What Is Social Security?

Social Security was created just over 75 years ago to make sure seniors would have a steady stream of income when they retired. It also insures American workers and their families against the loss of income due to disability or death.

Social Security is primarily funded by a payroll tax paid by workers and their employers, and only workers who meet the work and age requirements can get benefits. Therefore, it's a benefit that is earned by workers and their families.

Social Security provides a guaranteed benefit over a lifetime, so workers do not have to worry about outliving this income when they retire. Moreover, it is portable, which means workers carry Social Security benefits from job to job. And unlike most pension plans, Social Security provides protection against inflation through cost-of-living adjustments.

Social Security Benefits: Modest but Vital

The average annual Social Security retirement benefit is modest—roughly $14,700 a year. But if the average benefit is modest, it is also critical, given the fact that half of seniors have an income of less than $20,000 a year.

Today, about half of all seniors rely on Social Security for more than 50 percent of their income. Furthermore, nearly one in four relies on Social Security for 90 percent or more of their income. In 2011, nearly 55 million Americans received Social Security benefits, including disabled workers and spouses and dependents of deceased workers.

To demonstrate why Social Security is such a vital source of retirement income, consider this: To equal the average monthly Social Security check of about $1,228, adjusted annually for inflation, you would need to purchase an annuity (an investment instrument that guarantees a retirement income stream) of about $386,000.

Social Security has become even more important to American workers and their families as traditional pensions have disappeared, home values declined, retirement savings shrunk, and health care costs gone up. Half of the workforce has no retirement plan coverage provided by their employer, while almost one-third has no individual savings set aside for retirement.

The Future of Social Security

Social Security can pay full benefits for nearly 25 years. After that, it will still be able to pay about 75 percent of promised benefits for the next 75 years and beyond, even if no changes are made. But that's not good enough!