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Social Security in the United States is a Social Insurance program funded through dedicated Payroll Taxes called FICA (Federal Insurance Contributions Act). Tax deposits are formally entrusted to 1four'''Federal Old-Age and Survivors Insurance Trust Fund, or Federal Disability Insurance Trust Fund, Federal Hospital Insurance Trust Fund or the Federal Supplementary Medical Insurance Trust Fund. The main part of the program is sometimes abbreviated (OASDI), in reference to its three beneficiaries (OA for retirement, S for widows and survivors income, D for the disabled, and I for insurance). When initially signed into law by President Franklin D. Roosevelt in 1935, the term ''Social Security'' covered Unemployment Insurance as well. The term, in everyday speech, is used only to refer to the benefits for retirement, disability, survivorship, and death, which are the four main benefits provided by traditional private-sector pension plans. In 2004 the U.S. Social Security system paid out almost $500 billion in benefits.2 By dollars paid, the U.S. Social Security program is the largest government program in the world. The Social Security Administration is headquartered in Woodlawn , Maryland just to the west of Baltimore . ''See'' Social Security Administration . Largely because of solvency questions ranging from immediate crisis to large projected future shortfalls, reform of the Social Security system has been a major political issue for more than three decades during the presidencies of Gerald Ford , Jimmy Carter , Ronald Reagan , George H. W. Bush , Bill Clinton , and George W. Bush . (See Social Security Debate (United States) .) HISTORY A limited form of the Social Security program began as a measure to implement " Social Insurance " during the Great Depression of the 1930s, when Poverty rates among Senior Citizens exceeded 50%.3 Creation: The Social Security Act 1935 . Standing with Roosevelt are Rep. Robert Doughton ( D - NC ); unknown person in shadow; Sen. Robert Wagner (D- NY ); Rep. John Dingell (D- MI ); unknown man in bowtie; the Secretary Of Labor , Frances Perkins ; Sen. Pat Harrison (D- MS ); and Rep. David Lewis (D- MD ).]] The Social Security Act was drafted by President Roosevelt's committee on economic security, under Edwin Witte , and passed by Congress as part of the New Deal . It was controversial when originally proposed, with one point of opposition being that it would cause a loss of jobs. Historian Edward Berkowitz subsequently contended that the Act was a cause of the "Roosevelt Recession" in 1937 and 1938. However, the program has gone on to be one of the most popular government programs in American history.4 The Act is formally cited as the Social Security Act, ch. 531, at 15:40 on ( 14 August 1935 ), now codified as . The Act is also known as the '''Old Age Pension Act'''. The Act provided benefits to retirees and the unemployed, and a Lump-sum benefit at death. Payments to current retirees were (and continue to be) financed by a payroll tax on current workers' wages, half directly as a payroll tax and half paid by the employer. In the 1930s, the Supreme Court struck down many pieces of Roosevelt's New Deal legislation. In the spring of 1935, Justice Roberts joined with the conservatives to invalidate the Railroad Retirement Act . In May, the Court threw out a centerpiece of the New Deal, the National Industrial Recovery Act . In January 1936, a passionately split Court ruled the Agricultural Adjustment Act unconstitutional. In another case from 1936, the Court ruled New York state's Minimum-wage law Unconstitutional . President Roosevelt responded with an attempt to pack the court via the Judiciary Reorganization Bill Of 1937 . On 5 February 1937 , he sent a special message to Congress proposing legislation granting the President new powers to add additional judges to all federal courts whenever there were sitting judges age 70 or older who refused to retire. supremecourthistory.org The practical effect of this proposal was that the President would get to appoint six new Justices to the Supreme Court (and 44 judges to lower federal courts), thus instantly tipping the political balance on the Court dramatically in his favor. The debate on this proposal was heated and widespread, and lasted over in six months. Beginning with a set of decisions in March, April, and May, 1937 (including the Social Security Act cases), the Court would sustain a series of New Deal legislation. Two Supreme Court rulings affirmed the constitutionality of the Social Security Act.
Implementation Payroll taxes were first collected in 1937, also the year in which the first benefits were paid, namely the lump-sum death benefit paid to 53,236 beneficiaries. The first monthly payment was issued on 31 January 1940 to Ida May Fuller of Brattleboro , Vermont . Expansion The original 1935 statute paid retirement benefits only to the primary worker. Many types of people were excluded, mainly farm workers, the self-employed, and anyone employed by an employer of fewer than ten people. These limitations, intended to exclude those from whom it would be difficult to monitor compliance, covered approximately half of the civilian labor force in the United States. The 1935 Act also contained the first national unemployment-compensation program, aid to the states for various health and welfare programs, and the Aid to Dependent Children program. The initial tax rate was 2.0% of the first $3,000 of the employee's earnings, shared equally between the employee and the employer. The tax rate has been raised several times over the years, beginning in 1950, when it was raised to 3.0%. 6 In 1939, the 1937 Federal Insurance Contributions Act (FICA) Tax was amended in three important ways:
In 1956, the tax rate was raised to 4.0% (2.0% for the employer, 2.0% for the employee) and disability benefits were added. Also in 1956, women were allowed to retire at age 62 with reduced benefits (70%). In 1961, retirement at age 62 was extended to men, and the tax rate was increased to 6.0%. Medicare was added in 1965 by the Social Security Act Of 1965 , part of President Lyndon B. Johnson 's " Great Society " program. (''See'' List Of Social Security Legislation (United States) .) Social Security was changed to withdraw funds from the independent "Trust" and put it into the General fund for additional congressional revenue. Automatic annual Cost-of-living Adjustments (COLAs), not requiring legislation, began in 1975. Table of COLAs , via ssa.gov. During the Carter administration, immigrants who had never paid into the system became eligible for SSI ( Supplemental Security Income ) benefits when they reached age 65. SSI is not a Social Security benefit, but a welfare program, because the elderly and disabled poor are entitled to SSI regardless of work history. Likewise, SSI is not an entitlement, because there is no right to SSI payments. The 1983 amendments to the SSA, resulting from the 1982 report of the Greenspan Commission empaneled to investigate the long-run solvency of Social Security, taxed Social Security benefits for the first time: benefits in excess of a household income threshold, generally $25,000 for singles and $32,000 for couples (the precise formula computes and compares three different measures) became taxable. The amendments also gradually increased the age of eligibility for full old-age benefits, from 65 to 67 for those born after 1959. In 1940, benefits paid totaled $35 million. These rose to $961 million in 1950, $11.2 billion in 1960, $31.9 billion in 1970, $120.5 billion in 1980, and $247.8 billion in 1990 (all figures in nominal dollars, not adjusted for inflation). In 2004, $492 billion of benefits were paid to 47.5 million beneficiaries. The 1970s and the New Negative Financial Outlook of Social Security Throughout the 1950s and 1960s during the phase-in period of Social Security, Congress was able to grant generous benefit increases because the system had perpetual short-run surpluses. Congressional amendments to Social Security took place in even numbered years (election years) because the bills were politically popular, but by the late 1970s, this era was over. For the next three decades, projections of Social Security's finances would show large, long run deficits, and in the early 1980s, the program flirted with immediate insolvency. From this point on, amendments to Social Security would take place in odd numbered years (not election years) because Social Security reform now meant tax increases and benefit cuts. Social Security became known as the "Third Rail of American Politics." Touching it meant political death. Several effects came together in the 1970s to rapidly change the outlook on Social Security's long term financial picture from positive to problematic. By the 1970s, the phase-in period, where workers were paying taxes but few were collecting benefits, was largely over, and the ratio of elderly population to the working population was increasing. The long run financial structure of a pay as you go program was simply not attractive. These underlying negative trends were exacerbated by a colossal mathematical error made in the 1972 amendments. In these amendments, Congress hiked benefits 20 percent and attempted to index benefits to inflation so that benefits would rise automatically. If inflation was 5 percent, the goal was to automatically increase benefits by 5 percent so that the real value didn't decline. However, the implementation Congress chose double-indexed benefits to inflation. If inflation was 5 percent, benefits went up by 10 percent. If inflation was 8 percent, benefits went up by 16 percent. Unfortunately the 1970s was a period of incredibly high inflation which led to benefit increases that were nowhere near financially sustainable. The high inflation, double-indexing, and lower than expected wage growth was financial disaster for Social Security. To combat the declining financial outlook, in 1977 Congress passed and Carter signed legislation fixing the double-indexing mistake. Quoting Carter , "Now this legislation will guarantee that from 1980 to the year 2030, the social Security funds will be sound."Sylvester J. Schieber and John. B. Shoven, ''The Real Deal: the History and Future of Social Security''. (New Haven and London: Yale University Press, 1999), p. 182 This turned out to be not the case. The financial picture declined almost immediately and by the early 1980s, the system was again in crisis. 1983 amendments create first sizable ''trust fund'' After the 1977 amendments, the economic assumptions surrounding Social Security projections continued to be overly optimistic as the program moved toward a crisis. In 1982, projections indicated that the was created to address the crisis. Also of concern was the long-term prospect for Social Security because of demographic considerations. Of particular concern was the issue of what would happen when people born during the Post-World War II Baby Boom retired. The commission chaired by Alan Greenspan made several recommendations for addressing the issue. 7 Under the 1983 Amendments to Social Security, signed into law by President Ronald Reagan , a previously enacted increase in the payroll tax rate was accelerated, additional employees were added to the system, the full benefit retirement age was slowly increased, and up to one-half of the value of the Social Security benefit was made potentially taxable income. 8See . As a result of these changes, particularly the tax increases, the Social Security system began to generate a large (short run) surplus of funds, intended to cover the added retirement costs of the "boomers." Congress invested these surpluses into special series, non-marketable U.S. government bonds held by the Social Security Trust Fund . Under the law, the government bonds held by Social Security are backed by the full faith and credit of the U.S. government. Because the government had adopted the '' Unified Budgeting '' since the Johnson administration, this surplus off-sets the total fiscal debt, making it look much smaller. There has been significant disagreement over whether the Social Security Trust Fund has been saved, or has been used to finance other government programs and other tax cuts. (See the Social Security Trust Fund article for a more in depth discussion.) The special series, non-marketable bonds currently held in Social Security Trust Fund are Off-balance Sheet and are excluded from the U.S. National Debt calculation. Unlike traditional bonds, the bonds held in the Fund cannot be sold on the open market. Due to these unique features, some have argued that the bonds held in the trust fund are only "IOUs" that the government has written to itself. The Social Security and Medicare Trustees note: Since neither the interest paid on the Treasury bonds held in the HI Insurance and OASDI Trust Funds, nor their redemption, provides any net new income to the Treasury, the full amount of the required Treasury payments to these trust funds must be financed by some combination of increased taxation, increased Federal borrowing and debt, or a reduction in other government expenditures. (''Status of Social Security and Medicare Programs: A summary of the 2005 annual reports'') 9 This means that these bonds represent a promise to pay the trust fund later, whether by increasing taxes, by cutting benefits, or by borrowing more money. While this is true of all bonds10, bonds are normally funded by an immediate income from a private source, when the bond is purchased. The bonds placed in the trust fund are placed printed and in the trust, with no external source of money. The Federal government "buys" the bonds from itself. Because the Social Security has legal authority to pay benefits out of its current FICA contributions or accumulated trust fund, the existence of the trust fund would provide legal authority for the federal government to continue to pay benefits when current benefits exceed current FICA taxes until the trust fund completely depletes. The issue of funding or financing — because OSADHI (including Medicare) is so massive — is difficult to segregate from discussion of the rest of the federal budget. The size of the budget may mean that the United States has no other government spending, has massive tax hikes, or makes cuts in benefits. Massive government borrowing would not work unless the borrowed funds come from abroad; the net fiscal stimulus of extra domestic borrowing is offset dollar for dollar by less private domestic spending. Dates of coverage for various workers
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