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Key Facts

Reining in Federal Spending: Lessons from Social Security

What is Social Security?

Social Security is primarily a retirement and old age insurance program. Most workers contribute OASDI payroll taxes while they work and collect Social Security benefits when they retire. The current full retirement age is 66 and is slowly being raised to 67. Today, about 167 million people work and pay Social Security taxes and about 59 million people receive monthly Social Security benefits. Social Security also provides disability insurance for disabled American under its DI program. 

Social Security is primarily financed through a dedicated payroll tax. Employers and employees each pay 6.2 percent of wages up the taxable maximum, while the self-employed pay the combined 12.4 percent.

To see the financial operations of the trust funds, click here.

To learn more about Social Security, click here.

What is Medicare?

Medicare is the federal health insurance program for people who are 65 or older. Workers contribute Medicare payroll taxes throughout their working lives and receive Medicare once they reach the retirement age. Medicare covers hospital insurance (Part A), supplementary medical insurance (Part B), and prescription drug coverage (Part D).

What were the changes to Social Security in 1977?

The 1970s were tumultuous years for the Social Security System. In 1972, legislation was enacted designed to automatically keep benefits up to date with inflation while at the same time assuring adequate financing to support the program into the long-range future. Unfortunately, the new formula accidentally double-indexed new benefits, leading to real increases year after year. This was called the Social Security “Notch.” 

In addition, the 1972 legislation provided a one-time increase of 20% in Social Security benefit levels. Almost immediately economic conditions dramatically worsened with serious consequences for the Social Security program.

The 1977 Social Security amendments attempted to restore the program's financial soundness. A major element of those amendments was a change in the formula (i.e. benefit computation method) for Social Security benefits. Individuals born prior to 1917 were left under the old formula. Individuals born after 1916 were required to have their benefits computed under the new rules in order to prevent double-indexing. Many of those born in 1917 and after saw their benefits but as little as five years away from retirement. But since the Social Security trust funds were nearing bankruptcy, the change had to be made.