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The Social Security Act

At approximately 3:30 p.m. on August 14, 1935, the Social Security Act* became law above President Franklin D. Roosevelt`s signature. The Social Security Act is one of the truly momentous legislative accomplishments in United States history. Enacted in the throes of the Great Depression, it was a sweeping bill that generated an array of programs to aid numerous groups of Americans. The law got its title from the groundbreaking social insurance program designed to provide a steady income for retired workers aged 65 or older. Background 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:

  • The Industrial Revolution** come of age;
  • a population shift from the countryside to cities;
  • longer life expectancy; and
  • the fading of the extended family.
  • In other words, Americans had become increasingly industrialized, citified, and older, and fewer people lived with various near relatives. The Bishops` Program of Social Reconstruction, published by liberals Roman Catholic bishops after World War I, suggested a change in the attitude towards government "safety nets."

    Until this level of legal minimum wages is reached, the worker stands in needs of the device of insurance. The state should make comprehensive provision for insurance against illness, invalidity, unemployment, and old age. So far as possible the insurance fund should be raised by a levy on industry, as is now done in the case of accident compensation. The industry in which a man is employed should provide with all that is necessary to meet all the needs of his entire life. Therefore any contribution to the insurance funds from the general revenues of the state should be only slight and temporary.
    The act and its subsequent amendments The Social Security Act signifies a sharp departure from prior American tradition. The United States had customarily stressed "pulling oneself up by the bootstraps" and voluntarism to alleviate social ills. Previous to 1929, the federal government didn`t furnish such programs as old-age pensions, public assistance, unemployment compensation, or health insurance — except for war veterans. However, the depression of the early 1930s generated nationwide misery, and sparked a popular crusade for old-age pensions coordinated by a retired California doctor, Francis Townsend. The Roosevelt administration responded by securing the Social Security Act in 1935. The program would be funded by payroll taxes apart from some startup costs. When proposing the legislation to Congress in January 1935, Roosevelt made a comment about flexibility that stands in contrast to later views. He proposed "voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age." This was never incorporated into Social Security, which remains funded by fixed amounts with no voluntary component. As critics have pointed out, the implicit annuity that young workers are investing in has such a low yield that it`s doubtful that many would have participate in voluntary annuities managed by the federal government. The act has been amended numerous times, notably in 1939 when surviving spouses and minor children were included as beneficiaries. Payroll taxes grew to pay for it. In the 1950s, more people were added to Social Security`s beneficiary pool, and the benefit was increased, including the first cost-of-living allowance (COLA) since 1940. In 1956, disability insurance was instituted and augmented over subsequent years. Early retirement for women at age 62 was permitted. Payroll taxes hovered at four percent. In 1961, early retirement for men at age 62 was allowed. Payroll taxes rose to six percent. A major advance occurred when the Social Security Administration was charged with providing health care to beneficiaries aged 65 or older, under the new Medicare Act signed into law by President Lyndon B. Johnson on July 30, 1965. The Health Care Financing Administration (HCFA) now maintains Medicare. In 1972 the law was modified to provide a yearly COLA, keyed to the annual increase in consumer prices, to begin in 1975. Concerns about the Social Security system`s financial health surfaced in the 1980s. In 1983, President Ronald Reagan signed into law, for the first time, the taxation of Social Security benefits. In addition, coverage was extended to federal employees, the retirement age was raised, to begin in 2000, and the reserves in the Social Security Trust Funds were increased. In 1985, the Social Security Trust Funds were moved out of the federal budget, so that funds set aside for the Social Security system could be tracked separately from the rest of the budget. By then, payroll taxes were pegged at 11.4 percent. In 1993, the amount of taxable benefits for upper income retirees was increased to 85 percent and payroll taxes rose to 12.4 percent. In 1996, the Social Security Trustees` Report stated that the system would begin to go into the red in 2012, and the trust funds would peter out by 2029. All members of the trustees` advisory panel concurred that at least some Social Security funds should be invested in the private sector. To keep the system as it was and actuarially sound, they wrote, payroll taxes would have to rise by 50 percent or benefits would have to be cut by 30 percent. In 1999, the Social Security Trustees` Report stated that the Social Security Retirement System`s unfunded liability¹ increased by $752 billion since the 1998 Trustee Report was released. That brought the total long-term unfunded liability to more than $19 trillion. In 2000, President Bill Clinton signed into law H.R. 5, "The Senior Citizens` Freedom to Work Act of 2000," which allowed approximately 900,000 officially retired but employed beneficiaries to keep their benefits without reductions. Latter-day developments Debate still rings in the halls of Congress about how the Social Security system will meet the swelling demands of the retiring "Baby Boom" generation (those born between 1946 and 1964). And, at the beginning of his second term, President George W. Bush campaigned to permit younger workers to invest a part of their Social Security contributions in the stock market.
    *H.R. 7260, Public Law No. 271, 74th Congress.
    **The application of power-driven machinery to manufacturing.
    ¹The amount by which the liabilities of a program exceed program assets.