Social Security (US)
(For coverage of the debate over extending cuts in the Social Security payroll tax, click here.)
Since it was created by President Franklin D. Roosevelt in 1935, Social Security has been the centerpiece of the nation’s social contract, an intergenerational commitment to provide at least a subsistence income to the most vulnerable of citizens. It is not only the biggest government entitlement plan, comprising over 20 percent of the federal budget, but also the most universal and the most popular.
According to the Social Security Administration, in 2011 nearly 55 million Americans received $727 billion in Social Security benefits. The recipients are retirees and their dependents, underage survivors of deceased workers and the disabled, among others. The money for this colossal endeavor comes from payroll taxes (known as Federal Insurance Contributions Act taxes) on current workers and on their employers.
The future of Social Security has been disputed for decades; efforts to change it have failed so often that it has been called the “third rail’' of American politics. Shortly after being re-elected in 2004, President George W. Bush initiated a campaign to partially privatize the system in legislation that quickly died.
In 2010, the chairmen of a bipartisan panel appointed by President Obama proposed making Social Security solvent for 75 years by raising payroll taxes for the affluent and reducing future benefits, including slowly raising the retirement age for full benefits to 69 from 67 by 2075. But reflecting the subject’s political potency, the Republicans who took control of the House in 2011 steered clear of discussing cuts to Social Security, even as they laid out sweeping changes to Medicare and Medicaid.
Then in September 2011, the question moved to center stage in the Republican presidential campaign during the debates when Gov. Rick Perry of Texas blasted Social Security, calling it a “Ponzi scheme” — a criticism discussed at length in his 2010 book “Fed Up!” in which he assailed the system as a “failure.”
While there are some superficial similarities, it is ultimately a misleading exaggeration to describe Social Security as a Ponzi scheme. It is a pay-as-you-go program that faces a shortfall of roughly 25 percent when the Social Security Trust Fund is exhausted some time around 2036.
Forestalling a Shortfall
The chief question hanging over the system is the question of how demographics will shape its finances. In 1982, a bipartisan commission came up with a plan that forestalled an impending shortfall through a tax increase that also generated a significant surplus. This surplus was put into an off-budget account known as the Social Security trust fund and loaned to the federal government. Repayment of the loans would provide a cushion for the day when the retirement of the baby boom generation meant that the system was paying out more than it was taking in.
That threshold was reached in 2010, six years sooner than expected, as tax receipts fell during the recession that began in 2007.
In May 2011 the Social Security Administration estimated that when the program’s trust funds are exhausted, $6.5 trillion in additional money will be needed over a 75-year period — roughly $87 billion per year — to pay all scheduled benefits.
Creation of a Safety Net
Government pensions were pioneered in Germany by Bismark, and the idea spread across Europe in the late 19th century. By 1934, it was not hard to make the case for Social Security in the United States. The Great Depression had devastated employment, pensions, the stock market and savings. Many older Americans, and their beleaguered children with families of their own, found themselves suddenly and shockingly in economic free-fall.
President Franklin D. Roosevelt signed the Social Security Act into law on Aug. 14, 1935, creating a social insurance program for retired workers over 65. Many other components of what is now thought of as Social Security, including disability coverage and medical benefits, were yet to come, but the act has remained the most enduring legacy of the New Deal.
Before the creation of Social Security, some Americans had private or state pensions, but most supported themselves into old age by working. The 1930 census, for example, found 58 percent of men over 65 still in the workforce; in contrast, by 2002, the figure was 18 percent.
The elderly also relied heavily on their families. “Children, friends and relatives have borne and still carry the major cost of supporting the aged,” the Committee on Economic Security, the Roosevelt administration panel that developed Social Security, reported in 1935. “Several of the state surveys have disclosed that from 30 to 50 percent of the people over 65 years of age were being supported in this way.”
The Depression swept this world away. Many of the elderly could no longer find work. Those who had been lucky enough to have a pension or some savings saw them disappear. And many who relied on their children saw them buckle under the strain.
Roosevelt sent his Social Security plan, which included unemployment insurance, to Congress in January 1935, and by August he was able to sign it into law. Some New Dealers chafed at its limits, but the law was widely seen as a moderate alternative to the more radical proposals — like a guaranteed minimum income for the elderly — that were stirring then from the grassroots.
The first Social Security check was mailed in 1940 to Ida May Fuller, a retired legal secretary in Ludlow, Vt. It was for $22.54.
Expansion of the Program
Even before the first monthly checks were issued, Congress in 1939 voted to expand the program by providing benefits for dependents of retirees, as well as for the survivors of workers who died in their productive years. This began the transformation of Social Security into a family insurance program.
In the 1950’s Social Security coverage was extended to groups not included in the original program: farm workers, domestic workers, self-employed people, members of the armed forces and some state and local government employees.
In 1956, Congress established a cash benefit program for disabled workers age 50 or older. In 1958, dependents of disabled workers became eligible for benefits, and in 1960, the age requirement was dropped.
The architects of Social Security considered including a health insurance program but deferred the idea for fear it might jeopardize approval of their other proposals. Not until 1965 did Congress establish such a program for the elderly. Medicare, which receives a portion of Social Security payroll taxes, was extended to cover disabled people in 1972.
For the neediest of the aged, blind and disabled, there is another program authorized by the Social Security Act: Supplemental Security Income, which is financed with general revenue, not with money from the Social Security trust fund.
Keeping Up With Inflation
The original Social Security legislation had not included an inflation adjustment, which meant benefits did not keep up with the cost of living. Congress finally increased benefits in 1950 and then continued to do so in fits and starts, sometimes faster than inflation, sometimes slower and usually in an election year. President Richard M. Nixon and a Democratic Congress brought some order to this process in 1972, by automatically tying benefits to the movement of an inflation index in the previous year, in what became as the COLA (cost of living adjustment).
The global slowdown that began in 2008 led oil prices to plunge and some other prices to come down. Overall prices dropped 2.1 percent in 2009, according to the relevant price index.
Forecasts by the Obama administration and the Congressional Budget Office indicate that Social Security beneficiaries will not receive any cost-of-living increase in 2010 or in 2011. The COLA is intended to preserve the purchasing power of Social Security, by increasing benefits to keep pace with consumer prices. However, even with benefits remaining as they were, 2010 will be the first year since at least the Nixon era that the buying power of an individual worker’s Social Security goes up.
Problems of Solvency?
In 2010, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.
Stephen C. Goss, chief actuary of the Social Security Administration, said that while the Congressional projection would probably be borne out, the change would have no effect on benefits in 2010 and retirees would keep receiving their checks as usual.
The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.
Analysts have long tried to predict the year when Social Security would pay out more than it took in because they view it as a tipping point — the first step of a long, slow march to insolvency, unless Congress strengthens the program’s finances.
The long-term costs of Social Security present further problems for politicians, who are already struggling over how to reduce the nation’s debt. The national predicament echoes that of many European governments, which are facing market pressure to re-examine their commitments to generous pensions over extended retirements.
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