The federal government founded the Social Security program during the Great Depression. The program provides money to people after they’ve retired. A tax that everyone pays while they are working funds the program. Today’s workers fund payments for today’s retirees. Tomorrow’s workers will eventually pay for the current generation of workers. But will Social Security run out of money at any point in the future? For years, there have been rumors and questions. The short answer is that it is highly unlikely that the program will ever run out of money.
Social Security: A Brief History and How it Works
Before explaining why Social Security is unlikely to die out, it helps to know a bit about how the program came to be. President Franklin Delano Roosevelt signed the Social Security Act into law in 1935. That followed generations of Americans fighting for a social insurance program that could help support American workers once they reached retirement age. Before that, there was no social welfare program designed to support people once they reached the age where it became difficult to work. The government first collected Social Security taxes in 1937 and payments began in 1940. The Social Security Administration, an independent government agency based in Maryland, administers the program. The government has created other programs throughout the years, including Social Security Disability Insurance and Supplemental Social Income.
A dedicated tax on earnings pays for Social Security. The total is 12.40%, 6.20% of which is paid by the worker and 6.20% of which is paid by the company. There is a cap on taxable income of $132,900 for 2019, meaning that income above that level is not subject to Social Security taxes. The money pays retirement benefits for retirees. Workers earn “work credits” based on total income earned during their career. These credits determine a person’s total retirement benefit. In retirement, a check arrives monthly. Some people are also eligible for survivor benefits when their spouse dies.Why People Think Social Security Will Run Out (and Why They’re Wrong)
Social Security has become a hot button political topic in the past few decades. Some even call it the “third rail” of American politics, implying that to dare touch the program means certain political death. One of the biggest reasons it’s such a big deal is that some people think the money to fund the program is going to run out and leave tomorrow’s seniors, who are paying into the system now, out in the cold.
People believe the program will run out of money for many reasons, including:
While Social Security is unlikely to run out, that doesn’t mean the government won’t need to take some steps to protect the security of the program in the coming years. Steps could include raising the age at which you can begin to receive payments or increasing the payroll tax that pays for Social Security.The Bottom Line
It isn’t a stretch to say that Social Security is a program with some issues. Still, it is not in imminent danger of completely running out of money. While some changes will probably have to happen to make sure it is completely safe, young people who fear they will not be getting any payments from Uncle Sam in retirement are probably worrying a bit too much.Retirement Tips
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