A Brief History of Social Security

April 13, 2006

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When first adopted, social security covered about 60 percent of the work force. Over the years, it has expanded coverage to include the self-employed, many state and local government employees, federal workers, and employees of nonprofit organizations. Today, approximately 95 percent of all workers are covered by social security.

The program was designed to be a self-supporting federal program, financed with payroll taxes and providing not just retirement income, but a host of other insurance programs as well. There are four distinct types of benefits provided:

Retirement benefits, which you can elect to receive at any time after age 62, are based on the number of years that you have worked and the amount of money you have earned. Your spouse and, in some cases, your children may also be eligible for benefits based on your earnings records. Coverage has also been extended to ex-spouses if the marriage lasted at least 10 years and the ex-spouse has not remarried.
Survivor's benefits are a form of life insurance, providing payments to your spouse and dependent children after your death.
Disability insurance ensures you a monthly income if you are unable to work because of an illness or disability, regardless of age.
Medicare provides both hospital insurance (Part A) and voluntary medical insurance (Part B) for men and women over age 65 and disabled younger people.

These benefits are financed by payroll taxes. For employees, the tax is called the Federal Insurance Contribution Act (FICA) tax, and half is paid by the employee and half by the employer. For self-employed people, the tax is called the Self-Employed Contribution Act (SECA) tax, and "both halves" are paid by you. In 2007, FICA and SECA demand 15.3 percent of the first $97,500 of wages ($94,200 in 2006). For employees, half (up to $7,458.75 in 2007, for example) is paid by the employee and the other half is paid by the employer. The wage base is adjusted each year based on increases in average wages in the country. In addition, any compensation over $97,500 in 2007 is subject to Medicare tax of 2.9 percent (or 1.45 percent each, for employee and employer).

Although social security was designed to be a self-supporting program and has largely succeeded in that goal, it has never developed the "trust fund" to draw on for future years which was once anticipated. This means that the taxes paid for social security are not put into a separate account that is used only to pay out social security benefits. Instead, the government uses the social security taxes as it uses all other taxes (to build roads, provide defense, etc.), and it puts an "IOU" in the trust fund.

To look at it another way, the social security taxes simply reduce the cost of government borrowing. Therefore, the funds from social security have played an important role in obscuring how truly large the federal deficit really is because social security receipts have been included in the federal budget figures. When government leaders tell us that "the budget will be in surplus" in the very near future, remember that they are including the social security trust funds in their calculations.

In the early 1980's government policy makers feared the social security system would become bankrupt, so in 1983, the system was changed significantly. Part of the changes involved adopting an expanded and indexed wage base and higher tax rates. Also, under certain circumstances, social security benefits may be subject to income tax.

Another important change was in the increase in the normal or full retirement age from 65 to 67. While the increase is gradual and relatively small, it represents a major change in social security philosophy. The age-65 retirement limit for full benefits had not been changed since the adoption of the Social Security Act in 1935, even though life expectancy for a 65-year- old then was only another 2 years. Today the life expectancy of a 65-year-old is another 16 years for men and 19 years for women. In 1935, when social security was enacted, most people never reached age 65.