The Problem

But for workers today, the picture is very different. Indeed, most people under 65 years of age will actually receive less in benefits than they contribute in payroll taxes over their working lives.1

"When today’s workers reach retirement age, their benefits will be paid only if higher taxes are collected from the next generation of workers."

When Social Security was initiated in 1937, workers contributed only 2 percent (half from the employer and half from the employee) of the first $3,000 of wages. The program only paid for retirement pensions and only covered workers who contributed. Since then, Social Security has become considerably more expensive. What started as a mild contribution for retirement pensions now claims 12.4 percent of the first $80,400 for pensions, benefits for family members and benefits for disabled workers, plus an additional 2.9 percent of all wages for Medicare. And taxes will have to rise even higher if the government is to pay promised benefits to future retirees.

From its inception, Social Security has been a pay-as-you-go system. Pay-as-you-go means taxes taken from today’s workers pay for benefits government provides to today’s retirees. When today’s workers reach retirement age, their benefits will be paid only if higher taxes are collected from the next generation of workers. But how high will future taxes have to be?