Social Security: Program Overview, Financing, and Reform Proposals

Social Security, established by the Social Security Act of 1935, is the nation's largest social insurance program. It provides retirement, survivors, and disability benefits financed primarily through payroll taxes imposed on covered earnings under the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA). The combined OASDI payroll tax rate is 12.4% of covered earnings (split equally between employer and employee), applied to earnings up to the taxable maximum ($168,600 in 2024), which is adjusted annually for wage growth.

Retirement benefits are calculated using a progressive benefit formula applied to a worker's average indexed monthly earnings (AIME) over their highest 35 years of earnings. The formula replaces a higher proportion of pre-retirement earnings for lower-wage workers. Workers may claim reduced benefits as early as age 62 or receive delayed retirement credits for claiming after the full retirement age, which is currently 67 for those born in 1960 or later. Cost-of-living adjustments (COLAs) are applied annually based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund are legally distinct, though they are often discussed together as the combined OASDI program. The DI Trust Fund's financial position has improved substantially following a decline in disability applications and enactment of a temporary payroll tax reallocation in 2015. The OASI Trust Fund faces more immediate depletion, with the Trustees projecting exhaustion in the mid-2030s.

The Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) reduce Social Security benefits for workers who also receive pensions from employment not covered by Social Security, such as some state and local government employees. These provisions have been controversial, with critics arguing they unfairly reduce benefits for affected workers. The Social Security Fairness Act, which would repeal both the WEP and GPO, has received significant congressional support.

Proposals to address Social Security's long-term financing include revenue-side options such as raising or eliminating the taxable maximum, applying the payroll tax to investment income, increasing the payroll tax rate, and dedicating new revenue sources such as estate tax receipts. Benefit-side options include raising the full retirement age, modifying the benefit formula, adopting a less generous COLA measure such as the chained CPI, and means-testing benefits for higher-income retirees.

Some proposals combine revenue increases and benefit modifications, while others propose more fundamental structural changes such as creating personal retirement accounts funded by a portion of payroll taxes, establishing a minimum benefit to reduce elderly poverty, or transitioning to a flat benefit system. Bipartisan proposals have sought to balance solvency with adequacy, recognizing that Social Security benefits are modest by international standards, with the average retired worker benefit of approximately $1,900 per month representing the sole or primary income source for many retirees.

Congressional interest in Social Security reform has increased as the projected depletion date approaches. The repeal of the WEP and GPO has advanced further than in previous Congresses. The Social Security Administration has faced budget constraints affecting service delivery, with field office closures, reduced staff, and longer processing times for disability determinations and other services. The Trustees' annual report continues to highlight the urgency of legislative action, noting that each year of delay narrows the range of feasible solutions and increases the magnitude of required adjustments.