History Social Security and Operations

In seeking to provide widespread and basic protection against what President Franklin D. Roosevelt called ‘‘the vicissitudes of life,’’ the Social Security Act of 1935 initiated two social insurance programs, three public assistance programs (i.e., welfare), and several public health and social service programs. Until 1950, Social Security, which was initially a social insurance program providing protection against loss of income in retirement, was neither the largest nor the most popular of the act’s programs. It was the state-run welfare programs included in the act, which provided aid to widows with dependent children, the old, and the blind, that gained swift public acceptance, mainly because they quickly sent funds to states to distribute to these needy groups. In contrast, and in keeping with social insurance principles in which the right to a benefit is based on the prior payroll tax contribution of employees and their employers, the Social Security program began collecting taxes during the late 1930s—though the program was not scheduled to pay its first benefits to retirees until the early 1940s. Where welfare programs seek to give immediate relief to those in extreme financial distress, the Social Security Act’s social insurance programs—Social Security, Unemployment Insurance, and later, Medicare—seek to prevent financial distress.

The ‘‘genius’’ of Social Security and related social insurance programs is that they represent, and build upon, a compromise between sometimes conflicting political values; the concern that all Americans should have adequate protection against selected contingencies (e.g., retirement) and a commitment to the work ethic. Near universal coverage assures widespread protection. Social insurance provides a social and work-related means of pooling risks. In exchange for making modest work-related contributions over many years, the social insurance approach provides individuals and their families with an earned right to protection against predictable risks. Social Security, for example, is structured in a manner that seeks to provide benefits that are adequate to maintain basic living standards, especially for low and modest income persons. However, in keeping with the principle of individual equity, persons who have paid more in Social Security taxes generally receive larger monthly benefits.

Incremental expansion characterized the development of Social Security from 1939 through the mid-1970s. The 1935 Act provided for benefits to workers in manufacturing and commerce who retired at age sixty-five or later. Benefits were added in 1939 for the wives of retired workers and for the surviving wives and children of deceased workers. These benefits were made available to men in 1950. Importantly, the 1950 Amendments to the Social Security Act defined social insurance as the nation’s dominant public policy approach to protecting older Americans against loss of income in retirement. These amendments expanded coverage to include regularly employed domestic and farm workers and increased benefits, assuring that Social Security benefits would generally be more available and more beneficial to receive than benefits provided through the federal/state Old Age Assistance program, also funded under the Social Security Act.

Disability insurance protections for permanently and severely disabled workers age fifty to sixty-four were added to the Social Security program in 1956, and extended to all workers under age sixty-five in 1960. The 1956 amendments also gave women the right to accept permanently reduced retired workers benefits between ages sixty-two and sixty-four, an option that was extended to men in 1961. The high rate of poverty and near-poverty among the old combined with a growing economy to provide political rationale for substantial benefits increases from 1965 through 1972, greatly improving the economic status of elderly Americans. In 1972, the automatic cost-of-living allowance (COLA) was incorporated into the law. Beginning in 1974, benefits were adjusted annually for changes in the cost of living. This new provision assured that, once received, benefits would maintain their purchasing power no matter how long a beneficiary lived. While critically important for helping to assure stable incomes for the old, disabled, and surviving family members, this provision is expensive and made financing the program more sensitive to economic change.

In the mid-1970s the focus shifted to program financing, followed a few years later by a political climate that challenged the support for the traditional Social Security program. Unanticipated economic changes (i.e., high inflation, lower than anticipated wage growth, a slowed economy) created short-term financing problems in the mid-1970s and again in the early 1980s. Demographic changes—including declining birth rates, increased life expectancies, and the anticipated aging of 76 million baby boomers born from 1946 through 1964—fueled long-term financing problems. Legislation was crafted in 1977 and 1983 involving modest benefit reductions and tax increases, spreading the pain of these changes across many constituencies, including working persons, employers, and current and future beneficiaries (especially those most well-off). By the mid-1980s, when the rest of the federal government began running large annual deficits, the Social Security program began accumulating large yearly surpluses, a trend expected to continue through about 2020. Even so, the impending retirement of the baby boomers, a declining ratio of workers to beneficiaries, and anticipated increases in longevity mean that financing reforms will be needed to assure the timely payment of benefits after 2038 or thereabouts.

Social Security is arguably the nation’s most successful and popular public policy. A favorable climate incubated its expansion through the mid-1970s. Even during the financing problems of the late 1970s and the 1980s, little support existed for substantially reducing benefits or retreating from the social insurance principles that guided the program. Except for a few advocates on the extreme outskirts of American politics, the voices favoring means-testing Social Security (limiting benefit receipt to persons whose incomes and/or assets fell below certain levels) were silent until the early 1990s. Similarly, during the early 1980s virtually no one in the political mainstream was giving serious consideration to privatizing aspects of the program. For example, in 1982, a commission headed by Federal Reserve Chairman Alan Greenspan unanimously agreed that Congress ‘‘should not alter the fundamental principles of the Social Security Program’’ (National Commission on Social Security Reform, 1983). This commission also rejected ‘‘proposals to make the Social Security program a voluntary one, or to transform it into. . . a program under which benefits are conditioned on the showing of financial need.’’ But persistent claims that Social Security is unfair to the young, false claims that the program is financially unsustainable, a soaring stock market, and growing skepticism (especially among the young) about whether the program will meet people’s needs, combined with the deficit politics of the 1980s and 1990s to spawn an environment that legitimized calls to radically transform the program. Indeed, irrespective of their validity, by the year 2001 proposals to partially privatize Social Security were being given very serious consideration.