MAY 2006 - Social Securitys financial woes are making headlines; both Congress and the President are publicly considering an overhaul of a system that has existed for 70 years but will face challenges in the coming decades. This study presents a brief history of Social Security, its creation in the 1930s, the many changes to the program since its inception, and its financial position as it has developed over the last several decades. The history of Social Security provides a context in which proposed changes to the system can be evaluated.
Earliest Developments
In 1934, President Franklin D. Roosevelt created the Committee on Economic Security (CES). The CES was assigned the task of studying the need for an economic security system to provide income for the elderly and disabled. Care for those unable to work was traditionally provided by family members or, in limited cases, by the government. Roosevelt recognized the need for a national system. In January 1935, the CES issued a report to President Roosevelt outlining a plan for a national program of economic security. This plan ultimately became the Social Security Act (SSA), which was passed by Congress on August 14, 1935.
The SSA created a social insurance program covering a variety of individuals. The law provided a monthly benefit to individuals age 65 (that is now 66 and older and scheduled to go up in future years)gs and older and no longer working. The monthly benefit was paid to the primary worker when he retired; the amount received was based on the individuals payroll tax contributions.
The SSA also provided unemployment insurance, aid to dependent children, and grants to states for medical care. The Social Security Board was established and charged with implementing a system to enroll employees, report earnings, and collect payroll tax contributions. Under the initial SSA, monthly benefits were to begin in 1942; from 1937 until 1942, Social Security would pay out a single lump sum to anyone retiring. This payback sum was given to those paying into Social Security but not having sufficient contributions to vest in monthly benefits.
Changes to the 1935 Act
There have been several important amendments to the original 1935 Social Security Act. In 1939, Social Security was modified to add benefits to the spouse or minor children of a retired worker. It also added a survivors benefit, paid to the family in the event of the premature death of a covered worker. Thus, with the 1939 amendment, the idea of economic security became a family-based program rather than an individual-based one, and one that provided benefits for retirement, disability, premature death, and medical costs after retirement. The payment of monthly benefits was accelerated to begin in 1940 rather than 1942. Interestingly, the first monthly retirement check was issued to an individual who had paid a total of $22.54 into the system and received $22,000 in benefits over her lifetime!
The next significant change to the SSA occurred in 1950, when the first cost of living adjustment (COLA) was added the program. This was a one-time increase in benefits of 7.7%; the next COLA occurred in 1952, a 12.5% increase. In 1954, a stipulation was added that would freeze a workers record during the years he was disabled and unable to work. This amendment avoided a workers receiving reduced or no benefits in the event of a disability.
In 1961, the retirement age for men was reduced to 62, with a reduced monthly benefit for those choosing to retire early. Several major changes to Social Security occurred with the 1972 amendment: automatic COLAs were instituted, a minimum monthly benefit was established, monthly benefits were significantly increased to those individuals waiting until age 65 to retire, and a system for automatic increases in the amount of earnings subject to Social Security taxation was developed.
Social Security Today
The first recognition of the fragility of the Social Security program occurred in 1975. A report developed by the Treasury Department indicated that Social Security payroll taxes collected would be insufficient to meet Social Security payments by 1979. In response, Congress increased the tax rate, reduced benefits, and made the automatic adjustment to the amount of earnings subject to Social Security independent of the COLA. These steps averted a potential Social Security failure.
In 1983, another potential Social Security crisis was avoided. President Ronald Reagan formed the Greenspan Commission to study the financial state of Social Security. The commission issued a detailed report calling for numerous, sweeping changes to be implemented in order to strengthen Social Security. A bill passed by Congress based upon the recommendations of the Greenspan Commission taxed some Social Security benefits, included federal employees in the definition of employees for Social Security payroll tax purposes, and scheduled increases in the retirement age in the next century.
In his February 2005 State of the Union Address, President George W. Bush indicated that strengthening Social Security was one of the priorities for his second term in office. He stated that unless significant changes were implemented, Social Security is headed toward bankruptcy. The March 23, 2005, report of the Trustees of the Social Security Fund painted a grim picture. The report indicated that Social Security contributions would peak in 2008 and decline thereafter. By 2018, the report stated, the government will begin paying out more than it collects in payroll taxes, with the deficiency growing each year: $200 billion deficiency by the year 2027, $300 billion by the year 2033, and then the system would be bankrupt.
When Social Security was implemented in 1935, the amount of earnings subject to tax was $3,000. The tax rate was 1%. As the Exhibit indicates, in 1966 the Medicare tax rate was split from the Old Age, Survivor, and Disability (OASDI) rate. By 2005 the OASDI rate is 6.2% for both employer and employee on earnings up to $90,000; the Medicare rate is 1.45% with no cap on earnings. There have been 20 increases in the OASDI rate since the inception of the program. Historically, the majority of additional funds needed for Social Security were obtained by increasing the rate and the earnings subject to taxation.
When Social Security was implemented, there were 16 workers for every Social Security recipient; today there are 3.3 workers for every recipient, and it is estimated that by 2030 there will be only two workers for every recipient. A pay as you go approach becomes less feasible when there are fewer workers supporting each benefit recipient. Another factor contributing to the concern about the state of the Social Security system is the fact that in 1935 fewer people lived long enough to collect benefits; the average life expectancy was 67 years. Today the average life expectancy is 77 years, and there are more than 48 million recipients. A more detailed history of Social Security is available at
Social Security Online History Pages: Main Page.
(The main reason average lifespan is getting longer is that in 1935 50% of children died before reaching age 5, lifespan is really much shorter these days if you only count those who reach adulthood and if you take out accidental and war deaths, you have an even shorter life expectancy)gs
A majority of people anticipate that Social Security will form a significant part of their retirement income. The AICPA (Understanding Social Security Reform: The Issues and Alternatives, March 2005) identified that Social Security currently comprises more than half the income for more than 60% of the programs beneficiaries; furthermore, for 30% of its beneficiaries, Social Security represents more than 90% of their total income. Thus, any proposed change that might impact benefits received or taxation of benefits will have a significant impact on retirement planning.
Social Security: Tax or Insurance?
When Congress implemented Social Security in the 1930s, was Social Security intended as a social welfare program that would redistribute wealth to retirees? Or was it intended to be an insurance program that workers paid into during their working years and received benefits from during their retirement years or if they became disabled? An analysis of these questions might shed light on the direction of Social Security in the future.
Originally, President Roosevelt called for social insurance. He envisioned a plan through which workers would contribute and provide for their own future economic security. He specifically disdained the idea of reliance upon welfare.
The original SSA embraced the idea of Social Security being an insurance program under which a group of individuals were insured against identifiable risks: disability and old age.
