Welcome back to the Deep Dive. Today we are taking
a scalpel to one of the most central, most complex,
and yet I think fundamentally misunderstood systems
in American financial life. We're talking about
U .S. Social Security. Exactly. Officially, you
probably know it as Old Age Survivors and Disability
Insurance or OASDI. And it's a system that touches
nearly every American worker. But you're right.
Very few of us really understand. the wiring
under the hood. It's so much more than just a
check in the mail. It's really the cornerstone
of retirement security for millions. It is. And
for anyone trying to navigate their own future
or just wanting to be well -informed on a huge
national issue, getting a rapid, comprehensive
understanding is vital. So our mission today
is to cut through all the noise, the political
talking points, and just dissect the actual history,
the structure, the funding, all of it. Using
only the extensive source material you provided.
We're going to get into the real mechanics and,
of course, the future challenges. And before
we dive into any of that, we have to establish
the scale here, the sheer immense scale. This
is not some small government program. No, it's
an economic pillar, just a staggering proportion.
I mean, the cost alone. Let's start there. The
cost is astronomical. In 2022 alone, the total
cost hit $1 .244 trillion. And that's just over
5%. I think it's about 5 .2 % of the entire U
.S. gross domestic product. It's massive. And
to make that feel a bit more real. On an individual
level, the average monthly benefit that was paid
out in May 2025 was $1 ,903. And that $1 ,900
is what keeps huge segments of the population,
retirees, the disabled, surviving families financially
anchored. It's the floor for millions of people.
And what's really remarkable is the program's
reach. I mean, the sources show that nearly 94
% of all individuals in paid employment in the
U .S. are covered by Social Security. 94%. That
level of universality is just, it's so rare in
federal. program. It really is. But that number,
94%, it immediately raises a question for me.
Who are the other 6 %? Who's not covered? That's
a crucial detail. And it's a big group. It's
approximately 6 .6 million state and local government
workers. So like teachers, firefighters? Exactly.
That accounts for about 28 % of all state and
local employees. Because of... Historical exemptions
that go way back to the program's beginning,
they have their own separate pension plans. So
they're not paying FICA tax. Right. They're relying
on their own state or city pension systems instead.
It's a huge segment of the workforce that functions
completely outside the core system we're about
to deep dive into. Okay, so let's unpack this.
To really get the system as it operates today,
we have to go back, way back. To 1935. The Social
Security Act was signed into law by President
Franklin D. Roosevelt right in the depths of
the Great Depression. And it was revolutionary.
Completely. The sources define its original purpose
as implementing social insurance. This is a brand
new concept for the U .S. government. Social
insurance meaning what exactly? A federal mechanism
designed to limit these... You know, unforeseen
dangers in a modern economy, specifically old
age, disability, poverty, and unemployment. Things
people couldn't prepare for on their own. You'd
think, given the state of the country then, it
would be an easy sell. But the political friction
around it was just intense. Oh, yeah. It was
immediately and very aggressively labeled by
opponents as socialism. Of course. And that opposition
is key to understanding why the system was set
up the way it was. It had to be framed as insurance,
something you earn through your contributions,
not as, you know, welfare. The anxiety was that
real. It was palpable. And I love the specific
anecdote from the Senate Finance Committee hearing
that just captures this tension perfectly. Tell
us about that. So the secretary of labor, Francis
Perkins, was testifying. And Senator Thomas Gore,
a Democrat from Oklahoma, by the way, he interrupted
her. He was really skeptical. And he asked her
directly. Point blank. Isn't this socialism?
And Perkins says, oh, no. But Gore, he's smiling
and he leans in and presses her. Isn't this a
teeny weeny bit of socialism? Teeny weeny bit.
That's fantastic. It just illustrates the massive
political leap this program represented at the
time. A teeny weeny bit of socialism that pretty
quickly grew into a giant of a program. Once
it was established, it didn't just sit there.
It evolved through decades of amendment. Constantly
expanding its scope. We should probably track
some of the key milestones that really define
the system we know today. Let's do it. OK, so
just four years after it was signed. In 1939,
the program expanded its definition of who gets
benefits. It wasn't just for the worker anymore.
They added benefits for the spouse and minor
children. Exactly. And that one change shifted
Social Security from being a purely individual
retirement program to more of a family protection
system, a safety net for the whole family. And
then the program officially gets going with the
very first monthly benefit check in 1940. It
went to Ida Mae Fuller. For the amount of $22
.54. $22 .54. It's just a fascinating historical
marker that this colossal system started with
a check that small. The expansion kept rolling
post -World War II. The disability program was
added in 1954. Formalizing protection for workers
who got sick or injured and couldn't work anymore
before retirement age. Right. But the single
biggest expansion. the one that probably changed
the entire trajectory of the SSA forever, came
in 1965. That was Medicare. Medicare, adding
health care benefits to the Social Security program.
And that was explosive. Absolutely. The sources
note that 20 million people joined the program
in just the next three years. It just underscores
the immediate desperate need there was for that
kind of federal health coverage. Okay, moving
into the 70s, we see a change that affected every
single retiree from then on. The automatic cost
of living adjustments. The key away started in
1975. And that was huge for stability. Before
75, Congress had to actually vote on COA adjustments.
They were irregular. Sometimes you saw these
massive jumps like a 77 percent COA in 1950.
That creates so much volatility. So much. The
automatic COA linked to inflation made future
benefits predictable. It protected their purchasing
power. And then we get to 1983. This was maybe
the most pivotal year for modern Social Security,
and it was driven by solvency concerns even back
then. Oh, the changes that year were seismic.
First, they started taxing Social Security benefits
for higher income beneficiaries. That was new.
Completely new. Second, new federal hires had
to join Social Security. And critically... They
increased the normal retirement age for younger
workers, setting it on that gradual path towards
66 and then 67. Those adjustments really changed
the math for future generations. Fundamentally
altered the balance of what you pay in and what
you get out. It's also really important that
we clarify the umbrella term Social Security
Act because it's more than just retirement checks.
The Social Security Administration, the SSA,
it mainly runs two enormous programs. Right.
The first and the core focus of this deep dive
is OASDI old age, survivors, and disability insurance.
This is that pay -as -you -go social insurance
system we've been talking about, funded by FICA.
And the second major program run by the SSA is
Supplemental Security Income, SSI. And SSI is
different. It's a separate, means -tested, federal
public assistance program. It's designed to give
extra income support to aged blind and disabled
people who meet these really strict income and
resource tests. So that's more of a welfare program.
It is. And it highlights how the SSA acts as
this dual agency. It manages both social insurance
with OASDI and welfare assistance with SSI. And
there's overlap. A lot. In 2022, two and a half
million Social Security beneficiaries also needed
that supplemental income through SSI, which really
just shows you the poverty line so many retirees
are struggling to stay above. To really grasp
the system's current reach, let's look at who's
getting the benefits today. The 2023 data says
the total number of people getting a social security
check was about 66 .8 million. 66 .8 million.
That's a population roughly the size of France,
all getting a monthly payment. And the sources
break this huge group down into three main categories.
This is the largest group. The one everyone thinks
of is the retired workers and their families.
Right. That group totals 52 .4 million people.
And that includes the main worker, but also spouses
and minor children who are collecting what are
called derivative benefits. Then you have the
disability recipients. That's the DI part of
OASDI. In 2023, that was 7 .4 million disabled
workers getting checks, plus another 1 .2 million
dependents. So they're children and spouses who
rely on that disabled workers earnings history.
And finally, the survivor group, the S in OASDI.
About 5 .8 million people were getting some type
of survivor benefit. And this includes about
2 million kids who lost a parent. Which really
emphasizes the program's crucial role as like
a life insurance policy for young families, not
just retirement income for the elderly. It's
a huge part of the program that often gets overlooked.
OK, so that is an enormous financial obligation.
We're talking over a trillion dollars a year.
So how is this behemoth funded? It's financed
primarily through mandatory payroll taxes, the
infamous FICA and SECA taxes. FICA is... the
Federal Insurance Contributions Act, which is
for employees. And SECA is the Self -Employed
Contributions Act. The key mechanism is the total
payroll tax rate of 12 .4 % of your earnings,
but, and this is a big, but only up to a taxable
maximum. And that 12 .4 % is split down the middle
between the worker and the employer, right? That's
correct, for standard employment. You, the employee,
pay 6 .2%, and your employer matches it with
another 6 .2%. But if you're self -employed,
you're on the hook for the whole thing. If you're
self -employed under SECA, you're responsible
for the full 12 .4%. Though you can deduct half
of that amount, what would have been the employer's
share on your federal income tax return? Okay,
so this brings us to the first major controversy
in how the system is designed. that taxable maximum.
The Met will project that for 2026, the maximum
amount of taxable earnings for OASDI will be
$184 ,500. And that number is so crucial because
any wages you earn above that ceiling are completely
on tax for Social Security purposes. That is
the literal definition of a regressive tax structure.
It is. As a high earner's income goes up above
that cap, the percentage of their total income
that goes to Social Security taxes actually goes
down. And we have to emphasize a key distinction
here because the Medicare tax is also part of
that payroll tax, but it works differently. Very
differently. The separate Medicare tax for hospital
insurance, which is 2 .9 % total, split 1 .45
% from you, 1 .45 % from your employer, that
has no taxable income ceiling at all. So all
your earned income is subject to the Medicare
tax? Every penny. But the Social Security tax
base is capped. And that cap is the main thing
driving the whole solvency debate we're about
to get into. So where does all this FICA money
actually go? It doesn't just sit in a vault somewhere.
No, it's immediately routed into the Social Security
trust funds. Funds, plural. Right. There are
two legally separate funds for the two main benefit
types, the Old Age and Survivors Insurance, or
OSI Trust Fund, which gets 10 .6 % of the payroll
tax. And the other is for disability. The Disability
Insurance, or DI Trust Fund, which gets the remaining
1 .8%. OK, so we often hear critics say that
the government spent all the Social Security
money, especially when the system was running
a surplus from like 1983 to 2009. Is that accurate?
Is it an oversimplification? It is an oversimplification,
but it gets at a very real tension in the accounting.
When revenues were higher than spending, the
law requires that surplus to be invested entirely
in special series, non -marketable U .S. government
bonds. So the funds didn't just disappear. No,
they were legally converted into IOUs from the
Treasury. So in effect, the trust fund, by holding
these government bonds, was indirectly financing
the federal government's general deficit spending.
Correct. The money was used for other government
operations. The government essentially takes
an internal loan from the Social Security Trust
Fund. And those reserves are huge. As of 2022,
they were $2 .818 trillion. That's $2 .7 trillion
in the OASI fund and $118 billion in the DI fund.
That reserve represents the government's promise
to pay back the principal and interest on those
bonds when the SSA needs the cash to pay beneficiaries.
That massive reserve sounds like a great safety
cushion, but the inescapable issue is demographics.
The baby boomers. The baby boom generation is
retiring en masse, and that's shifting the ratio
of workers paying in to beneficiaries taking
out. And this brings us to the solvency question.
The demographics are the elephant in the room.
According to the 2024 trustees report, the combined
OASDI trust fund reserves, all those bonds, are
projected to be completely depleted in 2035.
And that is the headline everyone focuses on.
It is. But this is where the public misunderstanding
is greatest. When those bonds are depleted in
2035, does Social Security just stop? Does it
cease to exist? No. Absolutely not. And this
is probably the most critical takeaway from this
section. If the bonds are all cashed out in 2035,
the system doesn't disappear. Why not? Because
the incoming payroll tax revenue from all the
people who are still working would still be sufficient
to pay approximately 77 percent of all the scheduled
benefits. So the system is still getting a massive
firehose of money coming in every day. A huge
amount. It just can't meet 100 percent of its
promises without some kind of legislative change.
So the core crisis isn't total collapse. It's
the political dilemma of facing an immediate
across the board 23 percent benefit cut unless
Congress does something. Exactly. The problem
is a shortfall, not total bankruptcy. And the
sources want to fight this gap. The estimated
75 year actuarial deficit is three point six
one percent of payroll. Which means what in plain
English? It's the theoretical increase in the
payroll tax rate you'd need right now to maintain
solvency for the full 75 years. And if we look
at the total scale of the problem, the sources
set this unfunded obligation at, what, $15 .1
trillion in present value dollars? That's based
on 2009 data, but yes, that number represents
the gap between all the projected future costs
and all the expected contributions. That $15
trillion number is what really drives the constant
political debate. When a number is that large,
it guarantees that Congress has to be constantly
looking for solutions. So let's look impartially
at the three main categories of fixes that are
discussed in the sources. First up is the tax
side -finding ways to bring more revenue in.
The most popular solution, at least among some
Democrats, is lifting that payroll ceiling. Right.
Getting rid of the cap. Former Secretary of Labor
Robert Reich is a big advocate for this. He suggests
lifting or even just eliminating the payroll
ceiling, which is $168 ,600 in 2024. If you do
that. High earners would pay FICA taxes on all
their wages. Which would boost revenue significantly
and at the same time fix the regressive nature
of the tax. Exactly. The other simpler revenue
option is just to increase the overall FICA tax
rate for everybody. A straight up tax hike. Right.
The sources show the direct math. If workers
and employers each paid 8 .8 % instead of the
6 .2 % they pay now for a combined rate of 16
.0%, that increase alone could provide solvency
all the way through 2090. 75 years of full benefits.
But it requires everyone to take a 1 .8 % cut
in pay. Okay, so moving to the benefits side,
what are the ways to reduce future payouts? Raising
the normal retirement age seems to be the classic
lever to pull. It is, because it just pushes
the cost out. One proposal that's cited suggests
gradually increasing the normal retirement age
by two months per year until it hits age 69 in
2034. And that would significantly reduce the
lifetime payouts for future retirees. And dramatically
improve the system's solvency. Then you have
the most politically volatile proposal, means
testing. Means testing. This involves phasing
out or reducing Social Security benefits for
people who have high income from all sources
during their retirement. So not just from work.
Right. And the source material notes that if
benefits were phased out for people earning,
say, over $48 ,000 a year, it would eliminate
over 20 % of the current funding gap. But that
proposal really challenges the core idea of the
system as insurance. The idea that you earned
this benefit by paying FICA taxes your whole
life. Exactly. And the unpopularity reflects
that. Only 31 % of households surveyed were in
favor of means testing. It turns Social Security
from an earned insurance into a welfare program
in the eyes of a lot of people. There are also
less drastic benefit reductions proposed just
for new retirees. Yes. Proposals for like...
a 3 % to 5 % reduction in benefits just for new
retirees. The source material suggests this smaller,
across -the -board cut could eliminate between
18 % and 30 % of the funding gap. And these cuts
tend to be favored by people who want to avoid
tax hikes but also want to keep the system universal.
Right. And finally, there's a really technical
adjustment related to the calculation itself.
averaging and more working years. How does that
work? Right now, your benefit calculation uses
your highest 35 years of earnings. If you increase
that averaging period to, say, 38 or 40 years,
it would mean that for most people, more years
of low earnings or even zero earning years would
get included in the average. Which would naturally
lower the average. It would lower the average
index monthly earnings or AIM, and that could
reduce the overall deficit by 10 to 20 percent.
But it disproportionately impacts workers who
had interrupted careers, like caregivers. That
discussion of the average indexed monthly earnings
takes us neatly into the math behind an individual's
benefit check. This is where the system's design
really shows its goals. Okay, first, eligibility.
To be fully insured and eligible for retirement
benefits, a worker needs 40 quarters of coverage,
or QCs. Which is usually about 10 years of work,
right, since you can earn up to four QCs a year.
Exactly. Once you're eligible, the SSA needs
to determine your primary input number, the AIM.
AIM. What does that stand for again and why is
that the key number? AIME is the Average Indexed
Monthly Earnings. It's the key because it represents
your career -long average wage, but adjusted
for inflation. How do they do that? It's calculated
using your highest 35 years of earnings. which
are first adjusted, or indexed, to reflect the
average national wage growth over time. This
makes sure that the salary you earned back in
1995 has the same relative purchasing power as
the salary earned today. And if someone has a
shorter career, say, they only work for 30 years.
Then those five non -working years are assigned
a big fat zero in the calculation. Yeah. The
SSA sums up the highest 35 years of these indexed
earnings and divides that total by 420, which
is 35 years times 12 months. to get to the aim
and that aim is then used to determine your base
benefited amount that base benefit amount is
called the primary insurance amount or pia and
the way the pia is calculated is really the heart
of social security's progressive design the pia
formula is brilliant it's brilliant in its simplicity
and its equity goal it uses what are called bend
points that are updated every year based on wage
growth let's use an example For a worker who
turns 62 in 2024. Okay. This is where those famous
percentages come in. The formula works in three
brackets based on your aim. First, you get 90
% of your aim up to the first bend point, which
was $11 ,074. 90%. That's a huge replacement.
Huge. Second, you get 32 % of the aim between
$1 ,174 and the second bend point, which was
$7 ,078. Yeah. And third, you get only 15 % of
the aim over $7 ,078. So it goes from 90 % down
to 32, then all the way down to 15%. That is
an enormous drop off in the replacement rate
as your income goes up. It's designed to be highly
front loaded. A worker whose average earnings
were low. so they fall below that first level
of 174, the threshold, they get a benefit equal
to 90 % of their average monthly indexed earnings.
That's a near total replacement of their working
income. It is. But a high earner only gets 15
cents back on the dollar for their earnings above
that second bend point. This is the mechanism
that takes that regressive tax we talked about
and makes sure the benefit payout is highly progressive.
It provides a much stronger safety net for those
who need it most. And the CBO data we mentioned
earlier, that backs this up. Completely. The
benefit -to -tax ratio for the lowest earners
is nearly triple that of the highest earners,
all because of these bend points. It's an intentional,
mandated redistribution inside the system. So
once that PIA is calculated, that's your full
base benefit. How is that protected over time?
A worker who claims their benefits at exactly
their full retirement age, or FRA, they get 100
% of their calculated PIA. Then year after year,
that monthly benefit amount is indexed for price
inflation using the COLA. So it keeps its purchasing
power for your entire retirement. No matter how
long you live. Understanding the PIA is one thing,
but maximizing it means you have to navigate
all these complex rules around timing. Let's
start with the full retirement age, the FRA.
The FRA, or the normal retirement age, it's changed
over time. For a long time, it was 65. But the
1983 amendments gradually increased it to help
with solvency. So for anyone born in 1960 or
later, the FRA is now 67. Right. And the earliest
you can claim, which is age 62, has stayed the
same. But the penalty for claiming early has
gotten much steeper as that FRA has moved up.
And this brings us to the biggest personal financial
dilemma for most workers. The claiming decision.
Claim early versus delaying. Right. If you claim
early at age 62, you get a permanently reduced
benefit. And because that window between 62 and
67 is now five years long, the reduction is substantial.
How substantial? For someone with an FRA of 67,
blaming it 62 results in a benefit that is only
70 % of their PIA. Think about that. That's a
30 % lifetime reduction compared to just waiting
until 67. On the other hand, the system highly
incentivizes you to delay your retirement past
your FRA. At least until you're 70. Oh, yeah.
If you delay claiming up to age 70, you earn
what are called delayed retirement credits, or
DRCs. For anyone born in 1943 or later, these
credits increase your monthly benefit by 8 %
for every year you delay. 8 % a year. Or two
-thirds of 1 % per month. So if my FRA is 67
and I wait until I'm 70, what does that get me?
Your benefit jumps to 124 % of your calculated
PIA. And that 24 % increase is logged in for
life, and it also gets all the future CLAs. That's
arguably the best risk -adjusted return you can
get anywhere for your retirement savings. It
is, but it's critical to note that the benefit
increases stop completely after age 70. There's
no added financial incentive to wait past that
point. The decision gets even more complicated
if you decide to keep working while you're collecting
benefits, but before you hit that FRA mark. The
earnings test. This is a complex rule that surprises
a lot of people. If you're working and you are
under your FRA for the entire year, the SSA will
deduct $1 in benefits for every $2 you earn above
an annual limit. So if you earn too much, they
claw back some of your benefits. Exactly. The
sources reference the 2013 limit of $15 ,120.
But that calculation changes a lot in the year
you finally reach your FRA. Yes. In that specific
year, the deduction softens quite a bit. It becomes
only $1 for every $3 you earn above a much higher
limit, which was $40 ,080 back in 2013. And the
most critical point is what happens once you
hit your actual full retirement age. The earnings
test stops completely. You keep all your benefits
no matter how high your current earnings are.
Beyond the primary worker, the system covers
family members, spouses, survivors. Let's talk
about the complexity of dual entitlement. Okay,
so a spouse, or even a divorced spouse, can get
a derivative benefit if they're 62 or older.
The maximum they can get is 50 % of the worker's
PIA. But the dual entitlement rules are there
to prevent, like, double dipping. Exactly. The
beneficiary gets the higher of their own earned
retirement benefit or the spouse benefit. You
can't stack two full benefits on top of each
other. And the source material highlights that
these rules disproportionately affect women.
Why is that? It's largely due to historical wage
gaps and career patterns. Many women have career
earnings that are lower than their current or
former husbands, so their own retirement benefit
is often lower than the 50 % spouse benefit they
qualify for. So the system pays the higher of
the two. Meaning they may get zero benefit based
on their own work history and rely entirely on
their spouse's record. In 2022, 7 million women
were navigating these dual entitlement rules.
Survivor benefits for widows and widowers, they
work differently and are critically important,
especially when it comes to those delayed retirement
credits. Yes. A widow or widower is eligible
for 100 % of their deceased spouse's PIA if they
claim at their own FRA. And here's the key financial
implication for survivors. The DRCs. Any delayed
retirement credits the worker earned. by putting
off their retirement. Those are carried forward
and they increase the survivor's benefit as well.
So the decision to delay claiming isn't just
an individual choice. It's a family safety decision.
Now we have to talk about the offsets, which
often blindside people who had jobs not covered
by Social Security. First, the Windfall Elimination
Provision, or WEP. The WEP is designed to prevent
a specific kind of windfall. Remember those 903215
bend points? They're progressive. Right. Well,
without WEP, someone who worked only a few years
under Social Security but has a generous separate
pension, say, from a state government, would
look like a low -income worker to the SSA. they'd
qualify for that massive 90 % replacement rate,
even though they're actually pretty well off
because of their other pension. So WEP steps
in to adjust that 90 % factor down. Down to between
40 % and 85%, preventing that unearned windfall
and aligning their replacement rate more closely
with what a career Social Security worker would
get. And it's triggered for workers with fewer
than 30 years of substantial Social Security
earnings and a pension from non -FICA -covered
work. Exactly. It's an equity measure to close
that loophole. The second major provision is
the government pension offset, or GPO. The GPO
targeted the spousal and widow benefits. If a
person received a non -FICA -covered government
pension in their own right, the GPO would reduce
or even eliminate any spousal or survivor benefit
they were entitled to. How much was the reduction?
The rule was that the Social Security benefit
was reduced by two -thirds of the amount of the
government pension. The intent was similar to
WEP. preventing double dipping on derivative
benefits when the person already had a substantial
non -covered public pension. So if your non -covered
pension was high enough, your Social Security
spousal benefit could be wiped out completely.
It could. However, we have a very important update
here that's noted in the source material. The
GPO was repealed by the Social Security Fairness
Act of 2023, which was signed into law on January
5, 2025. So that's gone. That removes a massive
complexity for future beneficiary who have government
pensions. OK, let's shift our focus to the administrative
reality of running this massive system. When
someone applies for benefits, especially disability
insurance, and gets denied, they face this staggering
internal appeals process. That whole process
is managed by the Office of Hearings Operations.
Or OHO. It's gone through a bunch of names like
OBAR or OHO. This agency runs the Administrative
Law Judge or ALJ hearings. They're essentially
court appearances for people who were denied
benefits. It is, in fact, the largest system
of administrative courts in the entire United
States. And the appeals path itself is exhaustive.
It can take years. It's an initial denial, then
a process of reconsideration, then the actual
ALJ hearing. If you're still denied, you could
appeal to the Appeals Council. And finally, you
have the option to seek review in the federal
court system. It's a long, protracted process.
The numbers on that administrative burden are
shocking, especially when we look at recent challenges.
The scale is immense. The ALJs, the judges, have
a goal of resolving between 500 and 700 cases
a year. Just think about that workload. Five
to 700 cases. But due to staffing issues and,
critically, the disruptions from the COVID -19
pandemic, the system faced enormous strains.
In 2020, only 18 % of ALJs actually met that
annual case disposition target. Which means long,
long wait times for people who desperately need
disability income. It underscores the human impact
of that backlog. Absolutely. Shifting gears completely,
let's talk about the Social Security number itself.
We mentioned it was originally in intended not
to be a primary means of identification. And
yet today, it is undeniably the de facto national
ID. It's a classic case of mission creep. Totally.
The SSN was created purely to track worker earnings
for retirement benefits. Its unintended transformation
into a universal ID is largely because of the
Internal Revenue Code, which requires the SSN
for all federal tax purposes. So parents immediately
needed SSNs for their kids to claim them as dependents
on tax returns. And it snowballed from there.
There were attempts to limit its use. The Privacy
Act of 1974, for instance, was supposed to restrict
SSN usage. But it didn't really work. No. The
sources show that the exceptions basically swallowed
the rule. The Privacy Act failed to stop its
proliferation because so many exceptions were
written in, allowing state and local governments
to use the SSN for essential functions like taxes,
driver's licenses, vehicle registration. So now
it's just impossible to function in modern society
without giving out your SSN, despite the SSA's
original intent. Pretty much. Let's look internationally.
How does the SSA handle workers who split their
careers between the U .S. and other countries?
That's where international coordination or totalization
agreements come into play. These are bilateral
agreements that are absolutely vital for workers
who might have spent, say, 15 years in the U
.S. and 20 years in Germany or Canada. And what
are the two main purposes of these agreements?
They eliminate dual Social Security taxation.
Without an agreement, a worker could be legally
required to make FICA taxes to the U .S. and
also pay into the foreign country's Social Security
system on the exact same earnings. That would
be crippling. Totalization eliminates that double
taxation. And second, they make sure that workers
actually receive a benefit. How so? They fill
gaps in benefit protection. If you have, say,
35 quarters of U .S. coverage, you haven't met
the 40QC requirement to be eligible. A totalization
agreement allows the SSA to count the credits
you earned in the foreign system toward your
eligibility. And if that makes you eligible,
what happens then? Then the U .S. benefit is
prorated based only on the time you actually
worked in the U .S. And the SSA has these agreements
with a lot of major economies. Italy, Germany,
Canada, the U .K., Japan. Many others. But the
sources highlight one crucial nuance. The agreement
that was signed with Mexico back in 2004, which
would impact a massive number of binational workers,
is specifically noted as not yet in effect. So
if you're counting on combining your U .S. and
Mexican work credits, that benefit coordination
just hasn't been implemented yet. Not yet. That's
a big deal for a lot of people. OK, we've established
the structure, the funding, the calculations.
Now we have to confront the core contradictions
and controversies surrounding Social Security.
And we start with that central paradox we touched
on earlier, the tension between its tax and its
benefit structure. The regressive tax versus
progressive benefit problem. This is the defining
contradiction of the whole system. On the tax
side, FICA is criticized as regressive for two
main reasons. First, high earners only pay FICA
taxes up to that wage base. $168 ,600 in 2024.
So all their income above that is untaxed. Which
means someone earning a million dollars is paying
FICA on a tiny percentage of their total income,
while someone earning $50 ,000 pays FICA on 100
% of their income. Exactly. And second, the FICA
tax only applies to earned wages. It doesn't
touch unearned income. Things like dividends,
capital gains, rental income, which make up a
huge portion of wealth for high earners. And
that combination makes the funding mechanism
deeply regressive. But then the system whipsaws
and becomes fiercely progressive on the benefit
side. Because of the PIA bend points, the 90,
32 and 15 percent. Right. Low income earners
have their working income replaced at a rate
that's three or four times higher than high income
earners. The CBO calculation confirms it. The
benefit to tax ratio for the bottom fifth of
earners is nearly triple that of the top fifth.
So the system functions as a massive intentional
redistribution machine. Albeit one funded by
a regressive tax. Moving to the political critique,
we have to address the comparison of Social Security
to a Ponzi scheme. Elon Musk brought this up
in March 2025, and it's a sentiment we hear a
lot. Critics argue that, like a Ponzi scheme,
the system requires continuous contributions
from new, younger workers to pay the current
retirees. And since the ratio of workers to beneficiaries
is shrinking because of demographics, they argue
the system is fundamentally unsustainable. Structurally,
though, the sources draw a very sharp line between
Social Security and an actual illegal Ponzi scheme.
What's the real difference? A true Ponzi scheme
is fraudulent. because it hides the fact that
there's no underlying asset or return -generating
mechanism other than cash from new investors.
Social security is totally transparent. It's
underwritten by mandatory tax revenue and by
the interest -bearing treasury bonds in the trust
funds. And participation is mandatory. The rules
are public. It's not an illegal fraud designed
to trick investors. No. The financial historian
Robert E. Wright. He tried to bridge this gap
by calling it a quasi -pyramid scheme. A quasi
-pyramid scheme. It's a term that acknowledges
the similar sustainability challenges that are
driven by population dynamics. New people funding
old payouts without equating the program to a
clandestine illegal fraud. What stands out in
the sources is the massive variability in outcomes
for individual workers. It makes the whole system
feel almost arbitrary. The Urban Institute calculator
data really brought this to life, showing how
an individual's net lifetime benefits can swing
so wildly. That data is stunning. Just look at
a single man earning $95 ,000 a year and retiring
in 2045. Because his taxes are capped, but his
benefits are also capped, he's estimated to lose
over $200 ,000 in net benefits over his lifetime.
He pays far more into the system than he or his
estate will ever get back. Far more. Now, contrast
that with someone earning a very low wage, say
$5 ,000. That person still gets a positive net
benefit because the progressive formula gives
them back 90 % of their income, even though their
tax contributions were minimal. And gender plays
a role here, too, just based on life expectancy.
It's an unavoidable factor. Women generally receive
a higher net benefit, and it's just down to simple
longevity. The benefit calculations are based
on actuarial tables that average men and women,
but women generally live about three years longer.
So they collect benefits for longer, leading
to a higher positive net return. But the single
biggest individual swing factor, according to
the Urban Institute's data, is marital status,
which seems completely counterintuitive for a
system that's based on your covered earnings.
How big of a swing are we talking about? Hundreds
of thousands of dollars. Take that same high
earner. the one who was projected to lose $152
,000 if he stays single. If he marries a stay
-at -home spouse who has little or no career
history of her own, and she collects a derivative
spousal benefit, 50 % of his PIA, that household
could become a big winner. And what's a big winner?
Receiving net benefits of around $165 ,000. So
the difference between those two scenarios...
The single high earner versus the high earner
with a non -working spouse is a swing of over
$300 ,000 in net lifetime benefits. All based
on the marriage decision and the reliance on
spousal benefits. It reveals a massive blind
spot in the system. It does. The progressive
benefit formula is entirely blind to non -wage
income. If a high net worth individual structured
their finances to show a low wage history, maybe
they got their income from dividends or rental
income instead of a salary, they still appear
poor based on covered earnings. And they'd qualify
for the higher 90 % replacement rate. Potentially
collecting high net benefits despite being very
wealthy. Let's move to the COLA debate, the Cost
of Living Adjustment Index. This indexing affects
the purchasing power of every single benefit
check. Currently, the COLA uses the Consumer
Price Index for Urban Wage Earners and Clerical
Workers, or CPIW. And the core argument is whether
this index accurately measures the inflation
that's actually experienced by the massive population
of seniors who rely on it. On one side, some
economists argue that CPIW overestimates inflation.
They say it doesn't account for substitution
effects. You know, when the price of beef goes
up, you buy more chicken. They suggest replacing
it with the chain CPI or CCPI -U. And the chain
CPI generally results in lower annual adjustments.
It does. So if the government adopted it, it
would lower future payouts and that would reduce
the 75 -year actuarial deficit. It's basically
solving part of the solvency problem through
inflation indexing. But the counterargument is
fierce, especially from advocates for the elderly.
They argue that CPI -W actually underestimates
inflation for seniors. And that argument centers
on consumption patterns. Seniors spend significantly
more on medical care and housing, and medical
costs in particular rise much faster than general
inflation. So they suggest using a dedicated
CPI for the elderly. Right. And researchers estimated
back in 2003 that if CPIE were used, the trust
fund would run out of money five years sooner
than projected. It's a clear illustration of
the massive financial difference these index
choices make. Finally, we have to talk about
the truly bizarre administrative controversy
that's noted in the sources. The non -death date
issue. This sounds like something out of a science
fiction novel. It's a huge data integrity issue
inside the SSA. An audit report from the inspector
general in 2023 noted that the SSA's main database,
the Nubitant, includes approximately 18 .9 million
records for people born in 1920 or earlier, so
everyone is over 100 years old, who have no death
date recorded. Wait. 18 .9 million digital ghosts
who should all be centenarians or super centenarians.
That sounds like a catastrophic failure of data
management at a massive fraud risk. That was
the immediate concern of the OIG, the inspector
general. They recommended that the SSA correct
these records to prevent improper payments across
all kinds of government systems that rely on
that database. So did the SSA fix the records?
They declined. They cited the high cost. Their
estimate to fix it was between $5 .5 and $9 .7
million, and they argue that correcting records
for people who aren't getting benefits would
divert resources from those who are. So what
was their solution for the fraud risk? They argued
the risk was low because back in 2015, the SSA
implemented an automatic system where entitlement
to benefits is terminated for anyone who's listed
as being 115 years or older. So those 18 .9 million
individuals are largely just old digital ghosts
in the system. But the SSA has accounted for
the payments risk by just assuming anyone over
115 must be deceased, even if there's no death
date on file. Precisely. It's an administrative
workaround that prioritizes cost over absolute
data accuracy, which just speaks volumes about
the constant battle the SSA wages against its
own massive, massive administrative scale. This
deep dive into U .S. Social Security, it reveals
this complex ecosystem that's defined by these
profound tensions. We've seen, I think, three
critical areas of friction that are going to
define the system's future. First. That fundamental
tension between the regressive nature of the
payroll tax, which disproportionately burdens
low and middle earners, and the highly progressive
structure of the benefit payouts, which ensures
a stronger safety net for the least affluent.
Second, the urgency of the solvency battle. The
projected depletion of the trust funds in 2035
means Congress has, what, a decade at best to
enact significant, painful changes. Whether that's
raising the taxable wage cap, increasing the
overall tax rate, or adjusting benefits in the
retirement age, a 23 % benefit cut is the consequence
of doing nothing. And third, just the staggering
complexity of the personal claiming decisions.
The timing of your retirement claiming early
at 62 versus waiting until 70, that can result
in a 54 % swing in your monthly benefit. And
as that Urban Institute data showed, even your
marital status can lead to a swing of over $300
,000 in your net lifetime benefits. It's just
wild. This brings us to a final provocative thought.
Despite all these challenges, why is Social Security
so fundamentally indispensable to the American
financial structure? And the sources point to
a massive ongoing crisis in private retirement
savings. The statistics are sobering. In 2010,
the median retirement account balance, so your
401k or your IRA for workers age 55 to 64, was
only $120 ,000. $120 ,000. That amount, when
you spread it across a 20 - or 30 -year retirement,
provides only a trivial supplement to Social
Security. And the situation is often just dire.
75 % of Americans who were nearing retirement
had less than $30 ,000 saved in their retirement
accounts. Less than $30 ,000. This is why Social
Security remains a central safety net. Its ability
to pay 77 % of scheduled benefits, even if the
trust funds are depleted, is absolutely essential
because the vast majority of workers simply have
not accumulated adequate private savings. It's
a public guarantee filling a massive private
sector failure. Given all this detailed information
we've gone through on the PIA, delayed retirement
credits, the FRA, the claiming dilemma, we strongly
encourage you to take the next step. Use your
official My Social Security Online account and
the SSA's benefits calculators to explore your
own what -if scenarios. Only by understanding
these complex variables can you truly construct
your financial future. The rules are arcane,
but the implications are immense. Thank you for
diving so deep into the mechanics of this vital,
complex system with us today. Until next time.