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Social Security: Past, Present, and Future

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Throughout human history, the meaning of economic security has evolved. For the ancient Greeks, security meant stockpiles of olive oil. Olive oil could be stored for long periods of time and could also help with nutrition during times of famine. During the Middle Ages, security meant something different as guilds and societies were developed that offered rudimentary life insurance benefits to their members’ families.

Here, we will explore Social Security in the United States past, present, and future.

The History of Social Security

The US Social Security program was born out of one of the gravest economic crises in our history: the Great Depression. While the Great Depression affected virtually every country, the United States was hit the hardest. The Great Depression came on the heels of the stock market crash of 1929, also called the Great Crash, and it was the third economic collapse the United States had experienced in less than 100 years.

The previous economic crises had given rise to the development of Civil War pensions and company pensions. Still, neither of them was comprehensive enough to deal with the economic fallout of the 1930s. Following the Great Crash, unemployment rose to above 25%, about 10,000 banks failed, and the GDP fell by almost half, from $105 billion to $55 billion. These economic strains continued throughout the 1930s, with millions of people unemployed and most of the elderly population being dependent on someone to care for them.

After several years of economic turmoil, President Franklin D. Roosevelt announced his plan to create a Social Security program. The Social Security Act was officially signed into law on August 14, 1935, and was designed to pay retired workers (aged 65 and older) a continuing income and establish several other social welfare provisions.

How Social Security Works Today

Today, Social Security is considered an integral part of most Americans’ retirement plans. In 2020 alone, 69.8 million Americans received benefits from programs administered by the Social Security Administration (SSA), with 5.8 million new people receiving some form of Social Security in that year alone.

Social Security is funded largely through payroll taxes on a “pay-as-you-go” model, with the current workforce’s contributions being used to fund the benefits for the current Social Security benefits. Retirees are living longer than ever before, and the Social Security Trust can only invest in US Treasuries, so there are some headwinds to social security that the developers of the system did not anticipate.

The Future of Social Security

The 2021 annual report of the Social Security Board of Trustees announced that funds for Social Security would be exhausted by 2034. This was a year ahead of the projections made in the previous year’s report. While this announcement may seem catastrophic, what this actually means is that cash reserves for the program will be exhausted, and without change, retirees in 2034 could see their benefits reduced to 78% or more.

At Telarray, we tend to incorporate Social Security into our Observatory sessions if you are retired or near retirement. Typically we don’t include Social Security for younger clients since it’s hard to forecast the benefit, and there is uncertainty about the future of the program. With that said, if you plan to rely on Social Security for a meaningful portion of your spending in retirement, there are still reasons to be hopeful. Many retirees have absolutely no other plan, so the impact of a meaningful reduction in benefits would be devastating for many and therefore unlikely. Fair or not, probably one of the most likely outcomes is that benefit payments would be means-tested, meaning those retirees with meaningful income, pensions, or assets could see their benefits reduced to ensure benefits are paid to those with less. 

Whatever Social Security’s eventual destiny may be, your Telarray advisor will be prepared to help you with that and countless other retirement matters as we help navigate the path to your secure financial future.

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