The American dream is about freedom and financial security. But it is possible to lose everything. One day a person has a job, a family, and a house. Then there is a layoff , an accident, an illness, or the death of a breadwinner. One misfortune piles upon another. As late as the 1930s (and even in the 1940s), a person with no income or savings and no children to take him or her in risked going to the “poorhouse.”
II. A New Kind of Insurance Program
III. How Social Security Has Performed
IV. Social Security and the World Trade Center Disaster
V. The Politics of Social Security Today
VI. The Controversies
VII. Conclusion: Speaking Out, Speaking Up
By the time Social Security became law in 1935, every state except New Mexico had poorhouses. Sometimes called almshouses or poor farms, their existence is a little known fact in U.S. history today. Yet there were thousands of such places across the country, and becoming an inmate at a taxpayer-funded, county-run poorhouse was a fate to be dreaded (Altman 2005).
In the 1920s, the federal government sent volunteers to examine more than 2,000 poorhouses. The report came back that conditions were shameful (Gunderson and Julin 2002). A report by the New York State Commission on Old Age Security found that “sick people are thrown together with the well . . . people of culture and refinement with the crude and ignorant and feeble-minded” (Altman 2005).
Then came the added toll from the nation’s Great Depression. The stock market crash of Black Tuesday—October 24, 1929—shook America’s very foundations. Banks failed, savings were wiped out overnight, homes and farms were lost in foreclosures. Twenty five percent of all workers and 37 percent of all non–farm workers were unemployed. Financial gloom was everywhere, and people starved (Smiley 2010). Even with so much human misery in full view, passing the law that established Social Security was not an easy task.
Controversy surrounded the Social Security Act even as President Franklin D. Roosevelt signed it into law in 1935. Social security had been the product of several years of bitter controversy, negotiation, lobbying, and compromise. The debate had been widespread: from the Congress, big business, and the press to the workplaces and streets of America. One side believed, among other things, that the program was a “communist” one, and government could not be trusted to pay benefits properly, if at all. Supporters keenly felt the desperate need to protect older workers and their families against grinding poverty that had already struck millions of Americans upon retirement and was awaiting millions more (Landis 1997).
A New Kind of Insurance Program
President Roosevelt envisioned Social Security as a new kind of government program, uniquely suited to its mission of promoting both the work ethic and the dignity of older individuals and their families. It was established as social insurance, not public assistance, even though that is the way it was depicted by its detractors. The program was planned to provide a reliable retirement income to people at age 65. They would get no handout. Instead, workers would be required to contribute to their future retirement out of their current income and, by doing so, would earn the right to their Social Security pension.
On August 14, 1935, the day President Roosevelt signed the Social Security program into law, he explained his reasons for proposing it this way:
Today a hope of many years’ standing is fulfilled. . . . We can never insure one hundred per cent of the population against one hundred per cent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age. (Landis 1997)
Many people think of Social Security as merely a retirement program, but from the beginning it has been much more than that. In 1935, the insured events were retirement or death of workers, but they were expanded later to include the total disability of workers as well.
It is a comprehensive insurance program that provides protection for workers and also for their dependent family members. As with any type of insurance, Social Security buys working taxpayers protection against loss—specifically the loss of income in the following categories:
- Retirement benefits—for workers who retire from the workforce and have reached an eligible age (currently 62 years old for reduced benefits and 67 years old for full benefits).
- Family benefits—for family members who are dependents of workers who have become totally disabled or retire.
- Survivors benefits—for surviving family members of workers who die. Benefits are similar to life insurance.
- Disability coverage—for workers who become totally disabled and can no longer work even though they have not reached retirement age (Landis 1997).
Social Security is funded through dedicated payroll deductions under the Federal Insurance Contributions Act (FICA). These payments are formally deposited in trust funds to be paid out to workers when they reach retirement age or become disabled and can no longer work. The payroll tax rate is split between employee and employer, currently 6.2 percent of earnings for employees, and 6.2 percent for employers. The rate for individuals who are self-employed is 12.4 percent. These rates apply to wages up to and including an annual income (from wages) of $106,800. For income above that amount, there is no Social Security tax to pay.
In general, workers must make payroll contributions for 10 years or more to become eligible for a Social Security pension when they retire. Spouses are also covered, even if they have never worked. Benefits are based on a worker’s average wage, calculated on the 35 years of highest earnings. When high-income earners retire, they receive higher monthly benefits, but not proportionately so. The idea is that benefits should be proportionately more for those with lower earnings than for those with higher earnings. The benefit formula under the Social Security system is weighted in favor of lower-income groups (Myers 2003).
How Social Security Has Performed
Social Security accomplished what President Roosevelt and supporters of the program hoped it would do, but not overnight. The first monthly benefit check was issued by Social Security to retired legal secretary Ida May Fuller, who received $22.54 in January 1940. In 1950, benefits were raised for the first time. In 1972, Congress enacted a law that allowed for cost-of-living adjustments to help the elderly cope with annual increases in the rate of inflation.
Before Social Security, the poverty rate among older adults was three times that of the general population. Economists estimate that, without Social Security, the elderly poverty rate would have been 40 percent rather than the 9.4 percent it was in 2008. The current average monthly payment is $1,094 (Carr 2010).
The program significantly affects the lives of a majority of Americans. According to AARP, some of the basics reported as of July 2010 include the following:
- Monthly benefits are paid to about 54 million Americans.
- For 25 years, Social Security has received more in payments than it has paid out. It now has a $2.5 trillion reserve fund invested in government bonds.
- In 2010, the recession and high unemployment brought in fewer payments than anticipated, and Social Security has been drawing on its reserves.
- The Congressional Budget Office estimates that the reserve fund and payroll taxes will cover full payment of benefits for another 33 years.
Income security for the retired is not the only benefit successfully provided by Social Security; it also supports families struck by the death or disability of a breadwinner. Much like any private insurance, the Social Security program philosophy was to collect payments from workers and then pay a defined amount back to them (or their family) when certain events occur.
Social Security and the World Trade Center Disaster
In her book The Battle for Social Security, Nancy Altman tells the story of how Social Security employees worked to assist the survivors in the chaotic aftermath of the September 11 attacks on the World Trade Center. The story can serve as a case study of how the Social Security insurance system assists those eligible to receive family and survivors benefits under the program.
Two days after the attacks on the World Trade Center, the Social Security Administration went into action to identify and contact the family members of workers who perished in the attack. The task was to meet with employers and family members to help them secure the financial protection their loved ones had earned for them.
Altman writes that the Social Security Administration was among the first insurers to meet with employers and victims’ family members. Its employees worked with the New York City Police Department, the New York City Fire Department, and the Port Authority to find the families of every firefighter and police officer who had died. They were present at the family assistance centers and set up a Web page to inform family members how to apply for benefits. By September 16, every major network affiliate in New York carried public information spots about Social Security.
Employees from the Social Security Administration distributed fact sheets to advocacy organizations and established lines of communication with local hospitals, unions, and other local organizations. They worked 15-hour days, seven days a week, to get benefits to spouses and dependent children as quickly as possible. They knew that they were throwing an economic lifeline to the families when they needed help the most. On October 3, Social Security checks were mailed and electronically transferred to thousands of members of families who lost loved ones on September 11, 2001 (Altman 2005).
The Politics of Social Security Today
The struggle that surrounded President Roosevelt’s efforts to pass the Social Security Act in 1935 as well as the process of enacting amendments that improved the program over the past 75 years still rages today. As before, much of the battle involves passionate emotions and clashing values about who we are and want to be as Americans:
1. Are we a society where individuals look after themselves and are responsible for their choices and financial security no matter what might be happening in the business and financial sectors and the general economy?
Or are we a society that can be independent and responsible for our own well-being while also contributing resources and sharing risks that can off – set personal financial ruin during times of economic upheaval in the general economy?
2. Do we trust the unregulated business and financial communities to provide stable employment, disability coverage, and retirement pensions that will assure for us later-life financial security?
Or can we support policymakers who will strengthen the Social Security program and continue to oversee both our own contributions and, more importantly, those of the nation’s employers on behalf of working Americans?
Politicians and the media frequently warn that Social Security is headed for bankruptcy. Not true. The Social Security program is not a cause of the federal government’s current deficit and debt concerns. In fact, the program has been running surpluses since 1984 (Gregory 2010). The federal General Fund experienced an annual surplus of $86 billion in 2000, meaning that taxpayers contributed more in all federal taxes than was spent in all federal programs and operations. However, that surplus fell year by year after 2000 because of tax cuts, funding for wars, and other government spending to a deficit of $1.55 trillion in 2009 (Congressional Budget Office 2010a).
By contrast, the Social Security program has amassed a trust fund reserve now amounting to $2.5 trillion (Board of Trustees 2009; Congressional Budget Office 2010a). In addition, the trust fund has been lending funds to the government that it would otherwise have had to borrow from national and international public markets. Moreover, Social Security trust fund reserves are expected to increase to $3.2 trillion by 2015 and to $3.8 trillion by 2020 (Congressional Budget Office 2010b) unless the decrease in contributions due to unemployment continues to erode the reserves required to meet the growing surge of individuals who are reaching retirement age or are becoming disabled. Because the law requires 75-year solvency for the Social Security trust funds, and since numbers can be used to project future circumstances in different ways, no one can ascertain with any certainty what will happen over a 75-year period of time.
To summarize the important fiscal realities today, the Social Security reserve is being built primarily with:
- FICA taxes paid at the rate of 6.2 percent of earnings by lower- and middle-income workers up to a maximum wage level of $106,800, plus matching FICA tax payments by employers at 6.2 percent of earnings. These contributions currently total 12.4 percent.
- Interest paid on FICA taxes borrowed from the Social Security trust fund over the past 25 years to help finance the rest of government (Sloan 2009).
The long-term costs and paid-out benefits of the Social Security program are projected to rise with the increasing number of retirees from the baby boom generation during the coming years. This means that, in order to preserve the long-term viability of Social Security, certain actions must be taken by Congress. Suggested changes have included (a) increasing the maximum wage level on which FICA taxes are now paid; (b) increasing the age at which workers are eligible to receive retirement benefits from age 67 to (say) age 70; and (c) means-test the benefits so that only the poor receive benefits.
Arguments against these three proposed fixes are these: (a) at 12.4 percent, increasing the maximum wages to (say) $170,000 would be a large tax increase on an already ailing middle class; (b) increasing the age at which Social Security benefits may be obtained could be wrong-headed for anyone engaged in an occupation that involves physical activity; and (c) means-testing the benefits would be a terrible mistake that would violate the social compact that everyone pays Social Security taxes and everyone receives their benefits (Sloan 2009).
In the past decade, Republicans, along with a few Democrats, have campaigned for a radical restructuring of Social Security—namely, permitting workers to divert part of their payroll taxes from Social Security into personal retirement accounts, which could be invested in the stock market. The earnings on these accounts would replace a portion of Social Security benefits. This push to privatize has been a major conflict over Social Security.
Supporters of privatization argue that Social Security must be overhauled because its rate of return is dismal. In response, experts point out that comparing the rate of return on Social Security with that of an investment portfolio is “comparing apples and oranges” (Diamond n.d.). Social Security is not a portfolio, they say; it is insurance, which provides benefits in the event that a particular problem (e.g., disability) or condition (e.g., retirement) occurs. The opponents of privatization maintain that claiming Social Security’s return is dismal is as meaningless as claiming that the return you get on your fire insurance premiums is dismal.
The heart of the battle over privatization may be more about profits for the financial markets and financial businesses than about individual freedom and collective responsibility. These values have an honored place in U.S. tradition and easily tap into the emotions of U.S. voters. One side sees a society in which individuals are responsible for their lives and are free to make their own financial decisions (Suellentrop 2005). On the other side, a deeply held value embodied in Social Security is that real freedom requires a nation to protect the well-being of its members against harm. Risks of unemployment, disability, changes in the general economy, and in the practices of businesses (e.g., outsourcing employment) are to be shared and insured against to the extent possible.
Conclusion: Speaking Out, Speaking Up
The bottom line is that many older workers who felt reasonably well positioned for retirement a few years ago now need Social Security more than ever. Middle-aged individuals who may have time to recover savings and home equity are needed more than ever to contribute to the future viability of the program. Employers’ matching contributions are also required more than ever to sustain the Social Security system. Each of these social groups must also demonstrate to the nation’s young adults that they will have a realistic plan for future benefits (Sloan 2009).
This is no time to overlook, dismiss, or ignore the continued performance of the nation’s Social Security program, the social compact that helped to lift generations of older adults out of poverty and helped to close the nation’s poorhouses. Failing to understand the real economics of the Social Security program can bring back the poorhouse for individuals who suffer through financial ruin that is not their fault—sudden unemployment, loss of pensions or savings or home. Doing nothing is not an answer either.
Worse, believing that “Social Security will not be there for me when I grow older,” an opinion heard more and more frequently these days from younger Americans, might guarantee the untimely demise of this invaluable program, since one’s voice to save it will not have been heard.
Lois A. Vitt
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