A Brief History of Social Security

Dampening Capitalism’s inevitable Boom & Bust Cycle

Although most Americans are likely to believe that the Social Security System (SSS) is essentially a worker’s retirement program, it serves an even broader and more humane social purpose. In addition to retirees, SS also provides a monthly pension for survivors and the disabled. In other words, this worthy social program provides for any American citizen that is not reasonably expected to work, not just the workers who have contributed to the system. Often these benefits may be all that separates our fellow citizens from economic catastrophe.

Even though the SSS is intended to help alleviate the financial hardships of deserving Americans, this intention is belied by the fact that those with the smallest income pay the largest percentage of their annual income in Social Security Taxes. Both Earned Income above a set threshold and all Unearned Investment Income, primarily the province of wealthier citizens, are completely sheltered from the SS Tax Base. Ironically Congress has chosen to fund the SSS by taxing roughly the first $120K of Earned Income, the province of the working class. The result of this strange distribution of the SS tax responsibility is that those with the largest incomes pay a disproportionately smaller percentage of their annual income to assist the deserving.

To address SS’s supposed shortfall, we suggest two obvious points. 1) The SSS serves a high moral purpose by creating the basis of a viable social safety net. 2) We can easily remedy any monetary shortfall by expanding the SS Tax Base. Let all forms of income, both Earned and Unearned Investment Income, be taxed equally. Just as all income is included in the Federal Income Tax Base, all forms of income should also be included in the SS Tax Base. Why should so much of the income of our wealthier citizens be sheltered from this fund that assists a wide range of deserving Americans? Read on for details.

Prevalent Mindset: Social Security running out of Money

Is America capable of adequately funding an effective retirement system for the elderly? Or is the Social Security System running out of money?

Due to a constant media barrage, most Americans believe the latter statement. Many pundits of television, magazines and newspapers present ‘facts’, statistics, and graphs showing that more funds are going out than are coming in. The projections suggest that in a little more than a decade, there won’t be enough money in the system to take care of the elderly.

In response, the middle-aged worker may opt for early retirement in order to get his or her share before nothing is left. The young often skeptically think that their taxes are paying for the old, but that there won’t be money left in the Social Security System by the time they need it. In general, most Americans are insecure about the system that is meant to provide security in our old age. Due to its perceived shortcomings, some are even working to dismantle this government program that they consider to be a mandatory retirement savings for the working class — a required government Pension Fund.

Retirement, Survivors and Disability Insurance

But is the Social Security System strictly a Pension Fund for the elderly? Even a cursory examination of the program’s name suggests otherwise. On the letterhead of the Social Security Administration is the phraseRetirement, Survivors and Disability Insurance’. This language clearly indicates that SS attempts to address a broader social intention.

The title of the program does in fact include the word ‘retirement’, which suggests a pension-like purpose. However Social Security also uses the word ‘insurance’, which suggests other purposes than just a pension plan. The title indicates that the Social Security System has been designed to provide some kind of social insurance for 3 classes of deserving American citizens — retirees, survivors and the disabled.

This title seems to strongly suggest that the program does not limit itself to a single purpose. The legislation that created the Social Security System recognized that 3 groups of our fellow citizens were particularly in need of some form of economic social assistance. The name they’ve intentionally chosen obviously includes the word ‘insurance’ for a reason. Providing insurance for these groups is a key component of any viable social safety net.

However the use of the term ‘insurance’ can be misleading. Typically insurance covers unusual events that occur sporadically. There was some wisdom in the use of the word ‘insurance’ as applied to a broader human experience, such as retirement. We use insurance as protection from harmful events that would otherwise be overwhelming. The difference is that when we use the word insurance and apply it to the experience of all aging workers, we are no longer talking about atypical events, but rather a condition we hope to and expect to experience.

Private vs. Public: Insurance and Pensions

If Social Security is not exclusively a pension fund, how are we to understand Social Security? It is perhaps useful to view Social Security through the metaphorical frameworks of both a private pension fund and an insurance program. However, these models are from the private sector and therefore represent narrower purposes.

What are some differences between a private and public insurance program? Car and home insurance only honor claims to those who have paid their premiums. These companies certainly can’t afford to stay in business if they pay out settlements to the uninsured. Because solvency is of utmost importance for private businesses, the notion of ‘social security’ for the deserving does not even appear on their radar screen.

In contrast, public insurance honors the legitimate claims of all of its citizens, rather than limiting the claims to those who have paid into the system. If Social Security is truly a type of social safety net, then solvency is secondary to providing financial relief for the deserving. We must remember that a social insurance program has loftier goals than any private pension fund or insurance program.

As mentioned those paying premiums fund private insurance companies. How is the Social Security System funded? It is common knowledge that federal taxes are withdrawn from every paycheck. Then at retirement age, retirees receive a monthly payment that is proportional to how much they have paid into the system. In terms of funding at least, Social Security seems to be virtually identical to a private Pension Fund. Those paying into the system receive a monthly stipend according to their contribution.

Recall however that Social Security deems itself a [social] insurance program for survivors and the disabled, not just retirees. It seems that Social Security is funded in a similar manner to a retirement pension, but that it’s function is like a federal program that provides a social safety net for those in need.

Most federal programs, social and otherwise, are paid for out of the general fund. For instance, when there is a disaster like the flooding of New Orleans from Hurricane Katrina, federal assistance is dispersed from the general fund to provide social assistance for the deserving. These deserving citizens are provided with disaster relief according to their needs. This federal relief is not limited to a proportion of the amount of taxes they have paid.

Federal taxation on all types of income provides revenue for the general fund. Is this also true of Social Security? If Social Security is indeed a social insurance program for the needy, it would certainly seem that all forms of income should pay into this common pot.

Unfortunately, as we shall soon see, significant sources of income are excluded from the Social Security Tax Base. Further it will become clear that the wealthier segments of society contribute the smallest percentage of their income to this social insurance program. Why should those with the greatest income contribute the least to this program that provides for vulnerable members of our American society, i.e. the disabled, survivors and the retired?

If our mindset is that the Social Security System is a Pension Fund for workers, it makes sense that the wealthy should contribute a smaller portion of their income, as they don’t need to rely on this program for financial protection when they retire. However, if Social Security is instead a Social Insurance Program for the deserving, this perspective definitely seems flawed.

Why should some forms of income be sheltered from the tax base of a federal social insurance program that contributes to the common good? Shouldn’t everyone contribute at least an equal percentage of their income to assist deserving Americans? Do those with the greatest income feel they deserve a larger exemption from helping out many of our most vulnerable citizens? We certainly hope not.

Read on to find some answers to these intriguing questions.

Social Security: initially a Pension Fund for Working Class

To provide context, let’s start with the history of the Social Security System.

Due to the difficulties of the Great Depression of the 1930s, 5 million elderly people joined Townsend Clubs nationwide. The sole purpose of these ‘clubs’ was calling for a $200/month pension for anyone over the age of 60. Pressured in part by this mushrooming social movement, Roosevelt set up a committee to investigate and make recommendations. On August 14, 1935, Congress passed the Social Security Act. This legislation provided national old age pensions for the first time in American history. This was the beginning of America’s Social Security System.

To fund the retirement pensions, the legislation created a new tax, a mandatory payroll tax. A percentage was and is taken from the direct wages of the employee, which the employer matches. These special taxes are placed in the Social Security Fund, rather than in an individual saving account. The retiree receives a pension from this general fund. The Pension is in direct proportion to the amount he or she contributed.

In this way, Social Security is similar to a private pension fund. The worker’s pension is in direct proportion to contributions.

The catastrophic experience of the Great Depression provided the necessary sense of urgency to address the particular economic vulnerability of retired Americans. Their diminished earning power created a greater need for a secure source of income in their later years. The Social Security System filled this role. But is its role limited to retirees?

The real name of the original Social Security legislation is the Federal Insurance Contributions Act, whose acronym is FICA. Insurance what does that mean? The central purpose of an insurance program is to protect members against a loss that would present some kind of hardship. This government insurance protects retirees against the inevitable loss of earning power and the attendant hardship. As such, the original Social Security System acted as a type of Retirement Insurance Program or Federal Pension Fund for the Working Class.

Social Security System expands to include Widows, Orphans & Disabled

After the Social Security System was instituted, the collective pension fund began growing rapidly. Why? The contributions to the pension fund from the payroll taxes far exceeded the benefits the retirees were receiving. This was chiefly due to the fact that from the outset there were far more workers contributing than retirees drawing on the fund.

This growing surplus offered Congress the opportunity to expand the program beyond retirees. They decided to include other identifiable groups of Americans who should not be expected to work due to circumstances beyond their control. Congress quickly passed legislation that extended benefits from the SS Fund to dependents (widows and children), the disabled and related groups.

This legislation sensibly included these economically vulnerable Americans along with retirees under the umbrella of a secure social insurance program. In other words, the Social Security System was quickly expanded well beyond its original purpose as a Worker’s Pension Fund. It embraced a humane approach to providing a viable social safety net for identifiable groups that we do not reasonably expect to work.

The original Social Security Program was intended to provide some amount of financial security to wage earners when they were no longer reasonably expected to work. The expanded Federal Insurance System soon provided financial security, not only to retirees, but to other categories of citizens that were not expected to work — survivors and the disabled. From early on in the program’s history, it has provided a predictable source of subsistence income for these groups. For this reason, the Social Security Program currently refers to itself, but as Retirement, Survivors and Disability Insurance’. As such, this government program is much more than just a pension fund or insurance fund for retirees, as it is frequently portrayed and conceptualized.

The advent of social security in America represents a humane and innovative approach to creating what is often called a social insurance program. Whether it was motivated by compassion for the suffering of our fellow citizens and/or by other political considerations, this program was intended to help protect economically vulnerable Americans from severe financial hardship. The values this program embraces represent America’s greatest social legislation in the 20th century.

The entire article: Social Security System Affordable? is an article from our Tax Justice Series.

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