Social Security

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In the United States, there are several federal and state programs that provide income security to U.S. families. These programs started with the Social Security Act (the Act) of 1935, and have expanded and changed over the course of several decades to become the program that is in existence today. The Act was signed into law on August 14, 1935, and provided unemployment insurance, old-age insurance, and various welfare programs. The Great Depression served as a catalyst for the Social Security Act of 1935, and was intended to bring relief to families during that time. An important note is that the original Social Security Act of 1935 had many amendments that took place in 1939. Although these amendments actually happened before the original program became operational, the original Act was instrumental in establishing a framework for today’s Social Security program. Important aspects of these 1939 amendments include:

• The original Act provided for monthly retirement benefits that were payable to people 65 and older who were no longer working. The benefit formula was based on cumulative wages (earned since 1937). The 1939 amendments made an important change to the benefit formula, in that the retirement benefits were based on average wages instead of cumulative wages.

• The 1939 amendments also allowed for the creation of dependent and survivor benefits. A wife who was at least 65 years old was now eligible to receive a 50 percent benefit. Aged widows (and those responsible for dependent children) were eligible for a 75 percent benefit. Dependent children of retired or deceased workers received a 50 percent benefit.

The amendments of 1939 served to shift benefits to families rather than individuals. They also assessed payroll taxes on both employees and employers. The addition of these benefits along with the change in the benefit calculations from cumulative to average wages, served to reinforce the insurance principals of the Act as opposed to a savings or money-back method. Over the course of the next several decades, many more changes and amendments helped to shape Social Security into the program that exists today.

In the war years of the 1940’s, there was a debate over whether or not the program should build up a large reserve (or trust fund) to pay future benefits. This debate on reserves was due primarily to the robust wartime economy where there were higher-than-expected payroll taxes and fewer-than-expected retirement claims. Ironically, although there was a robust economy that helped to build up substantial reserves, tax increases proposed by Congress took center stage and the debate over reserve funding died down.

By the end of the 1950’s the Social Security system had been transformed through another series of amendments to the Social Security Act. Also by the end of the decade, the system became more universal. The amendments of 1950 brought an additional 9 million workers into covered employment, including farm and domestic workers, and people who were self-employed. In 1950 the first general benefits increase that averaged 77 percent occurred. Other general benefit increases that occurred throughout the 1950’s set the stage for automatic inflation adjustments that still happen today. Benefit increases require increases in payroll tax revenue, so the taxable wage base also rose by 60 percent during this period. The combined payroll tax rate climbed to 5 percent by 1959. Some of these payroll tax increases were used to fund the new Disability Insurance Program, which is a payroll tax-funded program designed to provide income supplements to people who are physically restricted in their ability to be employed due to a physical disability. Yet another amendment brought another change in the benefit structure that allowed women (but not men) to receive reduced retirement benefits as early as age 62. This option would later be extended to men. This...
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