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How Social Security Depends on a Healthy US Economy.

How Social Security Depends on a Healthy US Economy.

The main traditional sources of retirement income in the United States are often referred to as a three-legged or three-pillar chair:

  • Social Security benefits

  • Employer-provided pensions (including retirement accounts)

  • Income from employees' assets or assets savings

Social security is a program that offers elderly beneficiaries an inflation-indexed life annuity. In addition to benefiting from the protection offered by indexation, a potential beneficiary who takes the time to claim social security benefits essentially purchases additional longevity insurance, reducing the risk of "running out of money" by increasing his lifetime monthly allowance over time. Many observers view Social Security benefits as the basis of retirement income, primarily because benefits are a consistent and reliable resource for nearly all senior families. Since Social Security benefits represent a substantial share of the income of Americans aged 65 and over, precise measures of this share are important for researchers and policy decisions. Using data from the Current Population Survey (CPS), the SSA estimates that approximately 84% of people aged 65 and over received social security benefits in 2014. Among the poorest 40% of the income distribution, benefits averaged around 84% of total income.

Some experts have criticized the use of CPS data to support such estimates. Research has suggested that CPS does not adequately measure income from certain sources, particularly income from retirement accounts, such as personal retirement accounts (IRAs) or defined contribution plans. In particular, the researchers argued that estimates based on CPS data would likely exaggerate the dependence of older Americans on Social Security benefits and underestimate their dependence on a retirement account, especially among low-income respondents. In response, the Census Bureau modified the 2015 CPS income questions to more accurately reflect income withdrawn from retirement accounts. In addition, trends over the past several decades in terms of employer-sponsored retirement offers, social changes, and changes in social security rules may have influenced the relative importance of different sources of income for older Americans, in particular social security. It is, therefore, important that policymakers have a clear view of the composition of retirement income so that any suggested modifications to social security can better meet the needs of older people.

Maybe there is no social program in America that is more reliable than Social Security. Without disrespecting Medicare, which primarily helps cover the large medical bills of older people in their prime, no social program does more than the Social Security program.

According to the Social Security Administration (SSA), more than 3 in 5 retirees depend on the program for at least half of their monthly remuneration. Then there is the analysis of the Center for Budget and Policy Priorities, which concludes that social security revenues are responsible for keeping 22.1 million beneficiaries above the federal poverty line, of which 15, 1 million are retirees. It is so important.

The US economy can play an important role in the health of Social Security.

You might not realize that the health of Social Security is also tied to the health of the US economy. Due to the different forms of income generation for the program, a growing or declining economy can positively or negatively affect social security. Here are some ways the state of the US economy can affect Social Security.

Payroll Tax

If there exists a hierarchy of importance regarding income generation for Social Security, the income tax earned by 12.4% would be on a pedestal far above all else. Of the $996.6 billion raised by Social Security last year, the wage bill was responsible for $873.6 billion. This in itself is almost the reason why Social Security cannot go bankrupt.

The payroll tax of 12.4% applies to earned income (i.e., this limit increases in most years based on the national index of average wages.)

Because payroll taxes are deducted directly from workers' wages or paid through estimated taxes for the self-employed, the amount of income workers contributes each year can be positive or negative for the program.

On the other hand, a contraction or recession can slow or reverse wage growth, leading to a decrease in the collection of payroll taxes.

Taxation of social security benefits

The only other form of income without Social Security interest is taxation benefit. Last year, the social security benefits taxation generated more than $37.9 billion for the program.

Introduced in the 1983 amendments and entered into force in 1984, the taxation of social security benefits was originally a means of generating additional income from wealthy families. Once approved, it allowed the federal government to tax up to half of a person's Social Security benefits of adjusted gross income (AGI), plus half of the benefits exceeding $25,000. For couples filing jointly, this amount is $32,000. In 1993, the Clinton administration added a second tier that taxed 85% of an individual's or couple's benefits if they exceeded $34,000 or $44,000, respectively.

Interestingly, the taxation of profits is that these income limits have never been adjusted for inflation. As a result, a tax that once affected about 10 percent of all "senior citizens' families" now affects 56 percent of senior citizens' families, according to data from the Senior Citizens' League (SCL).

Similar to a payroll tax, but to a much lesser extent, the taxation of Social Security benefits can be affected by the welfare of the US economy. If the economy is strong, large Adjusted Gross Income should encourage more beneficiaries to pay taxes on some of their social security benefits. On the other hand, a weaker economy and a weaker Adjusted Gross Income would lower taxes on social security benefits.

Interest income on the program's asset reserves

The only form of Social Security interest income can also be indirectly affected by the health of the US economy.

Since the last significant overhaul of the program in 1983, Social Security has amassed more income than it spends each year. This has accumulated nearly $2.9 trillion in asset reserves. Of course, the program isn't just based on almost $2.9 trillion in cash in a locked safe. The program's excess money is invested in specially issued bonds and debt certificates by law. At the last review, the average yield on its many bonds and maturities was 2.9%. This is what enabled Social Security to generate an interest income of $85.1 billion in 2017.

So how does the US economy affect the interest income from the program? That is, influencing the way the country's central bank, the Federal Reserve, reacts to the US economy. This increases the return on interest-bearing assets, which generates more interest income for the social security program. Alternatively, a weak economy could lead to a more moderate monetary policy approach and lower borrowing rates, which would imply more nominal interest income for the program.

So, you see, the well-being of the US economy is more important than you probably think for Social Security.

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Dennis Jao
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