Retirement Prep: Social Security's Past, Present, and Future

Throughout human history, economic security has taken many forms, from the individual to community efforts. For the ancient Greeks, it was stockpiling olive oil, which could be stored for long periods of time and provide a source of nutrition during famine. During the Middle Ages, security took the form of guilds and societies that eventually began to pay life insurance benefits to their members.¹

Here, we will explore the history and future development of the Social Security program in the United States: the historical background, the current state, and future projections. Understanding the purpose and the intentions behind Social Security will help you understand why it is a valuable asset in your retirement preparation and the importance of timing when you apply for benefits.

The History of Social Security

The US Social Security program was born out of one of the gravest economic crises in the world: the Great Depression. While the Great Depression affected nearly every country in the world, few would argue that 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, the third economic collapse in the United States in less than 100 years (the previous two in the 1840s and 1890s).

The previous economic crises had given rise to the development of Civil War pensions and company pensions, but neither of those programs was comprehensive enough to deal with the strife caused by the Great Depression. 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 into the 1930s, with over millions of people unemployed and most of the elderly population being dependent on someone to care for them.¹

After several years of continued economic turmoil, President Franklin D. Roosevelt announced his plan to create a Social Security program, and the Social Security Act was officially signed into law on August 14, 1935. The main goal of the Act was to pay retired workers (aged 65 and older) a continuing income and establish several other welfare provisions in order to support people who were unable to work or find work.¹

How Social Security Works Today

The Social Security program proved beyond successful and to this day is considered an integral part of most Americans’ retirement strategies. 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.²

Social Security is funded largely through payroll taxes on a “pay-as-you-go” model. The current workforce’s contributions are used to fund the benefits for current Social Security recipients. The intended plan, as well as the hope, is that by the time today’s workforce is set to retire, the younger generations will still be contributing to the program to fund Social Security for the next generation of retirees, perpetuating a system for the working age population to support their parents and grandparents.²

The Future of Social Security

It is important to be realistic and factual about what the Social Security program will look like in the future.

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 retirees in 2034 could see their benefits reduced to 78%.^3,4

However, these are still just projections. It is difficult to say for certain what the future of Social Security will be. The hope is that Congress will act in time to resolve this shortage of funds problem.

Regardless of what happens to this program, it is important to make sure that you have other strategies in place for your retirement, a point your financial professional will likely emphasize and can help you identify. Social Security benefits are one source of additional income in retirement but a thorough, efficient retirement plan involves multiple financial sources, including Social Security, savings, and investments.

This ensures that, no matter the developments in Washington concerning Social Security, you can enjoy your golden years the way you want.