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Definition: Social Security from QFinance: The Ultimate Resource

government assistance program for elderly and disabled in the United States, the federal insurance program that provides income for retirees and their dependents and survivors, disability income, and healthcare for seniors. The program is funded by required contributions from employers and working individuals

Summary Article: Social Security
From The Social History of the American Family: An Encyclopedia

Social Security is a federal program enacted in 1935 that provides insurance to almost all Americans against economic insecurity risks, such as elderly poverty and disability. Economic and demographic changes in the decades leading to the passage of the Social Security Act underscored the need for a more coordinated, large-scale approach to ensuring economic security, especially for the elderly, and in the context of the Great Depression. A range of programs fall under (or were initiated by) the Social Security Act, although the most common is a pension-like system for those over age 65 (67 for future retirees). The program has seen many changes to its structure and has been the subject of frequent policy debates over the years. A period of steady expansion occurred from the late 1930s to the mid-1970s before giving way to concerns over the programs long-term funding model, a period that has persisted from the late 1970s to the present. Despite debate on how to best fund the program, the effect of Social Security is that many Americans are kept out of poverty through its benefits, especially the elderly, an age group whose poverty rate would be about 30 percent without Social Security.

History of Social Security

The Social Security program was enacted in 1935 as a means to ensure some level of economic security (such as a safety net) to many Americans, particularly the elderly. The passage of the program reflected a cultural shift regarding attitudes about how the government should provide economic security for citizens, as this had primarily been achieved through family relationships for previous generations. Throughout U.S. history, family members have generally felt some sense of responsibility to one another, and security for family members unable to work—as labor is the chief means for economic security—was found through other family members’ ability to generate resources, most notably through land ownership and agriculture.

As societies grew and economies became more complex, more formal systems of economic security arose, primarily in Europe. This influenced the approach of English colonists in America, with the first colonial legislation aimed at relief for the economically insecure being fashioned after English “poor laws” of the 1600s. These programs were locally based (i.e., no coordinated system), and while relief to the destitute was provided through taxation, relief could be given in a demeaning manner meant to discourage dependency. Relief was also variable, with the poor classified as either deserving or undeserving.

Thus, most economic security responses (outside of interfamily efforts) over the first 200 years of the United States fell to nongovernment organizations and charities. The chief exception was the Civil War pension program, which was a response to a high proportion of the population being either disabled or survivors previously dependent on male breadwinners. Although Civil War veterans still represented only a segment of the overall population, their pension system had been the largest federal benefit program in the decades leading up to the enactment of Social Security, and the structures of the two programs share similarities. Nonetheless, as late as 1915, only 25 percent of all funding spent on assisting the poor came from the public sector. However, by the early 1930s, social and economic changes that took root in the mid-1800s began to underscore the need for a more structured approach to addressing the needs of the economically insecure.

Demographic Changes Leading to the Social Security Program

The main impetus for a large-scale response to social insurance (e.g., safety net programs) was demographic changes that eroded traditional forms of economic security. One of the effects of the Industrial Revolution was that the country transitioned from an agriculture to an industrial economy, and from the late 1800s to the 1930s the percentage of Americans living in cities doubled, with 1920 being the first time that more families lived in cities than on farms. The primary economic security provider had been intergenerational family support, as well as support from community and religious charity sources. However, the urbanization of families over time meant fewer extended family households existed as younger, working-age family members migrated to city-based employment and left older family members on farms and in rural settings.

Fewer families on farms also caused a majority of the population to be reliant on wages for economic security, as opposed to sustenance and security through farm and land ownership. Economic security through wages meant families were increasingly vulnerable to problems such as recessions and layoffs. Some companies offered pensions. However, only a handful of companies provided pensions for nonexecutive workers at the start of the 20th century, and by the early 1930s only 15 percent of the workforce had the potential to receive work-related pensions. These early company pension plans were tenuous and often were paid at the employer's option. In reality, only about 5 percent of the elderly were receiving pensions in the years before Social Security. Most workers transitioned out of employment and into old age without economic security from employment, federal, or state sources. With fewer extended families living on farms, economic security in old age began to become more difficult, and longer life expectancies exacerbated this issue. More effective public health programs and better health care contributed to average life spans lengthening by 10 years over the first three decades of the 20th century, the most rapid increase ever recorded.

These demographic shifts strained traditional sources of economic security and made more Americans reliant on wages and more vulnerable to macroeconomic trends. The 1929 stock market crash and the resulting Great Depression of the 1930s saw unemployment exceed 25 percent. Millions of families faced economic insecurity, and more than half of the elderly population were unable to support themselves. Cultural attitudes toward the role of government in ensuring financial security began to shift, and for the first time some states began to implement support programs for the elderly, although these were often underfunded and inadequate. As the Depression worsened, a variety of populist social movements began to take shape. These encompassed a wide range of funding mechanisms, political approaches, and benefit structures, yet most called for some sort of pension system for the elderly. Federal responses to this varied in the first years of the Great Depression. Some politicians believed the downturn was merely part of an economic cycle that would right itself, with no government intervention necessary. President Herbert Hoover, whose one presidential term spanned the start of the Great Depression, had earlier campaigned on the inefficiency of government and initially advocated individual efforts toward economic recovery through volunteerism.

As more of the population faced economic peril, however, recovery through charitable efforts became less practical. Congress began considering the creation of a strengthened federal version of state-sponsored welfare/old-age benefit programs. When Franklin D. Roosevelt was elected president in 1932, he advocated a new social insurance model for the country, similar to the European social insurance programs that had begun in the late 1800s. By the time the United States established its own version, 34 other nations had also implemented social insurance programs. Guiding principles of social insurance are that governments play some role in ensuring economic security; that groups of persons (e.g., workers) are insured against some forms of risk (e.g., disability, old-age economic insecurity); and that a social aspect is present, with contributions to programs supporting broader social economic security versus individual self-interest.

The Social Security Act is signed into law by President Franklin Delano Roosevelt on August 14, 1935, as part of the Second New Deal. The act provided benefits to retirees and the unemployed, financed by a payroll tax on current workers’ wages. The act also gave money to states to provide assistance to aged individuals (Title I), for unemployment insurance (Title III), Aid to Families with Dependent Children (Title IV), Maternal and Child Welfare (Title V), public health services (Title VI), and the blind (Title X).

Enactment of Social Security

Roosevelt and Congress made sweeping policy changes in the 1930s through the New Deal, which aimed to alleviate the effects of the Great Depression through relief, recovery, and reform. A cornerstone of this was Roosevelt's social insurance model, and in 1934 he commissioned a Committee on Economic Security to research options. A little over a year later the Social Security Act, which included general welfare provisions as well as a social insurance system that provided financial benefits to retired workers, became law.

The original program included aid to dependent children, unemployment insurance, and grants to states for medical care. Benefits for those ages 65 and older who were not working were to be paid at the federal level for retirees, as well as through federal grants to states for old-age assistance. State old-age assistance program grants were seen as a temporary relief effort, as more retiring workers would eventually be paid through the federal Social Security program. Benefits were to start in 1942 only for retired workers who had paid into the program through payroll tax deductions, which began to be collected in 1937, and benefit amounts were based on workers’ contribution histories.

The Social Security Board was created to oversee the program, and initial tasks included communicating the mechanics of the system to the public and setting up logistics for implementation. By 1937, just over 150 Social Security field offices had been established and over 30 million Social Security numbers had been issued. To finance future benefits, Federal Insurance Contributions Act (FICA) taxes began to be paid through workers’ payroll taxes. These taxes were deposited into a central Social Security Trust Fund that pays out benefits, and building up a reserve fund was an important aspect of the original model. The initial 1937 FICA tax was 1 percent each for employers and employees on the first $3,000 of a worker's annual earnings, with gradual tax increases scheduled to reach 3 percent in 1949. By 2014, the Social Security program continued to be chiefly financed through payroll taxes equally levied on both employers and employees. Similarly, benefit amounts continued to be based on work history in covered employment (i.e., employment through which FICA taxes are assessed), and benefits still replaced a higher proportion of previous earnings for lower-income workers.

Changes to Social Security

Although tax rates and other key features of the program have changed over the years, many of the benefit programs outlined in the original 1935 act are still in existence. The program that is now called the Old-Age, Survivors, and Disability Insurance and the unemployment insurance program continue to pay benefits to these segments of the population. The Aid to Families with Dependent Children (AFDC) program also continued until the welfare reforms of 1996, at which point it transformed into the current Temporary Assistance to Needy Families (TANF). In addition, federally supported old-age programs eventually became the current Supplemental Security Income (SSI), which is a means-tested (i.e., available to those with lower incomes) assistance program; and provisions in the original legislation related to researching federal medical insurance laid the groundwork for the later creation of Medicare and Medicaid.

The structure of the Social Security program and the political approaches shaping it changed in other ways in the decades since the 1935 act was passed. These changes can be viewed in two phases: a period lasting through the 1970s, in which the program continued to be expanded, and a subsequent period (that currently continues) in which fiscal concerns over the program's long-term viability shape policy makers’ and public discourse.

Expansion Period: 1940s to 1970s

Amendments in 1939 revised the model to begin paying monthly benefits in 1940 (instead of 1942), increased benefit amounts for early program beneficiaries (based on average earnings versus cumulative), delayed the scheduled FICA tax increases (in fact, the 1 percent tax rate did not increase until 1950), allowed workers to have some additional postretirement income (i.e., the retirement earnings test), and transformed the program into a family-based model. The original act paid benefits only to retired workers, but the 1939 amendments created eligibility for wives of contributing retired workers over age 64 (men were not allowed spousal benefits until the late1960s) and for aged widows or widows caring for dependent children. Changes to how benefits were computed for workers resulted in an increased benefit amount, and, although formulas have since changed, key guidelines of the original benefit formula remain today. The 1939 amendments, however, reflected fundamental changes to the program in that it shifted from an economic security measure only for retired workers to a family-based security program; and the benefit and tax changes moved the program away from a savings model and more toward an insurance program, resulting in a decreased buildup of the Social Security Trust Fund. Concerns over the government's ability to actually save the funds (versus spending them) partially motivated the 1939 amendments and subsequent changes. With program expansion and FICA tax increases delayed, the program largely ran on a pay-as-you-go basis through the 1970s.

In the 1950s, Social Security benefits were extended to groups such as farm and domestic workers, self-employed persons, and disabled workers. Starting in the 1950s, cost-of-living allowances (COLAs) were put into place so that benefits, which had been fixed amounts and were becoming modest in comparison to state old-age pensions, could increase to keep up with inflation. Social Security program changes in the 1960s included increases in benefits and hikes in both the FICA tax (up to a combined 8.4 percent by the end of decade) and in the taxable amount of workers’ incomes. The disability insurance program expanded to be available to disabled workers under age 65, benefits for aged widows increased, and the age to begin receiving reduced benefits was lowered to 62. During this time the Medicare (medical insurance for retired workers over age 65 and younger people with disabilities) and Medicaid (means-tested medical insurance for low-income persons) programs were created through Social Security Act amendments, although they are now administered through the U.S. Department of Health and Human Services.

Changes in the 1970s included raising survivor benefits to 100 percent and replacing state old-age programs with the Supplement Security Income (SSI) program, which provides cash stipends to low-income persons over age 65 and the blind or disabled of any age. Although SSI is administered through the Social Security Administration, it is financed with Treasury funds. This period also saw increases in minimum benefits for low-wage workers and automatic COLA increases. Prior to 1972, COLA increases were only triggered when Congress legislated them; however, in this year automatic COLA increases were enacted so that benefits could retain purchasing power. However, a technical flaw in the COLA formula, combined with other economic issues in the 1970s, resulted in concerns about the long-term sustainability of Social Security's pay-as-you-go model.

Fiscal Concern Period: Late 1970s to Present

Economic conditions in the 1970s saw double-digit inflation and low growth of jobs and wages, which resulted in financing issues for Social Security. The flaw in the 1972 COLA formula was corrected in 1977 amendments, which scheduled a phased-in FICA payroll tax increase to 7.65 percent for employees and an equal amount for employers. This tax rate remains in effect today, although the earnings cap to which the tax is applied has increased to over $100,000. While these amendments increased the program's long-term financial stability, demographic changes continued to threaten the overall funding model.

The baby boom from 1946 to 1964 created a long-range problem of more retirees drawing down a trust fund to which fewer workers would be contributing. In the early 1980s a panel appointed by the president studied these issues and initiated changes in 1983. The 1983 amendments instituted a tax on Social Security benefits, covered federal employees under the program, slowed down COLA increases, accelerated FICA increases, and created a phased-in retirement age increase to be eligible for maximum benefits (currently age 67 for those born after 1960). Less substantial changes have taken place since the 1983 amendments, such as late-1990s welfare reform–related legislation that replaced the AFDC program with TANF and created work incentives for disabled and SSI recipients. At the same time, legislation in 2000 removed the retirement earnings cap, meaning that individuals can continue to work and receive full retirement benefits. Economic stimulus-related legislation in the late 2000s created temporary suspensions of FICA taxes and one-time payments to some Social Security recipients.

Although no substantial changes have been made to the structure of Social Security since the mid-1980s, political debate over the program has been a constant. Changes in the early 1980s had increased Social Security's long-term funding ability, and the program has run a surplus for decades. How long the program can support the pay-as-you-go model before drawing down the surplus varies each year according to the Social Security trustees’ annual report, although estimates generally place the payment of full benefits into the 2030s, with reduced benefits being paid after this time if no previous actions are taken. How this information is interpreted and communicated to the public and the responses on how to correct long-range funding issues vary greatly across the political spectrum. More fiscally conservative responses have typically involved benefit reductions (e.g., raising retirement age, COLA reductions, decreased benefits) and privatization of the program (including a move toward individual accounts versus the social insurance aspect of the current program). More fiscally liberal approaches have sought benefit protection through increased revenue (e.g., FICA increases, raised earnings cap, broadening tax sources). Moderate political proposals usually involve a mix of strategies, and most any proposal usually includes a long-term phase-in component so that the benefits of current or near-retirees (a traditionally powerful voting block) will not be disrupted.

Effects of Social Security

Over 95 percent of all workers are in Social Security–covered employment, and about one in six Americans collects Social Security benefits. Given the scope of the program, debate over Social Security policy will likely persist. However, the program has contributed to keeping many Americans out of poverty. When the program began, over half of the elderly population lacked the economic security to provide for themselves. When the official poverty measure was instituted in the early 1960s, over 35 percent of the elderly were in poverty; today, less than 10 percent are in poverty. The program also plays a role in keeping the nonelderly out of poverty, with most nonelderly workers being covered by disability insurance programs. About 8 percent of children live in families receiving any Social Security benefits and roughly 1.5 percent of all U.S. children are kept out of poverty due to the benefits, which are especially important to families raising disabled children.

Nearly two-thirds of elderly beneficiaries receive a majority of their income through Social Security benefits, and this percentage is higher for minorities. Women also uniquely benefit from the program, in that they are more likely to earn less, spend less time in the workforce, and live longer than men, thus receiving a greater proportion of benefits due to the program's progressive benefit computation formula and COLA adjustments over time. As the elderly age and draw down any other savings, benefits contribute to a greater share of total income. Although benefits are relatively modest (e.g., averaging about $15,000 annually), without Social Security benefits the current elderly poverty rate is estimated to be roughly 44 percent.

See Also: ADC/AFDC; Medicaid; Medicare; New Deal; Poverty and Poor Families; Primary Documents 1935; Retirement

Further Readings
  • Center on Budget and Policy Priorities. “Social Security”. (Accessed March 2014).
  • Martin, Patricia; David Weaver. “Social Security: A Program and Policy History”. Social Security Bulletin, v.66/1 (2005).
  • Social Security Administration. “Historical Background and Development”. (Accessed February 2014).
  • Graham McCaulley
    University of Missouri
    © 2014 SAGE Publications, Inc

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