A Brief History of Social Security www.socialsecurityreform.org

1935 - The Social Security Act, which covered workers in commerce and industry, was signed by President Roosevelt.

1937 - The Federal Insurance Contribution Act (FICA) required workers to pay taxes to support the Social Security system. Payroll taxes were 2%.

1939 - Social Security was expanded to cover dependents and survivors. Payroll taxes were 2%.

1950 - Coverage was expanded to job outside of commerce and industry, and benefit levels were increased. Payroll taxes were 3%.

1956 - Disability Insurance was created, and expanded over the following years. Early retirement at age 62 for women was permitted. Payroll taxes were 4%.

1961 - Early retirement at age 62 for men was permitted. Payroll taxes were 6%.

1972 - Automatic cost-of-living-adjustments (COLAs), which index benefits to inflation, were introduced. The formula to calculate increases initially overstated inflation by 25%, and people born between 1910 and 1916 received an unintended windfall. Payroll taxes were 9.2%.

1977 - The mistake in the benefit formula was corrected. The "notch" refers to the difference in benefits paid to the group that received the windfall and those who retired following the formula correction. Social Security was thought to be actuarially sound. Payroll taxes were 9.9%.

1983 - The National Commission on Social Security Reform was created in response to the actuarial unsoundness of the system. The commission called for 1) and increase in the self-employment tax; 2) partial taxation of benefits to upper income retirees; 3) expansion of coverage to include federal civilian and nonprofit organization employees; and 4) an increase in the retirement age from 65 to 67, to be enacted gradually starting in 2000. Again, Social Security was declared actuarially sound. Payroll taxes were 10.8%.

1985 - The Social Security Trust Funds were moved "off-budget" so that the funds earmarked for the Social Security system would be tracked separately from the rest of the budget. Payroll taxes were 11.4%.

1986 - COLAs were increased to respond to minor levels of inflation. Payroll taxes were 11.4%.

1993 - The amount of taxable benefits for upper income retirees was increased to 85%. Payroll taxes were 12.4%.

1996 - The Social Security Trustees' Report stated that the Social Security system would start to run deficits in 2012, and the trust funds would be exhausted by 2029. All members of the Advisory Panel agreed that some or all of Social Security's funds should be invested in the private sector. To keep the unchanged system actuarially sound, payroll taxes would have to be increased 50%, to 18% of payroll, or benefits would have to be slashed by 30%.

1997 - All members of the presidentially-appointed Social Security Advisory Panel agreed that some or all of Social Security's funds should be invested in the private sector. To keep the unchanged system actuarially sound, payroll taxes would have to be increased 50%, to 18% of payroll, or benefits would have to be slashed by 30%."

1999 - The Social Security Trustees' Report stated the Social Security Retirement System's unfunded liability increased by $752 billion since the 1998 Trustee Report was published. This brings the total long-term unfunded liability to more than $19 trillion.

When first adopted, social security covered about 60 percent of the work force. Over the years, it has expanded coverage to include the self-employed, many state and local government employees, federal workers, and employees of nonprofit organizations. Today, approximately 95 percent of all workers are covered by social security.
The program was designed to be a self-supporting federal program, financed with payroll taxes and providing not just retirement income, but a host of other insurance programs as well. There are four distinct types of benefits provided:
· Retirement benefits, which you can elect to receive at any time after age 62, are based on the number of years that you have worked and the amount of money you have earned. Your spouse and, in some cases, your children may also be eligible for benefits based on your earnings records. Coverage has also been extended to ex-spouses if the marriage lasted at least 10 years and the ex-spouse has not remarried.

· Survivor's benefits are a form of life insurance, providing payments to your spouse and dependent children after your death.

· Disability insurance ensures you a monthly income if you are unable to work because of an illness or disability, regardless of age.

· Medicare provides both hospital insurance (Part A) and voluntary medical insurance (Part B) for men and women over age 65 and disabled younger people.

These benefits are financed by payroll taxes. For employees, the tax is called the Federal Insurance Contribution Act (FICA) tax, and half is paid by both the employee and the employer. For self-employed people, the tax is called the Self-Employed Contribution Act (SECA) tax, and "both halves" are paid by you. In 2002, both FICA and SECA demand 15.3 percent of the first $84,900 of wages ($87,000 in 2003); for employees, half (up to $6,494.85 in 2002, for example) is paid by the employee and the other half is paid by the employer. The wage base is adjusted each year based on increases in average wages in the country. In addition, any compensation over $84,900 is subject to Medicare tax of 2.9 percent (or 1.45 percent each, for employee and employer).

Although social security was designed to be a self-supporting program and has largely succeeded in that goal, it has never developed the "trust fund" to draw on for future years which was once anticipated. This means that the taxes paid for social security are not put into a separate account that is used only to pay out social security benefits. Instead, the government uses the social security taxes as it uses all other taxes (to build roads, provide defense, etc.), and it puts an "IOU" in the trust fund.

To look at it another way, the social security taxes simply reduce the cost of government borrowing. Therefore, the funds from social security have played an important role in obscuring how truly large the federal deficit really is because social security receipts have been included in the federal budget figures. When government leaders tell us that "the budget will be in surplus" in the very near future, remember that they are including the social security trust funds in their calculations.

In the early 1980's government policy makers feared the social security system would become bankrupt, so in 1983, the system was changed significantly. Part of the changes involved adopting an expanded and indexed wage base and higher tax rates. Also, under certain circumstances, social security benefits may be subject to income tax.

Another important change was in the increase in the normal or full retirement age from 65 to 67. While the increase is gradual and relatively small, it represents a major change in social security philosophy. The age-65 retirement limit for full benefits had not been changed since the adoption of the Social Security Act in 1935, even though life expectancy for a 65-year- old then was only another 2 years. Today the life expectancy of a 65-year-old is another 16 years for men and 19 years for women. In 1935, when social security was enacted, most people never reached age 65.