position of the National Academy of Social Insurance or its funders.
Social Security is the primary form of life insurance for many families with children. For an illustrative young family - a 30-year-old worker earning $27,000 - $30,000 a year with a spouse and two young children - Social Security disability and life insurance protection are each valued at over $450,000.
Currently, more children live in families receiving income from Social Security than live in families that receive Temporary Assistance for Needy Families (TANF). About 6.5 million children benefit from Social Security. They include 3.2 million children who receive benefits directly because a parent has died, become disabled, or retired, and an additional 3.4 million children who live with a relative receiving Social Security benefits. Children can collect benefits up to the age of 18, or until 19 if they are still in high school. The spouse of a worker who died can collect benefits to care for the worker's child who is under age 16, or who is disabled.
Note: The earnings level for the maximum worker does not equal the tax maximum in the year prior to entitlement due to the historical ad hoc increases of the tax maximum.
*For family of deceased worker age 35 in 2011.
Life insurance benefits for families with children are based on the deceased worker's past earnings and the number of eligible children in the family. Larger families receive higher benefits, and a family maximum limits total payments to families of three or more beneficiaries. For families of the same size, survivors of low-income workers receive benefits that replace a larger portion of lost earnings than is the case for families of higher earning workers. If a worker, whose earnings would have averaged $40,000 over a full career, died at age 35 in 2011, annual Social Security survivors' benefits for the family would be about $30,010. This level of benefits would replace about 73 percent of the deceased worker's earnings of $36,860 in 2010.
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Social Security is especially important to people of color because they are less likely than white Americans to have pensions or retirement savings. In 2010, about two fifths (40 percent) of those age 65 and older received income from retirement benefits other than Social Security, such as defined benefit pensions, Individual Retirement Accounts (IRAs), 401(k) plans and related savings. People of color were less likely to receive income from these sources to supplement Social Security. For instance, among seniors over age 65 in 2010, 30 percent of African Americans and 19 percent of Hispanics received such income, compared to 42 percent of whites. For those who owned retirement accounts, the median value for non-whites and Hispanics ($25,000) was less than half that of whites and non-Hispanics ($54,000).
Social Security is the sole source of income for 36 percent of Hispanics and African Americans, and 25 percent of Asian and Pacific Islanders, as compared to 19 percent of whites aged 65 and older.
Because people of color generally earn less than whites, they benefit from Social Security's progressive benefit formula, which replaces a higher percentage of pre-retirement earnings for low-wage workers.
Social Security's survivor and disability benefits are important sources of income security for many people of color. Because African Americans have lower life expectancy and higher disability rates before age 65 as compared to whites, they are more likely to receive Social Security disability and survivor benefits.
In 2010, African Americans were 12.9 percent of the United States population between the ages of 20-64, and 18.5 percent of all disabled-worker beneficiaries. African American children accounted for 17.0 percent of all U.S. children (under age 18) and 22 percent of all children receiving survivor benefits, 22 percent of all children of disabled-worker beneficiaries, and 18 percent of all children of retired workers receiving benefits.
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Women are the majority (55 percent) of adult beneficiaries, collecting Social Security as retired or disabled workers, as wives, and as widows. Women pay 41 percent of Social Security taxes because they earn less than men do, and they collect approximately 49 percent of the benefits because they live longer than men, on average.
Women spend fewer years in the work force because they are more likely to be at home when their children are young, and they typically earn less than men when they are in the work force. This means that if they qualify for a private pension, it usually will be less than the pension earned by men. For all these reasons, Social Security serves as an important protection for women against economic insecurity in old age.
The average married woman receiving Social Security benefits will outlive her husband by eight years. Therefore, the spousal and survivor benefits are key parts of the program. In 2010, approximately 22 million women were over the age of 65, compared with about 17 million men, or a ratio of 129 women for every hundred men, according to data from the Social Security Administration. Of those 75 years and older, the ratio of women to men increases to 151 women for every hundred men.
Because women are often lower-paid than men, they benefit from Social Security's progressive benefit formula, which replaces a larger proportion of past wages for lower-earning workers.
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A married person can collect retirement benefits based on his or her own earnings from work, or an amount equal to 50 percent of the other spouse's retired worker benefit—whichever is the higher amount. The following examples illustrate how these benefits are calculated.
Example: Mrs. Williams will get a retirement benefit of $1,200 a month based on her work record. Mr. Williams is entitled to a retirement benefit of $500 a month based on his own work history. He will receive his own $500, plus additional $100 to bring his total to $600 a month, based on 50 percent of Mrs. Williams' benefit. Total family benefits for the Williams household will be $1,800 a month.
Example: Mrs. Royce is entitled to a retirement benefit of $1,100 a month based on her work history. Her husband will get a benefit of $1,400, which would provide a spousal benefit of $700. Mrs. Royce receives her own benefit of $1,100 a month, because that is the larger of the two amounts. Total family retirement benefits: $2,500 a month.
How does divorce affect Social Security benefits? A person who had been married for at least ten consecutive years–and is now single– can get the 50 percent spousal benefit even if the couple has divorced. A surviving divorced spouse can get the 100 percent survivor benefit if unmarried or remarried after the age of 60. A disabled former spouse is eligible for this benefit at age 50.
Example: Fred and Mary Simmons were married for twelve years and are now divorced. Fred is retiring at age 65 and drawing $1,300 in Social Security benefits. Mary, who is single and age 65, can draw a benefit of $650 a month. Upon Fred's death, she can receive $1,300 a month.
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Social Security is a key source of financial security to widowed spouses in old age. About 8.0 million individuals age 60 and older receive benefits based, at least in part, on a deceased spouse's work record. These beneficiaries include 4.3 million individuals who are entitled only as widowed spouses, and another 3.7 million who are entitled to benefits based on their own work records, but get higher benefits as widows or widowers. These surviving spouse beneficiaries are overwhelmingly women.
The benefits are important to women because wives tend to earn less than their husbands and they typically outlive their husbands – both because women live longer than men, on average, and because wives tend to be a few years younger than their husbands. When a retired worker dies, the surviving spouse gets an amount equal to the worker's full retirement benefit.
Example: John Smith has a $1,200-a-month retirement benefit. His wife Jane gets $600 as a 50 percent spousal benefit. Total family income from Social Security is $1,800 a month. When John dies, Jane will get $1,200 a month as her survivor benefit, two-thirds of the benefit the Smiths had received as a couple. Total income for Jane as a widow is $1,200 a month.
Example: Bill and Emily Jones each get benefits based on their individual earnings. Each of them is entitled to $1,200 a month, and total family income is $2,400 a month. When one of them dies, the widowed spouse continues to receive $1,200 a month. The widowed spouse cannot get both benefits. Therefore total monthly family income is reduced to $1,200 at widowhood, or 50 percent of their former income as a couple.
Example: Joe Sanchez receives $1,200 a month and his wife Consuela earned enough on her own to get an $800 monthly check. Total family income is $2,000 a month. When Joe dies, Consuela will receive her retirement check plus $400 a month as a widow. Her total benefit will be as much as Joe had been receiving, $1,200 a month, or 60 percent of their former income as a couple.
For more information on Social Security and survivor benefits, see:
Social Security Disability Insurance (DI) pays monthly benefits to workers who are no longer able to work due to a significant illness or impairment that is expected to last at least a year or to result in death within a year. It is part of the Social Security program that pays retirement benefits to the vast majority of older Americans. Benefits are based on the disabled worker's past earnings and are paid to the disabled worker and to his or her dependent family members. To be eligible, a disabled worker must have worked in jobs covered by Social Security. In 2011, 8.6 million disabled workers received benefits.
The disability benefit is linked through a formula to a worker's earnings before he or she became disabled. The following figures show how the disability insurance benefits compare to prior earnings for a worker who became eligible for benefits in 2011.
| Earnings Before Disability (Lifetime Average*) | Annual DI Benefit | Percent of Earnings Replaced by Benefit |
|---|---|---|
| $20,000 | $11,544 | 58% |
| $40,000 | $17,892 | 45% |
| $60,000 | $23,340 | 39% |
| $106,800 | $29,328 | 27% |
*Average indexed earnings
The average benefit paid to disabled workers in June 2012 was $1,111 a month or about $13,332 a year.
Workers and employers pay for the DI program with part of their Social Security taxes. Workers and employers each pay a Social Security tax that is 6.2 percent of workers' earnings up to a cap of $110,100 in 2012. The cap is adjusted each year to keep pace with average wages. (In 2011 and 2012, the tax rate for workers is reduced to 4.2 due to the payroll-tax holiday, with the other 2 percent made up from general revenue.) Of the normal 6.2 percent, 5.3 percent goes to pay for Social Security retirement and survivor benefits and 0.9 percent pays for disability insurance. The combined tax paid by workers and employers for disability insurance is 1.8 percent of wages, while the combined tax for retirement and survivor benefits is 10.6 percent, for a total of 12.4 percent.
In 2011, the disability insurance trust fund received $106.3 billion, mainly from the 0.9 percent tax on wages that workers and employers both pay. Total payments from the DI trust fund were $132.3 billion, mainly for benefits to disabled workers and their families, resulting in an annual deficit of $26.1 billion in 2011. The cumulative assets in the disability insurance trust fund totaled $153.9 billion at the end of 2011. Administrative expenses were 2.2 percent of outgo from the DI fund, and the remaining portion paid for benefits.
The Social Security test of disability is very strict. To be eligible for disability benefits, the Social Security law says that the applicant must be “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or is expected to last for a continuous period of at least 12 months.” Furthermore, the impairment or combination of impairments must be of such severity that the applicant is not only unable to do his or her previous work but cannot, considering his or her age, education, and work experience, engage in any other kind of substantial gainful work which exists in the national economy (Social Security Act, section 223(d)).
A person is considered to be involved in substantial gainful activity if he or she earns more than a certain amount. If a non-blind individual earns more than $1,010 a month in 2012, he or she would not be eligible for disabled worker benefits. The amount is adjusted each year to keep up with average wages. (In some cases earnings can be reduced by the costs associated with work, such as paying for a wheelchair or services of an attendant. If deductible work expenses bring net earnings below $1,010 a month, the individual can be eligible for benefits.) The substantial gainful activity level for blind individuals in 2012 is $1,690 a month.
State agencies, operating under federal guidelines, make the medical and vocational determinations for the Social Security Administration about whether applicants meet the test of disability in the law. Medical records, work history, and the applicant's age and education are considered in making the determination.
There is a five-month waiting period after the onset of disability before payments begin. If someone suffered a disabling injury in January and met Social Security's disability definition, he or she would become eligible for the first disability payment for July.
Many beneficiaries have multiple conditions. Of the 8.6 million individuals receiving disabled worker benefits at the end of 2011, 32 percent had mental impairments as the main disabling condition, or primary diagnosis. They include 4 percent with intellectual disability and 28 percent with other mental disorders. Musculoskeletal conditions – such as arthritis, back injuries and other disorders of the skeleton and connective tissues – were the main condition for 29 percent of the disabled workers. (Musculoskeletal conditions were more common among beneficiaries over the age of 50.) About 9 percent had heart disease or other conditions of the circulatory system as their primary diagnosis. Another 9 percent had impairments of the nervous system and sense organs. The remaining 21 percent include those with injuries, cancers, infectious diseases, metabolic and endocrine diseases, such as diabetes, diseases of the respiratory system and diseases of other body systems.
Disabled-worker beneficiaries are at risk of being poor or near poor. About 34 percent of disabled workers versus 13 percent of other working age adults have incomes below 125 percent of the poverty threshold.
SSDI recipients are also more likely to be older, with the average age of beneficiaries at 53. Within this group, almost seven out of ten are over 50 years old while about three in ten are over 60 years old. Many of them are fatally ill: about one in five male beneficiaries and one in seven female beneficiaries die in the first five years of collecting benefit.
When comparing with other adults, disabled workers are more likely to be black or Hispanic, and to have a lower level of education: about one out of three did not finish high school.
Supplemental Security Income (SSI) is a federal program that pays monthly benefits to low-income aged, blind and disabled individuals. The Social Security Administration runs the program, which is financed from general tax revenues, not from Social Security taxes. The SSI test of disability for adult applicants is the same as the test in the Social Security disability insurance program. Only people who have low incomes and limited financial assets are eligible for SSI. The federal SSI payment in 2012 for an individual with no other countable income is $698 a month. Payments are reduced as other income rises, and some states supplement the federal payment. In December 2011, 6.6 million low-income adults received SSI. These beneficiaries include 4.7 million adults under age 65 who were eligible based on disability or blindness and 1.9 million adults aged 65 and older. Women comprise the majority of adults receiving SSI.
Individuals who are drawing Social Security disability insurance (DI) become eligible for Medicare after receiving DI for two years. Low-income individuals who receive SSI are generally eligible for Medicaid immediately. Health coverage is critically important for those receiving disability benefits, because individual insurance policies are likely to be unaffordable or unavailable. According to the NASI report, Balancing Security and Opportunity: The Challenge of Income Disability Policy, "Many people with chronic health conditions or disabilities are at risk of very high health care costs. They often cannot gain coverage in the private insurance market, and even when they do have private coverage, it often does not cover the range of services and long-term supports that they need. Current gaps in health care coverage for people with disabilities limit their labor market options in several ways.”
The Social Security Advisory Board, which was created by Congress to advise the President, the Congress, and the Commissioner of Social Security, posed the question of whether the DI program and its test of disability is out of “sync” with the Americans with Disabilities Act (ADA). In April 2004, NASI drew on findings of its Disability Policy Panel report, Balancing Security and Opportunity, to testify before the Board as follows:
“The need for a disability wage-replacement program does not go away because we have the Americans with Disabilities Act (ADA). Nor is the need for such a program eliminated by advances in medicine, changes in the demands of jobs, new assistive technology, or other environmental accommodations. These developments may increase employment opportunities for some categories of individuals with disabilities. For example, the ADA expands opportunity for people who have highly valued skills whose main impediments to work had been based on discrimination, architectural barriers, or other impediments that the ADA alleviates. But other individuals may face increasing impediments to work as the work environment and demands of work change. For example, in an increasingly competitive world of work, emphasis on versatility and speed may impede employment prospects for people with mental impairments. Because the phenomenon of work disability will remain with us in a competitive economy, wage replacement programs remain essential.”
The Social Security Advisory Board has asked whether the Social Security definition of disability should be changed in some fundamental way. The Disability Policy Panel studied this question at length and reached the following conclusions:
Programs for people with disabilities should use definitions of disability as eligibility criteria that match the purpose of the program. A single, one-size-fits-all definition would not suit the varied needs of the highly diverse population of people with disabilities, nor would it match the particular purposes of different programs.
If the purpose of the program is to establish civil rights protections, a broad definition of disability, such as in the ADA is used: “Disability means … a physical or mental impairment that substantially limits one or more major life activities, a record of such an impairment, or being regarded as having such an impairment.”
If the purpose is to define eligibility for vocational rehabilitation, then the legal definition of eligibility is based on need for and likelihood of benefiting from such services.
Programs that provide personal assistance or long-term care services generally define eligibility in terms of the need for those particular services, such as need for assistance with activities of daily living.
Earnings-replacement insurance programs that are designed to replace income from employment all use a definition of disability based on loss of ability to work. This is true in private disability insurance, as well as in public programs. The wage-replacement benefits of disability insurance are not designed to pay for the added expenses associated with disability – such as personal assistance or vocational rehabilitation. Although these services might be needed, wage replacement benefits are designed to help pay every day living expenses – such as food, housing, and utilities – when wages are lost.
The Social Security test of work disability is very strict. A less strict test of inability to work would benefit people with partial disabilities and it would cost more.
By international standards, U.S. spending on disability benefits is relatively modest, according to data from the Organization for Economic Cooperation and Development. Spending on public disability benefits as a share of the total economy, or gross domestic product, in 2007 was 1.0 percent in the United States. This is compared to 1.1 percent in Germany, 1.9 percent in the United Kingdom, 2.2 percent in Sweden, and 2.1 percent in the Netherlands. These figures include public social insurance systems (such as Social Security disability insurance in the United States) and means-tested disability benefits (such as Supplemental Security Income in the United States).
For more information on Social Security Disability, see:
President Franklin D. Roosevelt signed the Social Security Act on August 14, 1935. Social Security taxes were first collected in January 1937, with workers and employers each paying one percent of the first $3,000 in wages and salary.
In 1939 President Roosevelt signed legislation establishing benefits for survivors and dependents.
Early retirement benefits, allowing people to draw checks at age 62, were enacted in 1956 for women and in 1961 for men.
Disability payments were enacted in 1956 and initially were payable only to workers aged 50-64.
Payments to divorced wives began in 1965, and to divorced husbands in 1977.
President Nixon signed legislation in 1972 authorizing a 20 percent cost-of-living adjustment (COLA) and making the COLA automatic each year.
President Reagan signed legislation in 1983 providing for taxation of benefits, and for a gradual increase in the age of full retirement benefits to 67.
President Clinton signed legislation in 2000 eliminating the retirement earnings test for people above the full-benefit retirement age. The earnings test required beneficiaries to give up part of their Social Security benefits when they earned in excess of a certain amount. It still applies to beneficiaries below the full-benefit age.
For more information on the history of Social Security, see:
Are you interested in learning more about Social Security: Just the Facts? (If you have not seen the video, click to watch below.) This page provides more information and lists additional resources for exploring each topic.
“Social Security is insurance.”
Social insurance encompasses broad-based systems that help workers and their families pool risks to avoid loss of income due to retirement, death, disability, or unemployment, and to ensure access to health care. In the case of Social Security, it covers workers for the risks that go hand-in-hand with getting older but are out of one’s control, affect all of us, and are difficult to plan for.
Further reading:
From the Social Insurance Sourcebook:
“The retirement costs of the baby boomers are mostly paid for.”
Yearly surpluses have been accumulating in the trust fund since 1984. Social Security has collected more in revenue than it has paid out in benefits, creating substantial reserves for the retirement of the baby boomers.
Further reading:
From the Social Insurance Sourcebook:
“The good news is that we can afford to keep Social Security strong.”
There are many options for making moderate adjustments to Social Security that will keep Social Security solvent for 75 years or more.
Further reading:
From the Social Insurance Sourcebook:
“A large majority of Americans—even across party lines and age groups—don’t mind paying for Social Security because it provides security & stability to the people who get it.”
Many public opinion polls have found that Americans draw a connection between the Social Security taxes they pay and the value they get for themselves, for their families, and for their broader communities. Moreover, working Americans also express willingness to pay more if that is what it will take to preserve Social Security for future generations. Large majorities—across party lines (87% of Democrats; 75% of independents; and 67% of Republicans) and age groups (79% of adults under 35; 71% of those 35-49; and 76% of those 50 to 64 years old)—agree that “it is critical that we preserve Social Security for future generations even if it means increasing working Americans’ contributions to Social Security taxes.”
Further reading:
From the Social Insurance Sourcebook:
“The average retirement benefit is modest, $1,230 a month. Yet benefits are the main income for most seniors.”
Social Security’s benefits are modest, both in absolute terms and in terms of the percentage of wages replaced. In light of the trillions of dollars of losses in savings and home equity experienced in the last few years, the adequacy of Social Security benefits is a subject of growing concern.
Further reading:
Additional resources from NASI’s Improving the Lives of Vulnerable Americans through Social Security education project:
From the Social Insurance Sourcebook:
“Social Security is efficient. Less than a penny of every dollar is spent on administration. “
Social Security spends less than one cent on every dollar on administration, even though it is collecting taxes from 94% of the workforce and sending benefits to 56 million Americans.
Further reading:
“Social Security lasted through all of these unexpected events – because it was designed to weather storms.”
Social Security was passed in 1935, in the midst of the Great Depression, and has remained a stable source of income for its beneficiaries in both good and bad economic times ever since.
Further reading:
Additional resources from NASI’s Improving the Lives of Vulnerable Americans through Social Security education project:
From the Social Insurance Sourcebook:
“Key Dates in the History of Social Security"
To view the video in Spanish, watch here: http://bit.ly/elsegurosocial. Para ver el vídeo en español (“El Seguro Social: Simplemente la Verdad”), haga clic aquí: http://bit.ly/elsegurosocial.
The Social Security section of "Learn" draws on reports, briefs, fact sheets, testimony, seminars, and other items available on the website of the National Academy of Social Insurance. Its purpose is to highlight key facts and to serve as a roadmap to more complete information about Social Security on the Academy's website.
This section was last updated in August 2012. The updates are the responsibility of NASI staff Elisa A. Walker, Income Security Policy Associate, and Jill C. Braunstein, Director of Communications. Thomas Nguyen, NASI’s Income Security intern, provided invaluable assistance in compiling the 2012 updates.
Bob Rosenblatt, NASI Senior Fellow, compiled the original social insurance sourcebook, which was released in December 2003.
The National Academy of Social Insurance is a nonprofit, nonpartisan organization made up of the nation's leading experts on social insurance. Its mission is to promote understanding and informed policymaking on social insurance and related programs through research, public education, training, and the open exchange of ideas. Social insurance encompasses broad-based systems for insuring workers and their families against economic insecurity caused by loss of income from work and the cost of health care. NASI's scope covers social insurance such as Social Security; Medicare; workers' compensation; and unemployment insurance, related public assistance, and private employee benefits.