Social Security is the common term for the U.S. government’s group of public disability and pension schemes. Starting in 1935, they have collectively become the single largest social program in the United States. In modern times, the stability of Social Security has come into question due to an increasingly aging population placing greater demands on a stagnant or shrinking pool of resources.

History

Social Security was a direct result of President Franklin Delano Roosevelt’s efforts to ameliorate the suffering and address the causes of the Great Depression. Passed in 1935, the Social Security Act offered a modest social insurance program to the nation’s elderly, at a time when the poverty rate among elderly citizens was above 50 percent. The original program provided payments to the retired and unemployed, as well as a lump-sum payment to relatives upon a person’s death. It was a controversial act at the time, as the Federal Government had never been in the business of providing general social services of this type. Over the successive decades, expansions of Social Security proved popular in Washington. Examples included expanding benefit payments, and extensions of who was eligible to receive them. However, starting in the 1970s, an increasingly strained financial outlook caused lawmakers to examine the future of Social Security. This began the shift from expanding the program to shoring it up, with the most landmark effort being the 1983 Social Security Trust Fund amendment. However, fears over the program and projections of its future insolvency continue to this day.

The original program split the wage tax between the worker and the employer. The modern tax is 12.4 percent on the wage earner, and 6.2 percent on the employer. In 1935, the program taxed all workers in “commerce and industry” under the age of 65. It has since been expanded to draw revenue from very nearly every wage earner in America. When it was initially created, income earned from local, state, and federal employment (including the salaries of appointed and elected officials) were exempted from taxation. This exemption was repealed in 1984.

Function

Social security benefits are determined using a formula that considers the earnings of a person during his or her lifetime, and the age of retirement. These benefits are strictly speaking not paid for from a fund of savings, but are instead covered by the taxes on existing workers. Social security funds are collected in the form of a tax on wages, half being paid by the worker and half by the employer. Retirees are eligible for benefits starting at age 62.

Misconceptions

The Social Security Trust Fund established in 1983 is strictly speaking not a savings fund. American wage earners do not pay taxes into the fund only to withdraw them at retirement. Instead, the Trust Fund is an accounting device for placing any surpluses produced by the Social Security Program (likely when there are many more workers than retirees in the system) off the federal budget. Surpluses are invested in government bonds. Prior to the establishment of the trust fund, Congress often treated Social Security surpluses like free candy, spending them on everything and anything but the actual program. Critics of the Social Security program have claimed that it under-performs compared to private investments, or that it is little more than a state-sanctioned Ponzi scheme. Neither claim is true. While private retirement plans can potentially generate greater return over a selected period of time, or for selected and especially wealthy individuals, assuming a median income and a 30-year investment duration, there is no retirement plan with proven better performance than Social Security.

Effects

Social security has achieved most or all of its goals, and stands as arguably the single most successful government social program in history. It has dramatically reduced the poverty rate among seniors and provided the American people and economy with a reliable cushion against the swings and crashes of the free market.

Expert Insight

While the retirement of the Baby Boom generation poses serious problems for Social Security, these problems are not insurmountable. As the program is largely reliant upon existing workers paying benefits to current retirees, having more retirees than workers in the system would naturally produce a deficit. However, the United States faces a better demographic picture than any other Western industrialized country (excepting Iceland), due to a higher birth rate and higher immigration. America’s imbalance between workers and retirees will not be nearly as steep as Italy or Japan, and those countries do not consider their problems to be so terrible as to demand the abandonment of their public pension scheme. There is no problem with Social Security that a mixed combination of reduced benefits, increased taxes and raising the retirement age could not address.