Jerry W. Markham
Congress adopted the Social Security Act (P.L. 74-271, 49 Stat. 620) in 1935 for the purpose of providing retirement security for American workers. This legislation was a product of the New Deal legislation that spun out of the Great Depression of the 1930s.
POPULIST PROPOSALS IN THE DEPRESSION ERA
Before Congress adopted the Social Security Act a number of individuals and leaders called for government payments to assist the poor and the elderly during this economically difficult period. Their programs promised wealth to everyone. The novelist Upton Sinclair, for example, ran for governor of California in 1934 on a platform that he called the End Poverty in California Plan (EPIC). One feature of the plan was a proposal for the state of California to tax corporations for purposes of getting the necessary revenue to feed the poor and to convert bankrupt factories and farms into cooperatives. Sinclair did not win the gubernatorial race, but his EPIC plan received much attention across the country. Dr. Francis Townsend, another populist with a large following, announced a plan that would entail monthly payments of $200 to nonworking elderly people to help relieve their hardships and difficulties. Over 7,000 "Townsend clubs" with 2.2 million members supported this program. Even Hollywood advertising executives formulated plans to assist the poor; two executives promoted a "Ham and Eggs" plan that would have given thirty dollars each Thursday to elderly people.
"Kingfish" Huey Long, the demagogue , former governor and senator from Louisiana was promoting a "Share the Wealth" program, which would have made "every man a king" by providing pensions of thirty dollars per month to individuals over the age of sixty with annual incomes of less than $1,000 and no more than $10,000 in assets. Under Long's Share the Wealth program, every family in America was guaranteed a minimum annual income of $2,000, and each family was to be given $5,000 to buy a home, an automobile, and a radio. Long proposed to fund the plan by confiscating the assets of the wealthy.
While none of these plans succeeded, they were popular and placed considerable political pressure on President Franklin Roosevelt to propose a plan of his own. A public opinion poll suggested that if Huey Long challenged Franklin Roosevelt, for example, the challenge would split the Democratic voters and could result in the election of the Republican presidential challenger, Alf Landon. Accordingly, Marion Folsom, an executive with the Eastman Kodak Company, created an alternative program for the Roosevelt administration and this program eventually became the Social Security Act.
THE GROWTH OF THE SOCIAL SECURITY ACT
The Social Security Act created a federal pension system funded by taxes on employers and employees. Social Security was not "needs based"; rather, the theory was that workers would contribute to those already retired. These workers would in turn receive benefits upon their own retirement funded by the taxes paid by those still working and from new workers entering the marketplace. The amount of benefits was not limited by the retiree's assets or income from investment sources.
The Social Security program as Congress originally enacted it did not provide universal coverage for retirement benefits but provided benefits principally for industrial employees. The legislation initially excluded most workers, including farm laborers, the self-employed, educators, household servants, casual laborers, and the unemployed.
The government mailed the first Social Security check in 1940 to Ida May Fuller in Ludlow, Vermont, just as the Depression was ending. Ida May Fuller lived for thirty-five more years, until 1975, and by that date, Congress had expanded the Social Security system to cover nearly all workers. Coverage was also broadened to include dependents of workers and disabled employees. By the end of the twentieth century, almost 150 million Americans contributed to the system and more than forty million received benefits. The government paid about 7.5 million individuals survivor benefits, and six million received disability benefits.
SOCIAL SECURITY BENEFITS AND CONTRIBUTIONS
Social Security benefits are similar to an annuity concept in that the government pays them from the time of retirement until the beneficiary and certain dependents are no longer living. The government ties the level of benefits to the workers' annual contributions and number of years the workers made the contributions. Importantly, the law does not entitle all workers to benefits, but only those who satisfy the minimum qualification requirements associated with a certain number of years of contributions. The law caps maximum benefits at a level not far above a poverty level, but many people nonetheless believe the benefits are an important entitlement the government cannot reduce or eliminate. The Supreme Court, however, has held that Social Security contributions do not entitle individuals to some contractual amount on retirement. The Court held that contributions to Social Security are not accrued property rights and that benefits may be removed or changed by Congress. In the Court's words:
The "right" to Social Security benefits is in one sense "earned," for the entire scheme rests on the legislative judgment that those who in their productive years were functioning members of the economy may justly call upon that economy, in their later years, for protection from "the rigors of the poor house as well as from the haunting fear that such a lot awaits them when journey's end is near." ... But ... [t]o engraft upon the Social Security system a concept of "accrued property rights" would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands.
Congress increased Social Security benefits for the first time in 1950, but benefit levels were undercut by inflation in the 1960s. Congress increased benefits again in 1972, and then provided for automatic cost of living adjustments in subsequent years to ensure that the benefits payments kept up with inflationary pressures. This resulted in a mandate that workers pay more into the system before retirement and at the same time restricted access through increased eligibility ages for benefits. Originally, Social Security contributions were equal to a tax of three percent on salaries up to $3,000; both the employee and employer paid the tax into the Social Security fund. By 2000, the law required workers and their employers to contribute 6.2 percent (a total of 12.4 percent) on employees' salaries up to $76,200.
Congress originally intended Social Security benefits to be funded on a "pay-as-you-go" basis. This meant that the benefits paid out each year were to
PROBLEMS AND REFORM PROPOSALS
As noted above, Congress adopted a scheme of Social Security taxes largely to pay for benefits in retirement. Eighty percent of American households now pay more in Social Security taxes than they do in income taxesnd the taxes have become burdensome. At the same time, the Social Security benefits are largely insufficient for enabling a comfortable retirement without outside sources of income. Notwithstanding the high taxes and minimal benefits, the Social Security system faces bankruptcy down the road. The Social Security Administration, the agency Congress charged with administering the system, announced it will pay out more in benefits than it will collect in taxes by the year 2015. Sometime before the year 2040, Social Security contributions will enable the government to pay only 71 percent of the benefits it owes under the law to Social Security participants. This means Congress must also dramatically cut benefits or increase contributions or both to maintain the present system in some form. Of particular concern is the fact that the number of workers paying into the Social Security system is shrinking. At the time Social Security was adopted there were twenty-five workers for each retiree. In 2002 there were about 3.25 workers for each retiree. By the year 2030, this ratio will drop to two workers for each Social Security recipient.
The Social Security system has several flaws beyond its bankruptcy. Minority and low-income individuals have shorter life spans and receive less in Social Security benefits than longer-lived, more affluent individuals. In short, criticisms of the current law abound.
Various groups have begun to examine the problems facing the Social Security system and have generated a range of proposals, including privatization, a process through which the program would change from public to private control. In January 1997, a federal advisory council was divided over the issue of whether to allow private social security accounts, but seven of its thirteen members wanted to require compulsory saving through individual accounts. Another federal advisory committee unanimously recommended the use of private accounts to supplement Social Security. The 2000 presidential election focused further attention on the issue. Following his election, President George W. Bush appointed a bipartisan panel to make recommendations on how to privatize Social Security. That committee urged partial privatization.
Advocates of Social Security reform contend that private accounts would provide far more social security and retirement benefits than Social Security, and that private accounts would make more funds available for investment, strengthening the economy for the benefit of everyone. Reformists argue that private contributions compounding tax-free in a private account will not only enhance the retirement years of the workers but will create an estate for their descendants that will enhance their status in life. Opponents of reform claim privatization will result in a loss of the contributions already made into the system and that private accounts may incur investment losses that could devastate a pensioner. Although still controversial in many circles, the law has already effectuated privatization for the pension accounts of federal government employees. These employees may invest contributions in stocks and other securities, and the benefits received during retirement will depend on the success of those investments. State pension funds also allow employees to invest contributions in common stocks and other securities. Countries in Europe, South America, and in Australia are also privatizing some or all of their social security pensions.
See also: AID TO DEPENDENT CHILDREN; EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974; MEDICAID ACT; MEDICARE ACT.
Campana, Kristen V. "Paying Our Own Way: The Privatization of the Chilean Social Security System and Its Lessons for American Reform." University of Pennsylvania Journal of International Economic Law 20 (1999): 38521.
Karmel, Roberta S. "Regulatory Implication of Individual Management of Pension Funds: The Challenge to Financial Regulators Posed by Social Security Privatization." Brooklyn Law Review 64 (1998): 10431.
Markham, Jerry W. "Privatizing Social Security." San Diego Law Review 38 (2001): 74716.
Social Security Online. <http://www.ssa.gov/>.
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