How Does Social Security Work?

• SS is called an Intergenerational transfer program: current workers pay taxes this year which are then paid that same year as benefits to retirees & the disabled. When the current workers eventually get old enough and retire, the next generation works & pays taxes to support their benefits.

• SS is NOT a savings or retirement investment program. It is NOT like a 401(k) or an IRA.

• A current retiree’s benefits are provided by the taxes paid by current workers.

• Amount of benefits that can be paid to each retiree depends upon:

• Ratio of # of workers per retiree in the economy

• Size of payroll (how much workers earn)

• Tax rate on payroll