By Adam Collins
“Inside the System” is a two-part series investigating the Social Security system. This week will explore its history and infrastructure.
Brief program history
Aug. 14 of this year will mark the 70thanniversary of the Social Security program. Signed into law by then-President Franklin D. Roosevelt, the system was designed to give seniors 65 and older a continuing form of income for the remainder of their lifetime.
“We can never insure 100 percent of the population against 100 percent of the hazards and vicissitudes of life,” President Roosevelt said at the signing ceremony for the social security legislation. “But we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age. This law, too, represents a cornerstone in a structure which is being built, but is by no means complete. … It is … a law that will take care of human needs and at the same time provide for the United States an economic structure of vastly greater soundness.”
At its inception, the program was quite different than it is today. When the program first began issuing checks, payments were made in the form of a lump sum to beneficiaries. However, by 1940 the program was issuing monthly checks. Cost-of-living adjustments, commonly referred to as COLAs, were not introduced until 1950, marking the first of many increases in beneficiary payments passed by Congress.
In 1965, Congress passed the largest change in the Social Security system since its inception. The legislation created a new program, Medicare, as a part of Social Security. This program provides healthcare coverage to Social Security beneficiaries over the age of 65. In 2003, the Bush administration successfully passed major legislation through Congress that will help those in the Medicare program pay for the rising cost of prescription medication.
How the program works
Every worker in the United States pays 6.2 percent of their gross wages as a social security tax; the employer then matches this amount, for a total of 12.4 percent. Taxes are only collected on the first $76,200 a person earns annually. Wages earned above this limit are not subject to social security taxation. Those who are self-employed pay the entire 12.4 percent themselves.
Social Security is a pay-as-you-go system. That means today’s workers pay the benefits of today’s retirees. The money collected from social security taxes is held in what is known as the Social Security Trust Fund. Those funds are then used to pay retirees’ benefits each month. The remainder is invested into interest-bearing government securities to be used for beneficiary payments in the future.
Those aged 65 and older are eligible to collect social security benefits in the form of a monthly check from the federal government. Beginning in 2003, social security began a 22-year plan to raise the retirement age required to collect benefits from 65 to 67. A person may claim early retirement, collecting benefits from age 62. The amount received, however, will be permanently reduced depending on the person’s age.
When a person dies, relatives are not entitled to receive the deceased’s monthly social security check. A one-time payout of $255 can be made to a spouse or child under the age of 18. A spouse can qualify to collect a monthly check, depending on how many social security credits the deceased had accumulated. If the spouse is non-working and therefore has no means of income, he or she would be entitled to receive all of the deceased’s monthly benefits.
However, no person, regardless of how much money they have paid into the social security program over their lifetime, is guaranteed to receive any benefits from the federal government. In 1937, the United States Supreme Court ruled that social security was not an insurance program, thus making the social security taxes a regular form of taxation and not a guarantee to benefits later in life. In a 1960 ruling on Flemming v. Nestor, the Supreme Court ruled that a worker and his/her dependents have no legal claim to receive social security benefits regardless of whether they have paid social security taxes or not.
A blurry future
When social security began paying monthly benefits to retirees in 1940, there were 42 workers for every one retiree. Today there are just over three workers for every retiree, and it is projected that by 2030 there will be two workers for every retiree. It has also been projected that by 2018 social security will begin paying more money in benefits than it collects in revenue through taxation. Analysts have several ideas about what will happen after this.
Many analysts argue that due to the disproportionate ratio of retirees to workers the social security program is not sustainable in its current form. Their predictions have the social security trust fund being completely depleted as early as 2042. According to those figures, if social security is not reformed in some way, anyone born after 1975 would not receive any benefits. That would include nearly all of today’s college undergraduates.
Some analysts, although they are in the minority, contend that these numbers are inaccurate. Their claim is that with changing economic factors social security will remain solvent for decades, thus major reform of the program is not necessary and would, in all likelihood, come at its detriment.
These analysts’ evidence comes from projected inflation and wage earnings. For example, in 2002, the average annual American salary was roughly $35,000. In that year the Economic Opportunity Institute projected that by 2075 the average annual American salary would increase to over $100,000. The rise in wages would also lead to an increase in inflation. Since the revenue the federal government collects for the social security program is tied to wage earnings, an increase in wages would mean an increase in the amount of money available to pay benefits.
Next week in part two of “Inside the System” –– The Cardinal will explore possible solutions and how Kentucky’s elected officials feel about Social Security reform.
