I.

Introduction

Social Security, public programs designed to provide income and services to individuals in the event of retirement, sickness, disability, death, or unemployment. In the United States, the term social security refers specifically to the programs established in 1935 under the Social Security Act. In particular, it refers to the social insurance portion of that act, which uses contributions made by workers and employers to provide income to people and their families during retirement or in the case of involuntary unemployment, disability, or death.

II.

Early Forms of Social Support

Societies throughout history have devised ways to support people who cannot support themselves, particularly older people, people with disabilities, and people without family. The Code of Hammurabi, a body of laws created by King Hammurabi of Babylonia in the 18th century bc, is one of the oldest documents to discuss social support. The code defined the rights that widows and orphans should have to the estates of their relatives.

Religious and moral teachings in most societies have also encouraged people to help one another through acts of individual goodwill. Until the past few centuries, however, no society had a universal, publicly financed social support system. One of the first publicly financed systems developed in the late 16th century in England, out of a series of legislative acts known as poor laws. Under these laws, local governments built almshouses, large facilities that housed those too old or unfit for work. Poor laws also established workhouses, public housing and work facilities for the unemployed. In addition, poor laws provided for some so-called outdoor relief, which offered assistance to the poor and unemployed outside of almshouses or workhouses. The funding of poor law measures, unlike that of later social insurance programs, came from general taxes rather than from those of the people being supported. The modern-day counterpart of the type of support once provided by the poor laws is usually called welfare. However, poor laws foreshadowed the development of social insurance in Europe and Social Security in the United States in that they established a framework of public support for the elderly, the disabled, and the unemployed.

In the 1700s, British settlers of North America established poor laws in their new colonies. These laws became the foundation for the first social support systems in Canada and the United States. Some people also received support from membership organizations, including fraternal orders and friendly societies (work-based organizations similar to craft guilds). These organizations provided financial support to their members and to the families of their members when a member could not work due to a disability or death.

The need for a more extensive social support system grew in the United States during the mid- to late 1800s because of changes in labor patterns that came with the Industrial Revolution. Before industrialization, most people worked on farms. Large families provided the labor necessary to run a farm, and most people lived in extended families, which encompassed several generations of relatives. In extended families, healthy working-age members could support their young, elderly, and infirm relatives. However, with the rise of factory, office, and service jobs located outside of the home, people no longer needed to live in large families to make a living. Many jobs actually required that people move far away from their extended families. With this change in work, people began to have small, nuclear families, which included only a couple and their children. In the shift from extended families to nuclear families, many people lost their most reliable source of support—a large network of relatives. As a result, increasing numbers of people ended up in poverty if they could not work or if they had no family members to support them in their old age.

One response to this shift in work patterns was the development of pension programs and insurance plans. During the 1800s trade unions developed their own insurance plans and mutual associations—groups that pooled funds contributed by employees and employers to finance insurance benefits. Railroad workers established particularly strong insurance and pension programs. A Railroad Retirement Act was later written into federal law along with Social Security. Corporations began offering pension plans in the late 1800s. By the early 1900s, many state and local governments offered pensions to government employees such as teachers, police officers, and firefighters. Private insurance companies had also begun offering health and disability insurance policies by this time. See also Retirement Plans.

One of the widest-ranging systems of social support in the United States prior to passage of the Social Security Act developed during the American Civil War (1861-1865). In 1862, the federal government created a generous pension program for Union war veterans disabled in battle and for their families. Later amendments to this legislation gave benefits to Union veterans in their old age and to those disabled outside of battle. As extensive as this pension program was, it covered only a minor portion of the U.S. population, and it lasted only into the early 1900s.

During the early 1900s most states enacted workers’ compensation laws that required businesses to pay benefits to employees injured on the job or to the families of workers who died because of work-related accidents or illnesses. Workers’ compensation and employer-sponsored pension programs formed the foundation of a growing system of privately funded social insurance, though with public oversight. However, these types of support still covered only a minority of U.S. citizens. Some states also enacted mandatory old-age pension laws, designed to cover all citizens, but many of these laws were quickly declared unconstitutional and repealed. Several attempts by states to develop health insurance systems also failed against tests of constitutionality.

Economic security declined for all U.S. citizens in 1929 when the stock market crashed, triggering the Great Depression—a period of severe unemployment throughout the country. Millions of people fell into poverty. Economic hardships were particularly severe for the oldest members of the population. In response, in the early 1930s several states managed to enact and maintain old-age pension and unemployment insurance programs. Political pressure for a national social insurance program increased as the depression persisted and deepened.

III.

The Social Security Act

In 1934 President Franklin Roosevelt created a Committee on Economic Security to draft a program of guaranteed social support for all U.S. citizens who were economically vulnerable during the Great Depression of the 1930s. In part, Roosevelt was responding to several radical proposals designed to stimulate the economy. One proposal would have distributed $200 per month to every aged family with the requirement that the money be spent during that month. In early 1935 the committee submitted its Economic Security Bill to the Congress of the United States. Congress subsequently changed the name of the bill to Social Security and approved it by the middle of 1935. President Roosevelt signed the Social Security Act into law in August of that year. The core of the Social Security Act was to protect all citizens against the economic risks of unemployment and old age.

The Social Security Act was a comprehensive law consisting of 11 titles, or subjects. Six of the titles detailed specific programs, while the others established methods of taxation to fund the programs, formed the organization of the controlling government body (the Social Security Board), and established guidelines for the creation of public health facilities. The six original programs were Old-Age Assistance, Old-Age Benefits (for retirement), Unemployment Compensation, Aid to Dependent Children (ADC), Maternal and Child Welfare, and Aid to the Blind. To most Americans Old-Age Benefits for retired adults became synonymous with the term social security. The federal government alone operated this program, whereas states ran the others with grants from the federal government.

Only Old-Age Benefits and Unemployment Compensation operated as social insurance programs. The federal government deducted taxes from workers’ pay to finance Social Security benefits, while states collected a tax from employers to finance unemployment benefits. Social Security and unemployment benefits came directly out of funds established to hold these taxes, rather than from general tax revenues. The other four program titles of the Social Security Act were forms of welfare, funded by general federal revenues. Old-Age Assistance and Aid to the Blind were meant primarily to supplement Old-Age Benefits, or to provide income to people ineligible for those benefits. Maternal and Child Welfare funded health-care programs for poor mothers and their children and for disabled children, as well as programs to protect and care for homeless, neglected, and otherwise endangered children. Aid to Dependent Children provided support for children living with only one parent or with relatives other than their parents.

In 1937 the government began issuing Social Security identification cards to all citizens. Each card had a unique number that the government used to keep track of a person’s earnings and the taxes collected from those earnings that went to finance Social Security benefits. Two titles of the Social Security Act specified the manner in which taxes would be deducted from workers’ earnings to finance both old-age benefits and unemployment compensation. These tax laws were later written into the code of the Internal Revenue Service. The Social Security tax became known by the name of one of these laws, the Federal Insurance Contributions Act (FICA).

The government began collecting Social Security taxes in 1937 and putting them in a trust fund—a fund that the government could use to pay benefits, cover administrative costs, and invest in securities to earn interest. To build up the trust fund, the government paid only single, lump-sum benefits to people who retired before 1940. Regular benefit payments, paid out monthly, began in that year. Workers could retire and become eligible for benefits at age 65.

IV.

Amendments to the Social Security Act

Since its inception in 1935, the U.S. government has modified the Social Security Act more than 20 times by major amendments. One of the first amendments, passed in 1939, added benefit support for the dependents (family members) of retired workers and for survivors of deceased workers. In the same year, the Social Security Board was absorbed into the cabinet-level Federal Security Agency. The government underwent a reorganization in 1946 and replaced the board with the Social Security Administration (SSA), still within the Federal Security Agency. In 1949 the government reorganized the SSA, moving the administration of Unemployment Compensation to the U.S. Department of Labor.

In 1953 the government abolished the Federal Security Agency, and the Social Security Administration became part of the new Cabinet-level agency of Health, Education, and Welfare. In 1956, under President Dwight Eisenhower, the U.S. Congress added monthly benefits for disabled workers to Social Security. Along with the amendment of 1939 for benefits to dependents and survivors, this new amendment created the form of Social Security that still exists today, which is known as Old-Age, Survivors, and Disability Insurance (OASDI).

A 1965 amendment signed into law by President Lyndon Johnson created Medicare (see Medicare and Medicaid), a program that provides hospital insurance to the elderly, along with supplementary medical insurance for other medical costs. A 1972 amendment to Social Security added Cost of Living Adjustments (COLAs) to increase benefit payments in keeping with inflation (see Cost of Living). Another 1972 amendment combined the original Old-Age Assistance and Aid to the Blind programs with new provisions for assistance to disabled people, which created a new program called Supplemental Security Income (SSI). The federal government handled most of the administration of this new program. In 1980 the SSA became a division of the U.S. Department of Health and Human Services, the federal agency that replaced the health and social welfare components of Health Education and Welfare in 1979.

During the 1970s and 1980s, concern arose about the financial integrity of the Social Security trust funds. The balance was shifting between money coming in from taxes and benefits going out of the funds, and it became clear that the trust funds could be depleted without some reforms to Social Security operations. To stem these developments, the administration of President Ronald Reagan passed a set of major legislative changes to Social Security laws in 1983. These changes included the cancellation and, in some cases, taxation of certain benefits. The Congress also legislated a gradual increase in the full retirement age, raising it from 65 to 67 for individuals born in 1960 or later. The Reagan administration also began to consider returning the SSA to its original status as an independent agency. Many members of Congress and the president’s Cabinet felt that this change would make the SSA more efficient and fiscally responsible and would demonstrate the government’s renewed commitment to Social Security. Over a decade later, in 1995, the SSA once again became an independent agency.

The following year, President Bill Clinton signed a set of major welfare reform bills into law. Under these reforms, the program called Aid to Families with Dependent Children (AFDC), a revision of the original ADC program, was abolished and replaced by Temporary Aid for Needy Families (TANF). This program placed time limits on benefits to poor families with dependent children and set work requirements for receiving those benefits.

As originally passed, the Social Security Act prohibited payment of retirement benefits to senior citizens who continued to earn income from regular employment. Amendments in the 1950s, 1960s, and 1970s defined specific earnings limits and allowed benefit payments to be reduced—rather than entirely eliminated—when these limits were exceeded. Since 1983 those 70 or older have been able to continue working without any earnings limits. Amendments to the Social Security Act passed in 1996 relaxed earnings limits for senior citizens who had reached full retirement age (65 to 67 depending on year of birth). Amendments in 1999 created stronger incentives and better supports for the disabled to engage in productive work. In 2000 Congress entirely eliminated the earnings limit for seniors who had reached the full retirement age, giving more seniors the freedom to work without reducing their Social Security benefits.

V.

Programs

Several federal agencies today support and administer the various Social Security programs. The Administration for Children and Families within Health and Human Services (HHS) supports TANF by giving block grants to states, which administer the program. The SSA jointly administers Medicare with the Health Care Financing Administration of HHS. The U.S. Employment and Training Administration of the Department of Labor administers Unemployment Compensation. The SSA itself includes 10 regional offices, 6 program centers, and more than 1,300 district and branch offices.

The programs associated with Social Security include Old-Age, Survivors, and Disability Insurance (OASDI); Medicare; Unemployment Compensation; and Supplemental Security Income (SSI). For people who have worked for a living, OASDI and Medicare provide support during their older years and when they have stopped working. Unemployment Compensation provides temporary financial help during periods between jobs. SSI provides income to people who cannot work for various reasons.

A.

Retirement, Disability, Death, and Medicare Benefits

OASDI, Medicare hospital insurance, and Medicare supplementary medical insurance are separately financed segments of Social Security, each with separate trust funds. (OASDI has two funds.) The OASDI program provides benefits for the aged, for the disabled, and for survivors of deceased workers. Financing for the cash benefits for OASDI comes from earmarked payroll taxes levied on employees, their employers, and the self-employed. The rate of these contributions is based on the taxable earnings of employees, up to a maximum taxable amount, with the employer contributing an equal amount. Self-employed people contribute twice the amount levied on employees.

Social Security benefits replace a portion of a person’s former earned income. In the interests of fairness and saving money in Social Security trust funds, the government has structured Social Security benefits to provide proportionately more support to poorer citizens and less to wealthier citizens, in relation to income earned during working years. In other words, those who earned low wages or salaries receive a larger percentage of their former income in benefits than do recipients who had higher incomes. In couples with just one worker contributing to Social Security, the noncontributing spouse who first claims benefits at age 65 or older receives 50 percent of the amount paid to his or her spouse. Similar percentages are payable to disabled individuals and their spouses. Surviving spouses and children receive a percentage of the retirement benefit computed from the earnings of the deceased earner.

The amount of cash benefits people receive varies depending on the combined wages, salaries, and self-employment income of the primary earner or earners in a family. The law specifies certain minimum and maximum monthly benefits. To keep the cash benefits in line with inflation, the SSA indexes them to increases in the cost of living. These adjustments—known as cost-of-living adjustments (COLAs)—are determined according to changes in the consumer price index, a figure compiled by the government to represent the current cost of a selection of goods and services.

Most eligible individuals can start receiving partial old-age benefits at age 62. Receipt of full benefits depends on the recipient’s year of birth but ranges between the ages of 65 and 67.

Medicare health insurance for the elderly is split into two parts, hospital insurance, also known as part A, and supplementary medical insurance (SMI), also known as part B. Medicare hospital insurance pays for inpatient hospital services, nursing home and hospice care, and home health services. Financing for this part of Medicare comes for the most part from payroll taxes. Medicare supplementary medical insurance, which pays for many services provided by physicians, is funded in part by uniform monthly contributions from aged and disabled people enrolled in the program, and in part by federal general revenues. Legislation passed in 1982 and 1984 froze the share of SMI costs covered by federal revenues at 75 percent. Patients are usually responsible for a deductible portion of their hospital costs and for copayment of a set percentage of physician charges. See also Health Insurance.

B.

Unemployment Compensation

The Unemployment Compensation program provides monetary support for people who have lost jobs. The Employment Service program (established prior to the Social Security Act) provides training and job-finding services for people seeking work. The two programs are controlled cooperatively by the federal and state governments. Titles III and IX of the Social Security Act authorized the federal government to grant money to states to administer unemployment compensation, and established a federal unemployment insurance trust fund. The Federal Unemployment Tax Act of 1939 authorized the collection of both federal and state payroll taxes from employers and specified how these funds were to be used. Most of the federal tax can be offset by employer contributions to state funds under an approved state unemployment compensation law. The federal government uses its small portion of the tax to pay for the administrative costs of the Unemployment Compensation and Employment Service programs, and for loans to states whose funds run low.

State financing and benefit laws vary widely. In general, unemployment compensation benefits under state laws are intended to replace about 50 percent of the wages previously earned by a worker. Maximum weekly benefits provisions, however, result in benefits equal to less than 50 percent of wages for most higher-earning workers. All states pay benefits for up to 26 weeks to qualified recipients. In some states, the duration of benefits depends on the amount earned and the number of weeks worked in a previous year. In others, all recipients are entitled to benefits for the same length of time. During periods of heavy unemployment, federal law authorizes extended benefits, in some cases up to 39 weeks. For example, in 1975, during a period of high unemployment, extended benefits were payable for up to 65 weeks. Federal payroll taxes help to finance such extended benefits. See also Unemployment Insurance.

C.

Supplemental Security Income

Under the Supplemental Security Income program (SSI), the federal government provides payments to elderly, blind, or disabled individuals with low income. SSI replaced federally subsidized programs of state assistance that existed from 1936 through 1973 for these three groups. The administration of President Richard Nixon implemented SSI in 1972, and the program began in 1974. Funding for SSI comes from general federal revenues, and many states add to SSI benefits from their own revenues.

The government relies on SSI to provide a safety net for the working and retired poor—that is, people who have worked, but earned minimal wages or did not work long enough to become vested in the Social Security Old Age or Disability programs. SSI programs take into consideration the income and resources of individuals and families to determine the amount of aid provided to recipients. Under the Social Security Act, the federal government also provides financial grants to the states to operate programs offering maternal and child health care, services to disabled children, child welfare services, and social services such as daycare for children of working mothers. See also Child Welfare.

VI.

Challenges to Stability and Proposals for Reform

In the early 21st century, OASDI benefits—the largest of all social insurance payments and the largest single portion of the federal budget—amounted to about 22 percent of federal expenditures and 4.5 percent of the U.S. gross domestic product (the total goods and services produced within a country). In the future, the proportion of federal spending allocated to social support programs may increase, because of factors such as the growing number of senior citizens in the United States, an increasing population, and rising medical costs.

Since the inception of Social Security, the government had administrated it as a pay-as-you-go program, paying benefits out of current receipts rather than building up a capital fund for each contributor. However, in the mid-1970s, expenditures for Social Security benefits began to exceed tax payments coming into the trust funds. This occurred because a serious recession reduced employment and trust-fund revenues while inflation simultaneously created a need to increase benefits. Public concern developed over the possibility that the Social Security system might become bankrupt over time. Since the funds had been accumulating for more than 35 years, they had a reserve of more than $40 billion in 1976, so the system was in no immediate danger. Nevertheless, experts warned that in the long term the reserve would eventually become depleted. In an effort to restore the financial integrity of Social Security, the government began to reform the system of contributions and benefits.

Many significant changes came under the Social Security Reform Act of 1983, which resulted from recommendations of a National Commission on Social Security Reform, also known as the Greenspan Commission after its chairman, Alan Greenspan. The 1983 act provided for increased revenues for Social Security by authorizing taxes on Social Security benefits. It also accelerated scheduled increases in payroll tax rates from 1984 to 1989 and increased the tax rates on the self-employed.

Even with these reforms, however, longer-range financial problems remained. Many of these problems were related to demographic changes that would increase the amount that Social Security programs would have to pay in benefits. The number of elderly people relative to working-age adults as a proportion of the entire population had been rising steadily. In the 1990s the government estimated that by 2050 there would be twice as many U.S. citizens aged 65 or older than there were in 1975. The Greenspan Commission had recommended that the problem of having too many retirees for each contributor to Social Security be solved by raising the retirement age, which would reduce the cost of benefits in the future. As a result, the 1983 reform act provided for a gradual increase in the minimum age for receiving full retirement benefits.

Continuing concerns over the solvency of the Social Security trust funds led the SSA to create two long-term strategic plans during the late 1980s and early 1990s. In 1994 President Bill Clinton appointed an Advisory Council on Social Security, the last of several since the 1930s, to review the status of the trust funds. In 1997 the council made its final report, in which it recommended reforms to Social Security. Among its recommendations, the council advocated building up trust-fund reserves, aligning benefits more closely with taxes paid, offering incentives to individuals to work to a later age, and accelerating the move toward later standard retirement ages. The council also advocated methods of both improving and encouraging the use of private investment and employer pension plans as alternatives or supplements to Social Security.

Advisory councils ended in 1995 when the SSA returned to independent agency status, and a permanent Social Security Advisory Board formed in 1997. The board was established to advise the president, Congress, and the commissioner of Social Security. A report issued by the board in 1998 echoed the recommendations of the last advisory board, but added further recommendations to curtail benefits, especially for people in higher income brackets; to reduce cost-of-living adjustments; to increase payroll taxes and taxes on benefits; and to phase in a later retirement age of 70.

One of the most controversial issues facing the Social Security system today is whether contributors ought to have some control over how their compulsory contributions are invested, as opposed to the federal government making these decisions. Plans that would allow workers partial or full control over Social Security investments are called privatization schemes. Proponents of privatization argue that the returns to Social Security investments historically have been low compared to what contributors would have enjoyed by investing in equities (the stock market). Opponents argue that Social Security is designed to be a final safety net for many economically vulnerable citizens and should not be subject to the risks of the stock market. Privatization schemes enjoyed some popularity in Congress during the mid- and late 1990s when the stock market was booming, but they became less popular as the market retreated and stagnated. President George W. Bush attempted to revive the issue in 2005 but could not generate enough support in Congress or from the public.

Fundamental differences of opinion on how to reform Social Security have thus far kept the government from making any major changes to the system. Recent estimates indicate that the Social Security trust fund will be exhausted by around 2040. Given the uncertain soundness of the system, efforts at reform are likely to continue for some time to come.