Social Security Since Its Inception, the Social

Social Security

Since its inception, the Social Security system has provided benefits to augment the income of people upon their retirement. However, current projections point to a crisis in Social Security. Experts believe that by 2038, the Social Security trust fund will have been depleted (Williamson).

This paper presents an overview of the current social security crisis and evaluates the plans to address this problem. The first part of the paper provides a history of the Social Security system, from its inception in 1935 to its current status under the federal government.

The next part then studies how the Social Security system is funded. In the final part, the paper studies the problems facing many retirees who stand to be adversely affected by the Social Security deficit. It looks at the pitfalls of privatization and other methods now being used to address the problem, such as proposed tax credits, simplifying the tax process and key changes in retirement policy.

The theory and legislation behind Social Security

On August 14, 1935 President Franklin Roosevelt signed the Social Security Act into law. This represented a shift from the previous American tradition of individualism and self-sufficiency to a form of a welfare state, patterned after late 19th century Germany and its national social insurance program. Before Roosevelt, the United States was one of the few remaining industrialized nations without such a program. Since the beginning of the 20th century, countries such as Australia, France, Great Britain, Spain and Venezuela had instituted social insurance systems designed to provide for the welfare of workers in the form of illness, old age and death benefits (Schieber and Shoven, 28).

The first workers were registered by January 1, 1937, when they also began accruing credits towards their old-age insurance benefits. The early applications were distributed through the U.S. Postal Service, with over 30 million new Social Security numbers being issued. After these numbers were assigned, the government then began collecting payroll withholding taxes, as mandated by the Federal Insurance Contributions Act (FICA). The first monthly benefits were issued in 1940 (Schieber and Shoven, 30).

Since its inception, the coverage and benefits of Social Security have been expanded. While the original Social Security Act was limited to only retirement benefits for the worker, two 1939 amendments added benefit payments to the retirees' dependents (spouse and to the minor children) and survivor benefits to the family in case a covered worker dies prematurely. Thus ushered in the Social Security program that is in place today, one that provides security and benefits for the family rather than just an individual worker (Schieber and Shoven, 31).

By the 1950s, society was becoming increasingly aware of the problems faced by disabled citizens. Towards this, a disability insurance program was added in 1956, to benefit disabled workers and disabled adult offspring. By 1960, an estimated 559,000 people received disability benefits averaging $80 per month (Schieber and Shoven, 31).

President Lyndon B. Johnson expanded Social Security benefits further in 1965 when he signed the Medicare Bill. Under this new law, the Social Security Administration created a new insurance program covering the health-related expenses of all Americans aged 65 or older (Schieber and Shoven, 35).

Social Security has undergone several changes since the 1960s, though the basic structure remains the same. In 1996, President Bill Clinton signed a law disallowing benefits if the disability was caused by drug addiction and alcoholism. In 2000, Congress changed the law further to allow full benefits for all citizens over the age of 65, even if they choose to continue working.

Funding for Social Security

The most common misconception regarding Social Security is equating SS benefits with welfare. This is not the case, since recipients of these benefits begin contributing to the Social Security fund as early as their first payroll employment.

The money for the Social Security fund comes from payroll taxes collected from both the employer and the workers, as mandated by the FICA law. These taxes then deposited into the common Social Security Trust fund and invested in United States treasury bonds. The income from these contributions funds the benefits of retired workers and their dependents.

When the Social Security system was first enacted, it was intended merely to supplement the income of retirees. However, statistics from the President's Commission to Strengthen Social Security (PCSSS) shows that half the elderly population depends on their monthly social security checks for their income (cited in Ungar). Currently, financial analysts advise younger people that they can no longer depend on Social Security benefits for their retirement. Instead, they need to provide for at least half of their retirement income on their own.

Social Security Crisis

While estimates regarding the year vary, most experts agree that the Social Security funds will face a cash deficit in the foreseeable future. The large number of baby boomers who are expected to retire starting 2008 will serve to add large numbers of beneficiaries while removing a significant proportion of workers who currently pay FICA contributions. This problem will be worsened by the decrease in the number of new workers, since most baby boomers had smaller families the generation preceding them. As a result of these two factors, the amount of benefit checks will exceed the amount of FICA contributions to the Social Security trust fund (cited in Ungar).

The government has instituted several measured aimed at averting this impending crisis.

The Bush government's plan to ensure the continued solvency of the Social Security fund involves replacing much of the current system with privatized accounts. The rationale behind this plan is that young people would not have to shoulder the burden of paying for the increasing costs of Social Security, at the expense of saving for their own retirement (Leone).

Critics of privatization charge, however, that these tactics would adversely affect working families who need Social Security benefits now. Furthermore, previous experiences with retirement and privatization shows that privatized pensions often put workers at the risk of abuse and the mercy of unscrupulous corporations.

A privatized pension allows employers to manage the plan's assets, while promising to credit the worker's pensions with a corresponding interest rate. However, employers have often changed this rate, reducing the value of their employees' pensions. For example, when companies like IBM, AT&T and Citibank switched from traditional pensions to cash balance plan, the pensions paid to longtime employees were significantly reduced. Because of the potential for abuse, conversions to cash-balance plans were banned in 1999. The Bush plan for privatization, however, would allow employers to return to such practices, under the guise of augmenting the Social Security trust fund (Leone).

In addition, labor groups such as the AFL-CIO criticized the way this privatization plan particularly hurts workers of color. According to the group, privatization would raise the retirement age further, ensuring that many African-American men, for instance, would not be able to benefit as much due to their shorter life expectancies ("What's wrong with individual investment accounts?").