Social Security has always been a program where the current workers of today provide benefits to today’s retirees, just as those retirees provided benefits to the generation that came before them. Some workers may think they are paying into Social Security for their own benefit, which is partially correct, but by the time that worker is ready to retire the worker relies on the current workforce to provide the benefits they will experience in their golden years. According to a Pew Research survey performed a few years ago, many Americans are still struggling with this concept.
Social Security is, and always has been, an inter-generational transfer of wealth. The taxes paid by today’s workers and their employers don’t go into dedicated individual accounts (although 32% of Americans think they do, according to the 2014 Pew Research survey). Nor do Social Security checks represent a return on invested capital, though you might be forgiven for thinking so since the “personalized Social Security statements” that used to be mailed out once a year and now are available online detail your payment history and projected monthly benefits. Rather, the benefits received by today’s retirees are funded by the taxes paid by today’s workers; when those workers retire, their benefits will be paid for by the next generation of workers’ taxes (caveat: see Point 3). Your benefit amount is based on your earnings history and age at retirement, not on how much you and your employer paid in Social Security taxes (although for most people, taxes paid are closely tied to their earnings).
The idea behind the Social Security system, which has now lasted more than 80 years and is still going strong, is that future workforces are large enough and reliable enough to pay for current retirees.
