Social Security provides a guaranteed, progressive benefit that keeps up with increases in the cost of living. In recent years, fewer employers have been offering defined-benefit pension plans, which guarantee a certain benefit level upon retirement, and more employers are offering defined-contribution plans, which pay a benefit based on a worker’s contributions and the rate of return they earn. For most workers, Social Security will be their only source of guaranteed retirement income that is not subject to investment risk or financial market fluctuations and that will keep up with inflation no matter how long they live.
In the chart below, you can see how Social Security benefits are progressive: they represent a higher proportion of a worker’s previous earnings for workers at lower earnings levels.
Social Security provides a foundation of retirement protection for nearly every American, and its benefits are not means-tested. Almost all workers participate in Social Security by making payroll tax contributions, and almost all elderly people receive Social Security benefits. The near-universality of Social Security brings many important advantages:
- Social Security provides a foundation of retirement protection for people at all earnings levels.
- Social Security provides a higher annual payout for a dollar contributed than private retirement annuities because the risk pool is not limited to those who expect to live a long time, no funds leak out in lump-sum payments or bequests, and its administrative costs are much lower.
- Finally, the universal nature of Social Security assures its continued popular and political support. Large majorities of Americans say that they don’t mind paying for Social Security because they value it for themselves, their families, and millions of others who rely on it.
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