Most Americans are familiar with Social Security, but many do not understand how it works. They might work for years and pay Social Security taxes, but very few understand its original purpose. Many might think Social Security has existed forever, but it only started in 1935.
So, exactly how did Social Security get its start, and what was its purpose? This article will answer all those questions and more as we explain the history of Social Security and provide some details about how it works. Keep reading to learn everything you need to know.
Old Age Before Social Security
To fully understand why Social Security was started, you must understand what things were like before the program began. Before Social Security, retirees often struggled financially. Upon reaching retirement age, many people had no choice but to continue working to have the financial means to survive.
Lack of Savings
Although retirement and retirement planning are popular conversation topics today, that was not the case in early America. Many could not save enough for retirement, and only a handful of large employers offered any pension plan. Even at those companies, very few employees qualified for a pension.
In the early 1930s, it was estimated that half of the elderly people in America did not have the financial resources to adequately care 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.
Additional Needs
In addition to struggling financially, many older people found themselves without reliable health care. Since most health care plans are provided through employers, people are often left without health insurance once they retire. People who became disabled and were unable to work were in similar situations. They could not earn a living and were 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 to meet these needs. Many people wonder, “Is Social Security socialism?” some still argue about that question today.
KEY TAKEAWAYS
- Today, payroll taxes are collected and put into two trust funds. One is for Medicare, retirement, and survivor benefits; the other is for disability benefits.
- Social Security retirement benefits began payments in 1937, but the first monthly payments didn’t start until January 1940.
- After several amendments to the Social Security Act, Social Security now provides retirement, spousal, disability, and survivor benefits.
The Social Security Act Of 1935
Civil War
After the Civil War, many disabled veterans began receiving government benefits. Though it would be many years before the Social Security Act was passed and benefits officially started, this was the origin of the Social Security programs in America.
These Civil War pensions were similar to the Social Security laws that would eventually be passed, and they laid the groundwork for how Social Security works today.
Great Depression
By the 1930’s, the Great Depression was in full swing. Many politicians said this was just another dip in the economic cycle and 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.
Congressional Approval
So, when was the Social Security Act passed? As a result of the Committee’s work, Congress passed the Social Security Act of 1935. “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, it 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.
Payroll Taxes
The Act also established payroll taxes to fund the program. After the assignment of Social Security numbers and Social Security cards – which was a considerable 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.
First Social Security Checks
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. Interestingly, the first monthly payment was sent to Miss Ida May Fuller, a Legal Secretary, in 1940.
Social Security Board
Finally, the Act established a Social Security Board. This board’s job was to inform people about the Social Security Act, including employees, employers, and the public. It also needed to establish local field offices to run the Social Security System. A few years later, this board was replaced by the current Social Security Administration.
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Social Security Trust Funds
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 them. 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 no small amount of money is paid monthly!
Multiple Trust Funds
There are two separate trust funds associated with the Social Security program.
- One is the Old Age and Survivors Insurance (OASI) Trust Fund. It pays for retirement, Medicare, and survivor benefits.
- The other is the Disability Insurance Trust Fund, which pays disability benefits to disabled workers.
Administrative Expenses
In addition to benefit payments, these trust funds pay for the administrative costs of operating Social Security. This includes the salary for Federal employees employed by the Social Security Administration (SSA) and other expenses incurred by the program.
These administrative costs are pretty 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.
Spousal and Survivor Benefits
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 payment of survivors benefits—or payments to the family of a deceased worker who died prematurely.
COLA Increases
By the 1950s, 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 in retirement benefits. In 1950, an amendment was passed that introduced cost-of-living adjustments. This was the first increase in Social Security benefits, although the method for automatic COLA increases was not introduced until the 1970s.
Disability Benefits
During the 1950s, several Social Security amendments dealt with disability insurance. These amendments started the disability program. At first, the Act 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 those workers’ dependents.
Medicare
Medicare was introduced in the 1960s. The SSA began administering this new type of social insurance program. Millions of Americans then had access to Medicare, and nearly 20 million enrolled within the program’s first three years.
SSI Program
The 1970s also brought major changes. 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 the administration of these programs, and SSI was born.
Taxation of Benefits
A few additional amendments were passed during the 1970s and 1980s, with the last significant amendment, passed in 1983 under President Ronald Reagan, allowing for the taxation of Social Security benefits.
Future of Social Security
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. Social Security reform is a hot topic in today’s political world, especially as life expectancy increases.
With Social Security only fully funded through 2036, additional amendments will likely be needed 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 combining these items and other ideas. With the future of Social Security uncertain, no one knows what will happen in the next few years.
TIP
Over the years, the Social Security Act has been amended to provide more benefits to its participants. One of the most significant changes is the annual COLA (cost-of-living) increase. The COLA raises beneficiaries’ monthly payments to help cover increased living costs.
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 struggling to survive with their existing payments. By the 1970s, Congress saw a need for automatic cost-of-living adjustments based on the current amount of inflation. This amendment was passed in 1972, with automatic adjustments starting in 1975.
Consumer Price Index
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 getting Congress to agree on the amount was often tricky. Today’s formula calls for the adjustment to be calculated based on the consumer price index values published by the Secretary of Labor. Social Security payments would also need to increase as consumer prices increased to provide for the same living level.
Annual Adjustment
These adjustments are now made on an annual basis. The CPI is observed year over year, and the same percentage increases the payments as the CPI increases. For example, if consumer prices increase by 2%, Social Security benefits will increase by 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.
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 had not worked for several years.
The First Amendment passed regarding 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 began receiving financial assistance before retirement age.
SSDI Program
Today, the disability program is a large part of the Social Security program. Millions of disabled workers receive monthly benefits through SSDI. To qualify, a worker still needs to have enough work history. This means the worker must have paid into the system for a certain period before being eligible for these benefits.
In general, they must have worked and paid Social Security taxes for at least 10 years before they can receive disability benefits. In addition to the workers, disability benefits also assist survivors or dependents of workers who are disabled or were killed on the job.
The Bottom Line
Social Security has existed for some time and has undergone several changes and updates throughout the years. With the program’s future uncertain, it is likely that more changes are on the horizon.
Millions of people have become dependent on Social Security’s services, and many would struggle without its existence. Understanding how and why Social Security was created helps us consider future changes to the program.
Frequently Asked Questions
Social Security was started under President Franklin D. Roosevelt. Many ask, “Why did President Franklin D. Roosevelt establish Social Security?” President Roosevelt saw the need for this 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 their care. Times were especially tough then, as Social Security was started during the middle of the Great Depression.
The Social Security Administration runs and maintains all the Social Security programs. Initially, there was simply a Social Security Board composed of three people appointed by the president. However, running Social Security quickly became too much work for three people.
The SSA was created several years later and has been in operation ever since. It handles the administration of retirement benefit payments, disability payments, survivor payments, and the other administrative tasks associated with keeping Social Security going.
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. Since its inception, Social Security has been amended and expanded several times to include benefits for workers’ spouses and dependents, disability benefits, and Medicare.
Social Security is the largest item in the Federal budget today, and millions of people rely on this vital program for income and health insurance. You can expect that Social Security will continue to undergo additional changes in the future. It is fully funded through 2035 but will no longer be able to fully fund its current commitments without additional changes after that time.
Democratic representatives in the Senate and House sponsored Social Security. When it was passed, Congress was primarily controlled by the Democratic party. However, a majority of the Republicans in Congress voted for the bill as well. President Franklin D. Roosevelt, who was a member of the Democratic party, signed it into law.
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.
You can find a Social Security Administration office near you by using our SSA office locator and searching for your closest location.
