Social Security Act
1. The Problem
When English-speaking colonists arrived in North America, they were steeped in the notions and practices they knew in England, including the “Poor Laws.” The original colonial poor laws emulated the Elizabethan Poor Law of 1601. They stressed local taxation to support the impoverished and all relief was a local obligation. Town elders determined who was eligible for relief (or subject to punishment for laziness) and how it would be meted out. Prevailing American attitudes toward poverty relief were usually dubious, and governmental involvement was slight.
Social Security as it would be recognized today did not actually come into being in America until 1935, but there was one significant predecessor, a social security program intended for a particular segment of the American population. In the aftermath of the Civil War, there were hundreds of thousands of disabled veterans as well as widows and orphans. Their needs led to the development of a pension plan with similarities to later developments in Social Security. Rooted in the 18th century, several significant social trends occurred in 19th century America that made conventional ways of securing economic survival increasingly obsolete. Beginning in the late 19th century changes like the Industrial Revolution, America’s urbanization, the vanishing extended family and a longer life expectancy helped abolish the economic security policies of the time. Prior to the Industrial Revolution, many people were farmers and managed to support themselves during hard times, and extended family often lived together on family farms and cared for one another as they aged or struggled.The Industrial Revolution, however, attracted people to move to cities for jobs that were often threatened by layoffs and recession, leaving many without a way to support themselves if they lost their job. The urbanization of American also found many people leaving their extended family behind to provide for themselves. As sanitary and general conditions in America improved, the life expectancy of its citizens did, too. When more and more people grew older, many were unable to work or became sick yet still required care.
Moreover many people went homeless and out of money due to great depression in early 1900s. The Great Depression left millions of people unemployed and struggling to put food on the table. It struck the elderly especially hard and many states passed legislation to protect their elder citizens. But most elder-assistance programs of the time were a dismal failure. They were underfunded, poorly run and, in some cases, flat out ignored by officials. Those seniors who received assistance only got about 65 cents a day. As the depression raged on, government officials and frustrated private citizens alike moved to find ways to help struggling Americans and introduced plans to increase economic security. Most ideas were basically federal or state financed pension plans. Some included all citizens while others included only the elderly. None of the plans became law; however, many had huge followings and initiated spirited dialogue about how to care for the disadvantaged and the elderly. The need for a reliable source of financial benefits for the elderly became a very important to solve. Until Franklin D. Roosevelt became president, most social assistance plans in America were dependent on the government, charities and private citizens doling out money to people in need.
2. Working towards the problem
Roosevelt, however, borrowed a page from Europe’s economic security rulebook and took a different approach. He proposed a program in which people contributed to their own future economic security by contributing a portion of their work income through payroll tax deductions. Basically, the current working generation would pay into the program and finance the retired generation’s monthly allowance. Social Security was controversial when originally proposed, with one point of opposition being that it would reduce the labor force, but supporters argued instead that retiring older workers would free up employment for young men, which during the Depression was a vital point of concern. On January 17, 1935, President Franklin D. Roosevelt sent a message to Congress asking for “social security” legislation. The same day, Senator Robert Wagner of New York and Representative David Lewis of Maryland introduced bills reflecting the administration’s views. The resulting Senate and House bills encountered opposition from those who considered it a governmental invasion of the private sphere and from those who sought exemption from payroll taxes for employers who adopted government-approved pension plans. Eventually the bill passed both houses, and on August 15, 1935, President Roosevelt signed the Social Security Act into law.
3. The Policy
The Social Security Act is America’s foremost social welfare law, designed to counteract the dangers of old age, poverty, disability and unemployment through a range of government programs and benefits. The Act was originally passed in 1935, as part of Franklin Delano Roosevelt’s Second New Deal. The cornerstone of the Social Security Act is the Social Security payments it provides current retirees. Social Security benefits are funded through payroll taxes collected by the IRS and entrusted to the federal Social Security Trust Funds. Full benefits are available to retirees at the age of 65, though early retirees, starting at 62, may receive reduced benefits. Social Security benefits are “earned entitlements”; a typical worker must have worked ten years before qualifying. In addition to qualifying workers, the spouses and children of workers who have died are typically entitled to the deceased’s benefits. A key feature of the Social Security Act and Social Security as a social program is how it is funded — via a payroll tax. The Social Security tax combines with the Medicare tax to form what is known as FICA, or the payroll tax. As of 2018, the Social Security tax rate was 6.2% and the Medicare tax rate was 1.45%. The total payroll tax of 7.65% is deducted from the employee’s paycheck; the employer must make a matching contribution of an additional 7.65%. The employee effectively pays the entire tax, as the employer’s matching requirement reduces what he is able to pay his employees. Thus, Social Security represents a tax of 12.4% on the employee in addition to Medicare taxes, federal income taxes, state and local income taxes, sales taxes and numerous other less-noticed taxes.
Eighty-two years after President Franklin Roosevelt signed the Social Security Act on August 14, 1935, Social Security remains one of the nation’s most successful, effective, and popular programs. Almost all workers participate in Social Security by making payroll tax contributions, and almost all elderly Americans receive Social Security benefits. In fact, 97 percent of the elderly (aged 60 to 89) either receive Social Security or will receive it, according to SSA estimates. The near-universality of Social Security brings many important advantages. Social Security provides a foundation of retirement protection for people at all earnings levels. It encourages private pensions and personal saving because it isn’t means-tested. In other words, it doesn’t reduce or deny benefits to people whose income or assets exceed a certain level. Social Security provides a higher annual payout than private retirement annuities per dollar contributed because its risk is not limited to those who expect to live a long time, no funds leak out in lump-sum payments or bequests, and its administrative costs are much lower.
Furthermore universal participation and the absence of means-testing make Social Security very efficient to administer. Administrative costs amount to only 0.7 percent of annual benefits, far below the percentages for private retirement annuities. Means-testing Social Security would impose significant reporting and processing burdens on both recipients and administrators, undercutting many of those advantages while yielding little savings. Finally, Social Security’s universal nature assures its continued popular and political support. Large majorities of Americans say that they don’t mind paying for Social Security because they value it for themselves, their families, and millions of others who rely on it. Social Security is more than just a retirement program. It provides important life insurance and disability insurance protection as well. About 61 million people, or more than one in every six U.S. residents, collected Social Security benefits in June 2017. While older Americans make up about four in five beneficiaries, another one-fifth of beneficiaries received Social Security Disability Insurance (SSDI) or were young survivors of deceased workers. In addition to Social Security’s retirement benefits, workers earn life insurance and SSDI protection by making Social Security payroll tax contributions. About 95 percent of people aged 20-49 who worked in jobs covered by Social Security in 2016 have earned life insurance protection through Social Security.Furthermore, For a young worker with average earnings, a spouse, and two children, that’s equivalent to a life insurance policy with a face value of over $674,000 in 2016, according to Social Security’s actuaries. About 89 percent of people aged 21-64 who worked in covered employment in 2016 are insured through Social Security in case of severe disability.