Social Security is more than just a retirement program:
It provides important life insurance and disability insurance protection as well. Over 64 million people, or more than 1 in every 6 U.S. residents, collected Social Security benefits in June 2020. While older Americans make up about 4 in 5 beneficiaries, another one-fifth of beneficiaries received Social Security Disability Insurance (SSDI) or were young survivors of deceased workers. In addition to Social Security’s retirement benefits, workers earn life insurance and SSDI protection by making Social Security payroll tax contributions: About 96 percent of people aged 20-49 who worked in jobs covered by Social Security in 2019 have earned life insurance protection through Social Security.
For a young worker with average earnings, a spouse, and two children, that’s equivalent to a life insurance policy with a face value of over $725,000 in 2018, according to Social Security’s actuaries. About 89 percent of people aged 21-64 who worked in covered employment in 2019 are insured through Social Security in case of severe disability. The risk of disability or premature death is greater than many realize. Some 6 percent of recent entrants to the labor force will die before reaching the full retirement age, and many more will become disabled.
Social Security provides a guaranteed, progressive benefit that keeps up with increases in the cost of living. Social Security benefits are based on the earnings on which you pay Social Security payroll taxes. The higher your earnings (up to a maximum taxable amount, currently $137,700), the higher your benefit. Social Security benefits are progressive: they represent a higher proportion of a worker’s previous earnings for workers at lower earnings levels. For example, benefits for a low earner (with 45 percent of the average wage) retiring at age 65 in 2020 replace about half of their prior earnings. But benefits for a high earner (with 160 percent of the average wage) replace about one-quarter of prior earnings, though they are larger in dollar terms than those for the low-wage worker. Many employers have shifted from offering traditional defined-benefit pension plans, which guarantee a certain benefit level upon retirement, toward defined-contribution plans (such as 401(k)s), which pay a benefit based on a worker’s contributions and the rate of return they earn. Social Security, therefore, will be most workers’ only source of guaranteed retirement income that is not subject to investment risk or financial market fluctuations.
Once someone starts receiving Social Security, their benefits increase to keep pace with inflation, helping to ensure that people do not fall into poverty as they age. In contrast, most private pensions and annuities are not adjusted (or are only partly adjusted) for inflation.
Social Security provides a foundation of retirement:
Almost all workers participate in Social Security by making payroll tax contributions, and almost all elderly Americans receive Social Security benefits. In fact, 97 percent of the elderly (aged 60 to 89) either receive Social Security or will receive it, according to Social Security Administration estimates. The near-universality of Social Security brings many important advantages. Social Security provides a foundation of retirement protection for people at all earnings levels. It encourages private pensions and personal saving because it isn’t means-tested — in other words, it doesn’t reduce or deny benefits to people whose income or assets exceed a certain level. Social Security provides a higher annual payout than private retirement annuities per dollar contributed because its risk pool is not limited to those who expect to live a long time, no funds leak out in lump-sum payments or bequests, and its administrative costs are much lower. Indeed, universal participation and the absence of means-testing make Social Security very efficient to administer. Administrative costs amount to only 0.6 percent of annual benefits, far below the percentages for private retirement annuities. Means-testing Social Security would impose significant reporting and processing burdens on both recipients and administrators, undercutting many of those advantages while yielding little savings. Finally, Social Security’s universal nature ensures its continued popular and political support. Large majorities of Americans say that they don’t mind paying for Social Security because they value it for themselves, their families, and millions of others who rely on it.
Most elderly beneficiaries rely on Social Security for the majority of their income. Social Security provides the majority of income to most elderly Americans. For about half of seniors, it provides at least 50 percent of their income, and for about 1 in 4 seniors, it provides at least 90 percent of income, across multiple surveys and the study that matches survey and administrative data.
Social Security is particularly important for people of color:
Social Security is a particularly important source of income for groups with low earnings and less opportunity to save and earn pensions, including Black and Latino workers and their families, who face higher poverty rates both during their working lives and in old age. The poverty rate among Black and Latino seniors is over 2.5 times as high as for white seniors. There is a significant racial retirement wealth gap, leading seniors of color to face more retirement insecurity than white seniors. African American and Latino workers are less likely to be offered workplace retirement plans and likelier to work in low-wage jobs with little margin for savings. Social Security helps reduce the economic disparities between white seniors and seniors of color.
Social Security’s importance to families of color goes beyond retirement. Black and Latino workers benefit substantially from Social Security because they have higher disability rates and lower lifetime earnings than white workers, on average, and African American workers have higher rates of premature death. Persistent racial disparities in health care access and quality — as well as in access to food, affordable housing, high-quality schools, and economic opportunity — mean African American workers are likelier to become disabled or die before reaching retirement.
Social Security is especially beneficial for women:
Social Security is especially important for women, because they tend to earn less than men, take more time out of the paid workforce, live longer, accumulate less savings, and receive smaller pensions. Women represent more than half of Social Security beneficiaries in their 60s and 7 in 10 beneficiaries in their 90s. In addition, women make up 96 percent of Social Security survivor beneficiaries. Women benefit disproportionately from the program’s inflation-protected benefits (because they tend to live longer than men), its progressive formula for computing benefits (because they tend to have lower earnings), and its benefits for spouses and survivors.