Fifty Years of Social Security
by Martha A. McSteen
Acting Commissioner of Social Security
The author wishes to acknowledge the assistance provided by the following members of the Social Security Administration's Office of Legislative and Regulatory Policy: Peggy S. Fisher, Director, and Timothy K. Evans, and Richard L. Griffiths, staff, of the Division of Retirement and Survivors Benefits.
Today, we celebrate the 50th anniversary of the Federal social insurance program, now known simply as "Social Security," that emerged in 1935 as part of the Nation's response to the plight of its elderly. The Social Security program of the 1980's is the direct descendent of the limited program of contributory old-age benefits enacted in 1935. The program, which today covers virtually all jobs, continues to have certain basic characteristics found in the original program; that is, eligibility is earned through work in covered jobs, participation is generally compulsory, the amount of the benefits is related to covered earnings, the program is intended to provide a base of protection, and benefits are financed primarily through dedicated payroll taxes paid by workers and their employers.
Yet, while the program fundamentals have remained the same over 5 decades, much has changed. As American work and life patterns have changed, so too Social Security has been adapted to meet current expectations. The legislative history of the program, described briefly below, shows clearly how Social Security has retained its essential characteristics as it has evolved to keep pace with the times.
Foundations of Change
By the end of the First World War, a primarily agrarian American society had become a primarily urban, industrialized one. Thus, on the eve of the Great Depression of the 1930's, a larger proportion of the American people were dependent on cash wages for their support than ever before. By 1932, however, unemployment reached 34 percent of the nonagricultural workforce. Between 1929 and 1932, national income dropped by 43 percent, per capita income by 19 percent. By the mid-1930's, the lifetime savings of millions of people had been wiped out.
For vast numbers of aged people, and people nearing old age, the loss of their savings brought with it the prospect of living their remaining years in destitution. At the height of the Depression, many old people were literally penniless. One-third to one-half of the aged were dependent on family or friends for support. The poor houses and other relief agencies that existed at the time to assist people who had fallen on hard times were financed mainly from charity and local funds. They could not begin--either financially or conceptually--to respond adequately to the special needs of the aged brought about by the cataclysmic events of the Depression.
Before Social Security, many people faced destitution in old age
Although by 1934, 30 States had responded by providing pensions for the needy aged, total expenditures for State programs for the aged that year were $31 million--an average of $19.74 a month per aged person. As the Depression worsened, benefits to individuals were cut further to enable States to spread available funds among as many people as possible.
Various national schemes to provide income to the aged received substantial attention. These included the Townsend Old-Age Revolving Pension Plan and a plan called "Share the Wealth" advanced by Louisiana Senator Huey P. Long.
Under the Townsend plan, every American over age 60 was to get a monthly pension, provided he or she did not work and promised to spend the entire payment during the month. Under Long's plan, large personal fortunes would be liquidated to finance (1) pensions for the aged and (2) cash payments to every family sufficient to buy a home, a car, and radio.
Due in large part to the public and congressional pressures for some Federal response to the chaotic conditions of the time, in June 1934, a Committee on Economic Security was established by Executive Order of President Franklin Roosevelt. This Cabinet-level Committee, chaired by Frances Perkins, the Secretary of Labor, was given the task of developing constructive, long-term proposals for the prevention of all the major causes of economic insecurity. Given the desperate conditions of the time, the Committee's major attention was focused on programs to protect the unemployed. Yet, amid some controversy about the feasibility and constitutionality of such a plan, there developed from the work of the Committee a proposal for compulsory, contributory old-age insurance, which was ultimately enacted as part of the Social Security Act.
The Social Security Act, enacted on August 14, 1935, provided a new federally administered system of social insurance for the aged financed through payroll taxes paid by employees and their employers. Under the system, which applied only to workers in commerce and industry, people would earn retirement benefit eligibility as they worked. With some exceptions, benefits would be related to workers' average covered earnings, and workers could not have earnings and still be eligible for benefits. No benefits were provided for spouses or children, and lump-sum refunds were provided to the estates of workers who died before age 65 or before receiving at least the equivalent in benefits of their taxes plus interest. Collection of payroll taxes began in 1937, and benefit payments were scheduled to begin in 1942.
The Early Years
Even as the Social Security legislation moved through the Congress in the late winter and spring of 1935, it was acknowledged by many supporters that the old-age program then under consideration was but a first step in providing comprehensive protection for American workers against loss of earnings. President Roosevelt, in signing the Social Security Bill into law noted that "This law, too, represents a cornerstone in a structure which is being built but is by no means complete." In May 1937 the month in which the old-age program survived a crucial constitutional test in the landmark Helvering v. Davis case (in which the employer Social Security payroll tax was found constitutional), the Senate Committee on Finance and the Social Security Board jointly appointed an Advisory Council on Social Security. This outside advisory group, which would be the first of many to study and make recommendations concerning Social Security over the years,* was instructed to study possible ways of making the program more fully effective sooner than contemplated under the 1935 law.
(* Appointment of outside advisory bodies has long been institutionalized as a tradition in Social Security policymaking. Numerous advisory bodies have met over the years, and most of the changes made in Social Security have been based in large part on their studies and recommendations. The law has since 1956 required periodic appointment of Advisory Councils.)
The Council's fundamental finding was an endorsement of contributory old-age insurance as a way of preventing dependency in old age and thereby reducing reliance on needs-tested assistance. Further, the Council recommended a benefit structure that, in addition to basic benefits for workers, would provide protection for aged wives, widows, and surviving children starting in 1940.
Based on the Advisory Council's recommendations and recognizing the heavy dependence of most families on the male wage earner at that time, the Congress, in 1939, enacted legislation that eliminated lump-sum payroll tax refunds and provided benefits for aged wives and widows, young children of retired and deceased workers, young widows caring for a child beneficiary, and dependent parents of retired and deceased workers.
| Unemployment affected many families during the Great Depression of the 1930s |
The Committee on Ways and Means of the House of Representatives and the Senate Committee on Finance, in their reports on the 1939 amendments, reasoned that "Under a social-insurance plan the primary purpose is to pay benefits in accordance with the probable needs of the beneficiaries rather than to make payments to the estate of a deceased person regardless of whether or not he leaves dependents."
The 1939 legislation also provided a new method of computing benefits, based on average monthly earnings instead of on cumulative wages. The net effect of the 1939 amendments was to increase the annual cost of benefits payable during the early years and to decrease the annual cost of benefits payable during later years. Over the long range, the average annual cost of benefits remained about the same as under prior law.
In addition to these changes in benefits, the 1939 amendments made basic changes in the financing of the Social Security program by establishing the Old-Age and Survivors Insurance Trust Fund and by changing the size of the financial reserves held by the program. The provisions of prior law would have resulted in the accumulation of a huge reserve fund over the years, similar to the reserves built up by private pension plans. The new legislation was designed to constrain the accumulation of reserves and, in effect, to move the financing of the program toward "pay-as-you-go" financing. This change in the reserve concept allowed the immediate payment of benefits to retired workers and to their dependents and survivors without increasing Social Security tax rates. This change in financing also permitted a 3-year postponement of the increases in the Social Security tax rate that had been scheduled for 1940.
Other recommendations of the 1938 Council that were enacted in 1939 included:
| The Advisory Council on Social Security, 1937-1938 |
| "Opportunity for the individual to secure protection for himself and his family against the economic hazards of old age and death is essential to the sustained welfare, freedom, and dignity of the American citizen. For some, such protection can be gained through individual savings and other private arrangements. For others, such arrangements are inadequate or too uncertain. Since the interest of the whole Nation is involved, the people, using the Government as the agency for their cooperation, should make sure that all members of the community have at least a basic measure of protection against the major hazards of old age and death." |
With respect to the existing old-age and survivors insurance (OASI) program, the Council was unanimous in finding three major deficiencies: inadequate coverage; unduly restrictive eligibility requirements for older workers; and inadequate benefits. To remedy these problems, the Council recommended a general benefit increase; a doubling of the minimum benefit; provision of benefits for additional dependents and survivors; and extension of coverage beyond the original boundaries of commerce and industry to self-employed workers, farm and domestic workers, Federal civilian employees not under a retirement system, State and local governmental employees, and employees of nonprofit organizations. In order to provide more adequate benefits to workers in these groups who were already middle-aged or older when their jobs were first covered, the Council recommended a "new-start" benefit computation. The 1948 Advisory Council also strongly recommended extension of the social insurance approach to provide a program of cash benefits to the permanently and totally disabled. The program recommended by the Council would pay benefits after a 6-month waiting period only to those with severe and long-lasting disabilities, would provide for expenditures of Social Security funds for rehabilitation of disabled workers, and would terminate benefits to workers who refused to accept physical examinations or rehabilitation. As its first order of business, in 1950, the Congress addressed the erosion in the value of Social Security benefits due to the inflation that had occurred since the inception of the program. The 1950 amendments provided for general benefit increases and increases in the minimum benefit that amounted to an across-the-board increase of about 77 percent. Echoing the view of the 1948 Advisory Council with respect to the ongoing role for the Social Security system, the Senate Committee on Finance said in its report of the 1950 amendments:
| "Your committee's impelling concern in recommending passage of [this bill] has been to take immediate, effective steps to cut down the need for further expansion of public assistance, particularly old-age assistance. . .We believe that improvement of the American social-security system should be in the direction of preventing dependency before it occurs and of providing more effective income protection, free from the humiliation of a test of need. . ." |
| "Monthly cash benefits, if adequate, can meet regularly recurring expenses such as those for food, clothing and shelter, but [they] are not a practical way to meet the problem that the aged and disabled face in the high and unpredictable costs of health care, costs that may run into the thousands of dollars for some and amount to very little for others. Security in old age and during disability requires the combination of a cash benefit and insurance against a substantial part of the costs of expensive illness." |
The Council found in part that, while health care expenditures for the aged were twice as high as those of younger people, the great majority of the aged were neither well-off nor had adequate health insurance. Further, they found that, by the 1960's, the inability of the aged to meet health care costs had become the single most important reason that older people applied for public assistance. Based on these findings, the Council recommended establishment of a program to provide, through a contributory social insurance mechanism, protection against the costs of hospital and related inpatient services for aged and disabled. In order to protect people who were already old, the Council recommended that hospital insurance protection be provided initially without regard to insured status; that is, that people at or near retirement age be grand-fathered into the new program. Even as the Council was meeting, the Congress was actively considering proposals to provide health insurance benefits. In 1965, the Congress passed "Medicare" legislation, which, while it essentially embodied the Advisory Council's recommendations, differed in two major respects. First, in addition to providing protection against hospital costs through a payroll tax financed hospital insurance (HI) program, the plan enacted also included a voluntary program to be financed through monthly premiums and Federal general revenues. This supplementary medical insurance (SMI) program was designed to meet the costs of physicians' services and other outpatient care. Second, only people aged 65 and over, rather than both the aged and disabled, would be eligible for Medicare. (A few years later, in 1972, Medicare protection was extended to people who had been receiving cash disability benefits for 24 months or more.) The Last 15 Years With the advent of Medicare, the body of programs which we refer to today as "Social Security" was complete. Yet, while there have been no major additions to the system over the last 15 years or so, there has been continuing public and congressional reassessment of the ongoing role of Social Security in the Nation's income support structure. For example, the 1975 Advisory Council on Social Security firmly endorsed the basic purposes and principles of the program, noting that:
| "The earnings-related OASDI program should remain the Nation's primary means of providing economic security in the event of retirement, death, or disability. It should be supplemented by effective private pensions, individual insurance, savings, and other investments; and it should be undergirded by effective means-tested programs. Future changes in OASDI should conform to the fundamental principles of the program: universal compulsory coverage, earnings-related benefits paid without a test of need, and contributions toward the cost of the program from covered workers and employers." |
| "An automatic adjustments system would, the Council believes, give to both present and future beneficiaries a greater sense of security than would exist if a benefit increase can take place only after an action by the Congress. Beneficiaries would be assured, by virtue of an explicit provision in the law, that the purchasing power of their benefits would not deteriorate because of inflation." |
| Ida May Fuller, who became Social Security's first beneficiary in 1940 | Ernest Ackerman, who received the first Social Security lump-sum payment in 1937 |