Most Americans are familiar with Social Security, but many do not understand exactly how it works. They might work for years and pay Social Security taxes, but very few understand the original purpose of Social Security. Many might think that Social Security has been around forever, but it only started in 1935. So, exactly how did Social Security get its start and what was the purpose of it? We will answer all those questions and more in this article as we explain the history of Social Security as well as some details about how it works. Keep reading to learn everything you need to know.
Old Age Before Social Security
In order to fully understand why Social Security was started, you need to have an understanding of what things were like before the program got started. Before Social Security, retirees often struggled financially. Upon reaching retirement age, many people had no choice but to continue working so that they could have the financial means to survive. Although retirement itself and retirement planning are popular conversation topics in today’s world, that was not the case in early America. Many people were unable to save enough for their own retirement, and only a handful of large employers offered any type of pension plan. Even at those companies, very few of the employees actually qualified for a pension.
In the early 1930’s, it was estimated that half of elderly people in America did not have the financial resources to adequately provide for themselves. For this reason, many states began passing laws that provided an old-age pension. Before the creation of a Federal Social Security program, approximately 17 states had some form of pension program for the elderly.
In addition to struggling financially, many older people found themselves without reliable health care. Since most health care plans are provided through employers, once people retired, they were often left without health insurance of any kind. People who became disabled and were unable to work were in similar situations. They were unable to earn a living and also left without health insurance. Often, survivors of workers were left in dire straits as well if the household earner suddenly passed away. Many surviving spouses and children were left without any financial resources, and they often struggled to meet their needs. The Federal government was starting to see the need for a social insurance program of some kind to meet these needs. Many people wonder, “Is Social Security socialism,” and some people still argue that question today.
The Social Security Act Of 1935
After the Civil War, many disabled veterans began to receive benefits from the government. Though it would be many years before the Social Security Act was passed and Social Security benefits officially began, this was the beginning of true Social Security programs in America. These Civil War pensions had many similarities to the Social Security laws that would eventually be passed, and they laid the groundwork for the way that Social Security works today. By the 1930’s, the Great Depression was in full swing. Many politicians said that this was just another dip in the economic cycle, and they suggested that Congress do nothing. However, President Franklin D. Roosevelt knew that something must be done. He assembled the Committee on Economic Security to study the problem and suggest a solution. So, when was the Social Security Act passed?
As a result of the Committee’s work, the Social Security Act of 1935 was passed by Congress. “What did the Social Security Act of 1935 do,” you might ask. It was intended to offer some immediate relief to families, but many of the old-age insurance programs that we know today were not scheduled to take effect until 1942. Within a couple of years, the program was already expanding. In addition to old-age benefits, the program was expanded to include survivors benefits, spousal benefits, dependent children’s benefits, unemployment insurance and other items. It would be approximately 20 years before the Act was expanded to include disability benefits.
The Act also established payroll taxes to fund the program. After assignment of Social Security numbers and Social Security cards – which was a huge task – these FICA and OASDI taxes started being collected and placed into the Social Security trust funds. Money from these funds was then used to pay monthly benefits to recipients based on their eligibility. A lump sum payment was made to eligible recipients in 1937. The first Social Security monthly payments went out in 1940, and the program continued to grow and expand for the first several years after its creation. An interesting fact is that the first monthly payment was sent to Miss Ida May Fuller, a Legal Secretary, in 1940. We will discuss some of the key amendments to the Social Security Act later in this article.
Finally, the Act established a Social Security Board. The job of this board was to inform people about the Social Security Act including both employees, employers, and the public. They also needed to establish local field offices for running the Social Security System. A few years later, this board was replaced by the current Social Security Administration.
Social Security Trust Funds
The Social Security trust funds are essentially the accounts where all the payroll taxes are stored. These trust funds earn interest while the money is in these accounts. Monthly benefits are then paid from the funds in these accounts. This includes retirement benefits, disability benefits, Medicare benefits, and all other benefits paid by Social Security. Remember that Social Security is the largest line item in the Federal budget today, so it is no small amount of money that is paid each month!
There are actually two separate trust funds associated with the Social Security program. One is the Old Age and Survivors Insurance (OASI) trust fund. It is used to pay for retirement benefits, Medicare benefits, and survivors benefits. The other is the Disability Insurance trust fund. This fund is used to pay for disability benefits to disabled workers. In addition to benefit payments, these trust funds also pay for the administrative costs associated with operating Social Security. This includes the salary for Federal employees who are employed by the Social Security Administration (SSA) and other expenses incurred by the program. These administrative costs are quite low comparatively. Most of the money collected and deposited into the trust funds goes to pay benefits while very little of it is used for administrative costs.
Important Amendments To The Social Security Act
The Social Security Act went through many amendments in its first few years. Most of these amendments found ways to expand the program to include payments to additional people who might need them. The first big amendment came in 1939, just a few years after the Act was initially passed. Initially, the Act only provided for payments to retired workers. However, this first amendment expanded that to include benefits for a spouse or minor children of a retired worker. It also included for payment of survivors benefits – or payments to the family of a deceased worker who died prematurely.
By the 1950’s Social Security payments were quite low. Payments had been fixed since the program’s inception, and many people were receiving more on old-age welfare programs from their state than they were receiving in retirement benefits. In 1950, an amendment was passed that introduced cost of living adjustments. This was the first ever increase in Social Security benefits, although the method for automatic COLA increases was not introduced until the 1970’s.
During the 1950’s there were several Social Security amendments dealing with disability insurance. The disability program was started by these amendments. At first, the Act simply stated that a disability would not wipe out your retirement benefits. However, it was quickly amended again to begin providing cash benefits to workers who experienced a disability that prevented them from working. Another amendment expanded these payments to dependents of those workers.
During the 1960’s, Medicare was introduced. This was a new type of social insurance program that the SSA began to administer. Millions of Americans then had access to Medicare, and nearly 20 million Americans enrolled within the first three years of the program. The 1970’s brought major changes as well. The Supplemental Security Income (SSI) program was introduced. Before this, these types of programs were administered by state governments, but they were widely disparate between different states. The Federal government took over administration of these programs, and SSI was born.
A few additional amendments were passed during the 1970’s and 1980’s with the last major amendment coming in 1983 under President Ronald Reagan. This amendment allowed for the taxation of Social Security benefits. The Social Security program is now commonplace for employees – even self-employed workers. Many people rely on Social Security as a retirement program to provide income during their retirement years, and Social Security reform is a hot topic in today’s political world especially as life expectancy continues to increase. With Social Security only funded fully through 2037, additional amendments are likely in the near future to keep the program running. These reforms might include increasing the Social Security tax rate, reducing benefits, increasing the retirement age, increasing the tax limit, or a combination of these items along with other ideas. With the future of Social Security uncertain, no one knows for sure what will happen in the next few years.
Cost Of Living Adjustments (COLAs)
The first COLA came about in 1950. Until then, Social Security payments had remained the same for over 10 years. People were starting to see their dollar buy fewer things, and they were struggling to survive with their existing payments. By the 1970’s, Congress saw a need for automatic cost of living adjustments based on the current amount of inflation. This amendment was passed in 1972 with the automatic adjustments starting in 1975. Before this, the House and Senate would need to agree on an increase and pass a special amendment to have the increase take effect. This was too cumbersome, and it was often difficult to get Congress to agree on the amount. Today’s formula calls for the calculation of the adjustment to be based on the consumer price index values published by the Secretary of Labor. As consumer prices increased, Social Security payments would also need to increase to provide for the same level of living.
These adjustments are now made on an annual basis. The CPI is observed year over year, and the payments are increased by the same percentage as the CPI increases. For example, if consumer prices increase 2%, then Social Security benefits will increase 2%. In some years, there may be no increase if there is no increase in the CPI. Similarly, benefits will never decrease because of a COLA. If prices go down, then your benefits will remain the same. You can learn more about COLAs and see the historical increases at SSA.gov.
Social Security Disability
When disability benefits were first introduced to the program, they were not in the form of cash payments. Disabled workers who were unable to work could become ineligible to receive retirement benefits because they were not working for several years. The first amendment passed relating to disability simply stated that these workers could not lose their retirement benefits because they were unable to work due to a disability. It was a few more years before these workers actually began receiving financial assistance before retirement age.
Today, the disability program is a large part of the Social Security program itself. There are millions of disabled workers who receive monthly benefits through SSDI. To qualify, a worker still needs to have enough work history. This means that the worker must have paid into the system for a certain period of time before being eligible for these benefits. In general, they must have worked and paid Social Security taxes for at least 10 years before they will be eligible to receive disability benefits. In addition to the workers, disability benefits also provide assistance to survivors or dependents of workers who are disabled or were killed on the job.
The Bottom Line
Social Security has been around for quite some time, and it has undergone quite a few changes and updates throughout the years. With the future of the program uncertain, it is likely that more changes are on the horizon. Millions of people have become dependent on the services that Social Security provides, and many people would struggle without its existence. Understanding how and why Social Security was created helps us today to think about potential changes to the program in the future.
Frequently Asked Questions
Who started Social Security and why?
Social Security was started under President Franklin D. Roosevelt. Many people ask, “Why did President Franklin D. Roosevelt establish Social Security?” President Roosevelt saw the need for this type of social insurance program because so many elderly Americans were struggling financially. Upon retirement, they no longer had the financial means to support themselves or their families. The program was started to provide assistance to these retired workers and ensure that they were taken care of. Times were especially tough then as Social Security was started during the middle of the Great Depression.
What is the Social Security Administration?
The Social Security Administration is responsible for running and maintaining all the Social Security programs. Originally, there was simply a Social Security Board composed of three people appointed by the president. However, the process of running Social Security quickly became too much for three people to handle. The SSA was born several years later, and it has been in operation ever since. The SSA handles the administration of retirement benefit payments, disability payments, survivors payments, and the other administrative tasks associated with keeping Social Security going.
What was the original purpose of Social Security?
So, why was Social Security created? The original purpose of Social Security was to provide financial assistance to elderly people who were no longer working. Several states had similar programs already, but there were huge differences between these state programs. The Federal government realized the need for a centralized, Federal program to meet this need. Social Security has been amended and expanded several times since its inception to include benefits for worker’s spouses and dependents, disability benefits, and Medicare. It is the largest item in the Federal budget today, and millions of people rely on this important program for income and health insurance. You can expect that Social Security will continue to go through additional changes in the future. It is fully funded through the year 2037, but it will no longer be able to fund its current commitments in full after that time without additional changes.
Which party came up with Social Security?
Social Security was sponsored by Democratic representatives in the Senate and House. At the time at which it was passed, Congress was largely controlled by the Democratic party. However, a majority of the Republicans in Congress voted for the bill as well. It was signed into law by President Franklin D. Roosevelt, who was a member of the Democratic party. Through the years, amendments to the Social Security Act have been passed by both Democrats and Republicans. Social Security reform is often a hotly debated topic between the two parties.