Social Security Crisis: History, Funding, and Reform Plans

Introduction

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 proposed to address this problem. The first part provides a history of the Social Security system, from its inception in 1935 to its status in the early 2000s. The next part examines how the Social Security system is funded. The final part studies the problems facing retirees who stand to be adversely affected by the Social Security deficit, and looks at the pitfalls of privatization and other reform methods, such as proposed tax credits, simplification of 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 toward 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 already 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 toward 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 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 retirement benefits for the worker alone, two 1939 amendments added benefit payments to the retiree's dependents — a spouse and minor children — and survivor benefits to the family in the event a covered worker died prematurely. These amendments ushered in the Social Security program that remains in place today, one that provides security and benefits for the family rather than just the individual worker (Schieber and Shoven, 31).

By the 1950s, society was becoming increasingly aware of the problems faced by disabled citizens. In response, a disability insurance program was added in 1956 to benefit disabled workers and disabled adult dependents. 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 additional changes since the 1960s, though its basic structure remains the same. In 1996, President Bill Clinton signed a law disallowing benefits if the disability was caused by drug addiction or alcoholism. In 2000, Congress amended the law further to allow full benefits for all citizens over the age of 65, even if they chose to continue working.

Funding for Social Security

The most common misconception regarding Social Security is equating its benefits with welfare. This is not the case, since recipients 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 employers and workers, as mandated by FICA. These taxes are 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) show that half the elderly population depends on their monthly Social Security checks as their primary income source (cited in Ungar). Currently, financial analysts advise younger people that they can no longer depend solely on Social Security benefits for their retirement, and that they need to provide for at least half of their retirement income on their own.

The Social Security Crisis

While estimates regarding the exact 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 expected to retire starting in 2008 will add large numbers of beneficiaries while removing a significant proportion of workers who currently pay FICA contributions. This problem is compounded by a decrease in the number of new workers entering the labor force, since most baby boomers had smaller families than the generation preceding them. As a result of these two factors, the amount paid out in benefit checks will exceed the amount of FICA contributions flowing into the Social Security Trust Fund (cited in Ungar).

The government has instituted several measures aimed at averting this impending crisis, including proposals ranging from full privatization to targeted structural reforms.

Conclusion

The daunting task of Social Security reform lies in striking a balance between preserving the safety net of social insurance while minimizing the burdens currently faced by many working families across the United States.