What is Social Security, Exactly?

The Social Security system was implemented in 1935 by President Roosevelt to help families suffering from the Great Depression. Many people today simply believe that the Social Security system is a program in which they contribute a portion of their earnings that they can collect once they retire.

Similar to an IRA or savings account, people believe that money is securely sitting in an account simply collecting interest and waiting for them when they retire. The truth of the matter is that the Social Security system works nothing like that at all. In fact, the system has been the center of controversy for many years because many think it is poised to fail very soon.

The way that the Social Security system works is that you contribute a portion of your earnings each year to the fund, which is immediately paid out to people who are receiving their Social Security checks presently.

The thought process back in 1935 was that working people would contribute to the system that would help those who retired support themselves. Then when it was your turn to retire, the current generation of workers would basically pay for your checks. So in a sense, the working class is paying those Social Security checks in real time. The system was supposed to keep rolling at this pace. The problem occurs when there are more people retired and collecting checks than there are working and paying into the fund.

This is where many today see the collapse of the Social Security system occurring. To try and stay ahead of any potential problems, the government has been buying secure savings bonds. When they mature, the interest should be able to handle the influx in retirees that are getting eligible for benefits.

The thinking is that the government can easily draw on the added surplus as needed. The country has not reached that tipping point yet, so as of today no one is really sure if this will work long term or not. While the plan was supposed to work forever back in 1935 because of the large ratio of workers to retirees, problems are on the horizon with the weight being shifted to the retirees. As long as the money in the fund can support the checks to those eligible, the system will continue to work.

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