As of the end of May 2014, nearly 64 million Americans received some type of Social Security benefit, or 1 in 6 Americans. In 2012, the government paid out $775 billion in benefits, making it a significant driver of the economy. If you're not sure that you have an accurate idea as to how Social Security benefits work, read on.

The Vital Stats

The U.S. GDP totaled $16.2 trillion in 2012, which means that Social Security represented nearly 5% of the nation's GDP. In a report by the AARP, an organization devoted to serving retired individuals, Social Security supported approximately $1.4 trillion in goods and services, or economic output. It also directly generated $775 billion in GDP, which matches the payouts for that year. Its estimate of Social Security recipients stood at 57 million, which doesn’t include the nearly 6 million blind or disabled individuals who also receive supplemental security income (SSI). The vast majority of Social Security recipients are simply retired and 65 years of age, or older. There are also individuals who are under 65 but disabled, as well as certain people who qualify for benefits as early retirees.

Economic Impacts

According to the AARP study, the Social Security system provides more than 9 million jobs and close to $400 billion in annual benefits to these workers. Social Security is also taxable, which means that $222 billion went back to the federal, state, and local governments. And, though to be taken with a grain of political salt, the AARP estimates that cutting Social Security by 25% would result in the loss of 2.3 million jobs and a reduction of $349 billion in GDP.

The Downside Implications

Clearly, a cutback in Social Security would adversely affect the economy and millions of people who rely on it for their retirement spending. The Social Security Administration estimates that 64% of the beneficiaries rely on Social Security for at least half of their annual income. And since women live longer than men in general, any cuts would disproportionately affect them. Currently, 55% of beneficiaries are women and this percentage is expected to increase over time.

Estimates are that the Social Security system could run out of funds shortly after 2035, assuming estimated benefit payments continue to run above tax revenues to support Social Security payouts. However, small tweaks, such as increasing retirement ages or the tax revenues that go to supporting the system, as well as economic growth and further immigration/population growth, are expected to support Social Security for many more decades. Already, the retirement age for individuals born after 1960 is 67. Only those born in 1937 or before were able to retire at 65.

Bottom Line

Fewer than half of households with individuals aged 55 to 64 have saved enough for retirement. This means that Social Security payouts will represent the vast majority of their income throughout retirement. There aren’t any anticipated cutbacks to Social Security, but its impact on older Americans is certainly significant.

At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Economics

    The Economics of Raising the Social Security Age

    Briefly examine the economics behind raising the retirement age for Social Security benefits and how it could impact the federal budget.
  2. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  3. Entrepreneurship

    The Unintended Consequences of Outsourcing

    The outsourcing of labor overseas is a natural result of globalization of world markets and the drive for businesses to cut costs in order to maximize profits.
  4. Retirement

    The World's Most Luxurious Retirement Destinations

    If money is no object (or if you would just like to dream), these five spots are the crème de la crème.
  5. Professionals

    How to Protect Elderly Clients from Predators

    Advisors dealing with older clients face a specific set of difficulties. Here's how to help protect them.
  6. Professionals

    Social Security 'Start, Stop, Start' Explained

    The start, stop, start Social Security strategy is complicated. Here's what retirees considering it need to consider.
  7. Retirement

    Strategies for a Worry-Free Retirement

    Worried about retirement? Here are several strategies to greatly reduce the chance your nest egg will end up depleted.
  8. Professionals

    Your 401(k): How to Handle Market Volatility

    An in-depth look at how manage to 401(k) assets during times of market volatility.
  9. Professionals

    How to Build a Financial Plan for Gen X, Y Clients

    Retirement is creeping closer for clients in their 30s and 40s. It's a great segment for financial advisors to tap to build long-term client relationships.
  10. Professionals

    Don't Let Your Portfolio Be Trump'd by Illiquidity

    A look at Donald Trump's statement of finances and the biggest lesson every investor can learn.
RELATED TERMS
  1. Surplus

    The amount of an asset or resource that exceeds the portion that ...
  2. Dynamic Updating

    A method of determining how much to withdraw from retirement ...
  3. Possibility Of Failure (POF) Rates

    The likelihood that a retiree will run out of money prematurely ...
  4. Safe Withdrawal Rate (SWR) Method

    A method to determine how much retirees can withdraw from their ...
  5. Mandatory Distribution

    The amount an individual must withdraw from certain types of ...
  6. Auto Enrollment Plan

    An employer’s decision to sign employees up to have a percentage ...
RELATED FAQS
  1. What are the main differences between Social Security Benefits & Social Security ...

    While the names are very similar and they have similar purposes, there are a few marked differences between Social Security ... Read Full Answer >>
  2. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  3. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  4. Why would someone change their Social Security number?

    In general, the Social Security Administration, or SSA, does not encourage citizens to change their Social Security numbers, ... Read Full Answer >>
  5. Are spousal Social Security benefits retroactive?

    Spousal Social Security benefits are retroactive. These benefits are quite complicated, and anyone in this type of situation ... Read Full Answer >>
  6. Is Argentina a developed country?

    Argentina is not a developed country. It has one of the strongest economies in South America or Central America and ranks ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!