Many of us assume our Social Security taxes are held by the federal government, and then when we retire the money is given back to us. This is not the case. Social Security functions like so: People currently working have money taxed from them, and this money then goes out as payment to people currently retired. It’s strictly a pay-as-you-go system with no funds held for any one person. The fact that we don’t own our Social Security taxes or future benefits has been confirmed by the Supreme Court. Workers aren’t being taxed for their own future benefit, and retirees aren’t simply getting back the money they put in.
For years, there were lots of workers compared to the number of retired persons, so the program brought in more taxes than it paid in retiree benefits. This surplus is what is called the trust fund. However, over the last few decades the ratio of workers to retirees has declined significantly. In 1955 there were 8 workers for every retiree, while in 2010 there were less than three, and the ratio is projected to fall to two and then one.
As the worker-to-retiree ratio has fallen, the amount of the current taxes hasn’t been enough to cover benefits paid to current retirees, so Social Security administrators have dipped into the accumulated surpluses. This situation has happened periodically over the years, but always quickly rebounded to surpluses. However, in 2010 the deficits became permanent. Every year since then, and every year for at least the next 75 years, the Social Security program will be running a deficit.
So the question then becomes: Didn’t all those years of surpluses get saved in the trust fund so there’s enough money to cover current shortfalls? The answer is: sort of.
To start with a basic explanation of what Social Security is in the first place, and why it was started, go here.
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