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HISTORY OF SOCIAL SECURITY
1935 - The Social Security Act, which covered workers in commerce and industry, was signed by President Roosevelt.
1937 - The Federal Insurance Contribution Act (FICA) required workers to pay taxes to support the Social Security system. Payroll taxes were 2%.
1939 - Social Security was expanded to cover dependents and survivors. Payroll taxes were 2%.
1950 - Coverage was expanded to job outside of commerce and industry, and benefit levels were increased. Payroll taxes were 3%.
1956 - Disability Insurance was created, and expanded over the following years. Early retirement at age 62 for women was permitted. Payroll taxes were 4%.
1961 - Early retirement at age 62 for men was permitted. Payroll taxes were 6%.
1972 - Automatic cost-of-living-adjustments (COLAs), which index benefits to inflation, were introduced. The formula to calculate increases initially overstated inflation by 25%, and people born between 1910 and 1916 received an unintended windfall. Payroll taxes were 9.2%.
1977 - The mistake in the benefit formula was corrected. The "notch" refers to the difference in benefits paid to the group that received the windfall and those who retired following the formula correction. Social Security was thought to be actuarially sound. Payroll taxes were 9.9%.
1983 - The National Commission on Social Security Reform was created in response to the actuarial unsoundness of the system. The commission called for 1) and increase in the self-employment tax; 2) partial taxation of benefits to upper income retirees; 3) expansion of coverage to include federal civilian and nonprofit organization employees; and 4) an increase in the retirement age from 65 to 67, to be enacted gradually starting in 2000. Again, Social Security was declared actuarially sound. Payroll taxes were 10.8%.
1985 - The Social Security Trust Funds were moved "off-budget" so that the funds earmarked for the Social Security system would be tracked separately from the rest of the budget. Payroll taxes were 11.4%.
1986 - COLAs were increased to respond to minor levels of inflation. Payroll taxes were 11.4%.
1993 - The amount of taxable benefits for upper income retirees was increased to 85%. Payroll taxes were 12.4%.
1996 - The Social Security Trustees' Report stated that the Social Security system would start to run deficits in 2012, and the trust funds would be exhausted by 2029. All members of the Advisory Panel agreed that some or all of Social Security's funds should be invested in the private sector. To keep the unchanged system actuarially sound, payroll taxes would have to be increased 50%, to 18% of payroll, or benefits would have to be slashed by 30%.
1997 - All members of the presidentially-appointed Social Security Advisory Panel agreed that some or all of Social Security's funds should be invested in the private sector. To keep the unchanged system actuarially sound, payroll taxes would have to be increased 50%, to 18% of payroll, or benefits would have to be slashed by 30%."
1999 - The Social Security Trustees' Report stated the Social Security Retirement System's unfunded liability increased by $752 billion since the 1998 Trustee Report was published. This brings the total long-term unfunded liability to more than $19 trillion.
The System Today
Social Security is the single largest item in the federal budget, consuming over 22% of total expenditures. (For comparative purposes, 17% of the budget is spent on national defense, 0.5% is spent on training and employment, and 2.5% is spent of food and nutritional assistance.) In 1996, the system is projected to collect $387 billion in tax revenues and distribute $355 billion to over 43 million recipients.
Social Security is an entitlement program and is thus funded automatically rather than through the annual appropriations process. All individuals who are legally eligible for benefits automatically receive them. As a result, it is demand, not supply, that sets spending levels for the program. The only way to alter spending for Social Security is to change the guiding legislation.
There are a number of basic principles underlying today's structure of Social Security system, including: The system is work related - Benefit levels for retirees and their families are related to earning history and wage level. The higher the contributions, the higher the benefits. Benefits are not means tested - Benefits are paid regardless of income from saving, pensions, insurance, or other forms of non-work income. Workers do not have to prove need to receive benefits. Universal compulsory coverage - Workers may not opt out of the Social Security system. By mandating participation, adverse selection (the situation that arises when individuals who draw the most from an insurance system are the ones who join it) is avoided. Benefits are defined by law - Any person who meets the legal requirements qualifies for benefits. Disagreements may be taken to court.
Coverage
Ninety-five percent of workers, or 135 million people, are covered by the system. In addition to workers in the U.S. and territories, the system covers work done by U.S. citizens and resident aliens outside of the U.S. who are:
Employed by an American employer;
Employed by an American affiliate who has elected coverage;
Self-employed (in certain circumstances).
Workers who are excluded from coverage include:
Federal civilian employees hired before 1984;
Railroad workers who are covered by the Railroad Retirement System;
Some state and local government employees;
Household and farm workers whose earning don't meet certain minimum requirements;
Self-employed workers whose earnings are very low;
Some children who work in family businesses;
Some people who, for religious reasons, are granted exemptions.
Payroll Taxes
The Social Security system is funded by payroll taxes paid by employees and employers through the Federal Insurance Contributions Act (FICA) and the Self Employment Contributions Act (SECA). (The payroll tax is also used to fund part of the Medicare system.) Today the total employee/employer payroll tax is 15.3%, with 12.4% of that going to Social Security. This rate has been increased dramatically since 1937, when the rate was 2%.
Employers and employees each pay a 7.65% payroll tax. They pay 1.45% on all earnings for Medicare, and they pay 6.2% for Social Security up to a capped amount of $72,600. (This cap changes each year.)
Self-employed individuals pay the full 15.3% tax, but one half of the tax can be deducted as a business expense. Because the employer's portion of the payroll tax translates into lower wages for workers, it is most accurate to talk about the combined level of the payroll tax.
Trust Funds
The Social Security payroll taxes are recorded through the different program trust funds, which are used to track the inflows and outflows of the program. The trust funds are presently taking in more money then they are issuing in benefits, and they therefore run annual surpluses. Rather than saving the surpluses, the government spends the money on other parts of the budget, such as defense, domestic discretionary programs and other entitlement programs.
Social Security surpluses will continue until 2014, at which time the program will no longer take in enough money to cover benefits. The government will have borrowed over $3 trillion from the trust funds and not a penny will be left to cover the owed benefits. To repay the $3 trillion, the government will have to either cut spending by $3 trillion, raise taxes on every family in America by $43,000, or increase the national debt by an additional $3 trillion.
Payment Levels
Social Security is structured to replace a portion of beneficiaries' wages lost due to retirement, disability or death. Social Security benefits are calculated based on a retiree's earnings history and are intended to replace, on average, 42% of their peak salary.
The system is also designed to be progressive so that lower income workers receive a greater portion of their previous earning level than do higher income earners.
If workers retire early, their benefits are reduced for each month of benefits received before age 65. The cutback amounts to a 20% reduction for those who start collecting benefits at age 62. Workers who postpone retirement and remain in the workforce after age 65 qualify for inflated benefits, to reflect the additional years of contributions.
Eligibility
Retirement - Currently, workers become eligible for full retirement benefits at age 65 or for reduced benefits at 62.
To qualify for benefits, workers must have been part of the labor force for a set amount to time (usually 10 years) to show labor force attachment. Workers earn credits, up to four credits a year, that go towards their eligibility. Generally, forty credits are needed to qualify for benefits. (Younger people need fewer credits to qualify for disability or survivors benefits). The earning levels for credits change each year. In 1996, $640 earns one credit.
Survivors - Survivors benefits are paid to deceased workers' families. Those who qualify include:
Widows(er)s age 60 or older, 50 or older if disabled, or any age if caring for children under 16;
Children if they are unmarried and under 18, 18 to 19 but in school, or over 18 and disabled;
Parents, if the deceased was their primary means of support.
The average benefits level of a family that consists of a widow and two children is $1,350 per month, roughly equal to the payout from a $295,000 life insurance policy.
Disability - Disability is defined as "an inability to engage in any substantial gainful activity (SGA) by reason of any medically determinable physical or mental impairment that can be expected to result in death or has lasted or can be expected to last for a continuous period of not less than 12 months." Under such conditions, both disabled workers and their dependents can qualify for benefits.
Conclusion
The Social Security system has been one of the federal government's most successful and popular programs, and has helped protect beneficiaries against impoverishment. But the aging of the American population coupled with a slowdown in economic growth threatens the future stability of the system.
Reforms must be implemented to protect current retirees and to ensure retirement security for future generations. By educating the citizenry and reforming Social Security, we can increase economic stability, security and opportunity for all Americans.
History section provided courtesy of:
Economic Security 2000
1522 K Street, N.W., Suite 634
Washington, DC 20005
202-408-5556
