Social Security was instituted with the passage of the Social Security Act of 1935. It was signed into law by President Roosevelt as a means of providing a social safety net for retirees. The passage of Social Security occurred during the depths of the Great Depression. Prior to this, the concept of social security did not exist in the U.S. -- you either worked until you died, or you retired when you were wealthy enough to do so. Social Security is run by the Social Security Administration, which also administers Medicare as part of the system. Social Security is theoretically self-funding. In 1937, the first taxes were collected to finance the Social Security system. Workers pay into the Social Security system via a payroll tax. According to the SSA's website, general tax revenues have never funded Social Security to any meaningful extent, implying that the program is self-funding through these payroll taxes (SSA.gov, 2014). Social Security has a pending funding crisis, however, but there are no politically viable solutions available, so the do-nothing option looks to prevail.
The Problem
Prior to the existence of Social Security, there was no social safety net. People retired if they could afford to, otherwise they were not able to retire. This created a problem for people who were no longer fit to work, but were poor, which in those days was a lot of people. Prior to the Great Depression, people were generally able to find some sort of work, but the Depression left America with high unemployment. The result was that many people were not in a position to take care of themselves or their families. This spurred the need for a social safety net, in particular for those who were considered to be beyond working age. The age 65 was considered to be a typical retirement age at the time, and was therefore chosen as the starting point for Social Security benefits. Social Security was one of many programs instituted in the 1930s to offer greater security for Americans.
The program had a financing issue in the late 1970s, but payroll tax rates were raised in the 1980s to account for this, and Social Security since that point has been collecting more money than it pays. There is a concern in some circles that the pending retirement of the baby boomers is going to represent something of a drain on the system, but they have been paying into the system at high rates since 1983. However, by 2023, Social Security payments will dip into the trust fund that has been built up, with projections for the trust fund to be exhausted by 2036. Thus, there is a pending long-run problem with funding Social Security (Vernon, 2011). There is also a potential funding issue emerging with another aspect of Social Security, the Disability Insurance, as payments under that system are increasing, and it tends to cover people who did not pay much into the system.
Addressing this shortfall raises other problems. Cutting Social Security benefits is bad politics -- seniors vote. It is also bad optics, as people feel that since they have paid into the system their entire lives they are entitled to a certain level of benefits. However, raising the payroll tax to fund the system is also problematic. That basically means a wealth transfer from younger generations to the baby boomers, a generation that already holds most of the country's wealth, already has an entitled attitude (just try cutting their benefits) and enjoyed opportunities for good jobs, affordable housing and affordable education that today's young people simply do not have. Raising the burden on young people who need the money to pay Social Security entitlements to old people who don't need the money is fraught with moral hazard. So Social Security is effectively left with an impasse.
Level of Government and Intergovernmental Structure
Social Security is under federal mandate. While the Social Security Administration is responsible for the implementation of law regarding Social Security, Congress is responsible for the drafting and passing of such laws. Thus, changes to Social Security, either benefits or funding, needs to come from Congress. As noted, this presents a challenge because current and pending recipients of Social Security are a large part of the population and they tend to vote. Younger people may vote less and typically are not represented in Congress, but they also have limited means to absorb further tax increases, given youth unemployment rates, average youth wages and high student debt burden. Politically, making changes to Social Security is a major problem.
The only positive is...
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