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Thought Leadership

Social Security Act in America

The Social Security in the United States refers to the federal Old-Age, Survivors and Disability program (OASDI). The Social Security Act of 1935 and the current version comprise numerous social welfare and insurance programs these include:

  • Federal Old-Age (Retirement), Survivors, and Disability Insurance
  • Unemployment benefits  
  • Temporary Assistance for Needy Families 
  • Health Insurance for Aged and Disabled (Medicare)
  • Grants to States for Medical Assistance Programs (Medicaid)
  • State Children's Health Insurance Program (SCHIP)
  • Supplemental Security Income (SSI) Patient Protection and Affordable Care Act

Social Security is a social insurance program that is primarily funded through dedicated payroll taxes called Federal Insurance Contributions Act tax (FICA). Tax deposits are formally assigned to the Federal Old-Age and Survivors Insurance Trust Fund, the Federal Disability Insurance Trust Fund, the Federal Hospital Insurance Trust Fund, or the Federal Supplementary Medical Insurance Trust Fund.

The law was signed in by President Franklin Roosevelt in 1945. At that time, the term ‘social security’ covered unemployment as well. The term in everyday speech is used to refer only 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.


Creation of the Social Security Act

The Act was drafted during Roosevelt's first term by the President's Committee on Economic Security, under Frances Perkins, and passed by Congress as part of the New Deal. Thereafter it was enacted on August 14, 1935. The act was an attempt to tackle growing concerns such as old age, poverty and unemployment that would affect modern American life.

 

Amendments to the Social Security Act

The Social Security Act has been amended several times.  It was first amended in the 1950s. For months there were debates whether domestic labor should be included. Finally, in 1954 all domestic labor, non-profit workers, state and government workers were added. In the 1960s the retirement age of men was increased to 62.


The 1972 Amendment

In 1972 both houses agreed on a bill that proposed 20 percent benefits for 27.8 million Americans.

Although the 1972 amendment to the Social Security Act assured great benefits, by the 1970’s the number of people benefitting outnumbered those paying taxes. Furthermore, the elderly population was outnumbering the working population as well. Hence, there were growing concerns about the long time financial structure based on pay-as-you go program. These concerns proved right when the high inflation, double-indexing, and lower than expected wage growth turned out to be financial disaster for Social Security


Amendments Post the 1972 Financial Disaster

In order to combat the declining financial outlook, the Congress passed and President Carter signed a new legislation that would alter tax formulas and make more money for the government. This ascertained that the social security funds remain secure. However, the financial system declined in the early 1980’s, thereby putting the system in a sort of crisis.


Amendments in the 1980s

The Social Security Trust Fund reserves were decreasing because of high unemployment level.  According to the projections in 1982, the Social Security Trust Fund would run out of money by 1983 and the system would be unable to pay the benefits to eligible people. The National Commission on Social Security Reform, chaired by Alan Greenspan, was created to address this crisis. The 1983 amendments included a provision to exclude the Social Security Trust Fund from the unified budget.  This provision also provided for the exemption of Social Security and portions of the Medicare trust funds from any general budget cuts beginning in 1993.This change was one of the ways of trying to protect Social Security funds for the future.

Because of all these changes, the Social Security Fund began to generate a large short-term surplus of funds, intended to cover the added retirement costs of the "baby boomers."(People born post World War 2). The Congress invested the surplus into non-marketable U.S Treasury securities held by the Social Security Trust Fund and ensured that all the bonds held by Social Security had the backing of the Government


Benefits of Social Security

The largest component of OASDI is the payment of retirement benefits. Throughout a worker's career, the Social Security Administration keeps track of his or her earnings.  The amount of the monthly benefit to which the worker is entitled depends upon that earnings record and upon the age at which the retiree chooses to begin receiving benefits. For the entire history of Social Security, benefits have been paid almost entirely by using revenue from payroll taxes.

The Act provided benefits to retirees and the unemployed, and a lump-sum benefit at death. Payments to current retirees are financed by a payroll tax on current workers' wages, half directly as a payroll tax and half paid by the employer.  The act also gave money to states to provide assistance to aged individuals (Title I), for unemployment insurance (Title III),  Aid to Families with Dependent Children (Title IV), Maternal and Child Welfare (Title V), public health services (Title VI), and the blind (Title X)

 

Criticism of Social Security

Around 2017, payroll tax revenue is projected to be insufficient to cover Social Security benefits and the system will begin to withdraw money from the Social Security Trust Fund. The existence and economic significance of the Social Security Trust Fund is a subject of considerable dispute because its assets are special Treasury bonds; i.e. the money in the trust fund has been lent back to the federal government to pay for other expenses.