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by Causes | 8.14.19

On August 14, 1935, President Franklin D. Roosevelt signed the Social Security Act into law, creating the Social Security system that still provides federal assistance to the elderly today. The legislation was originally designed to offer vulnerable groups such as the elderly (Social Security’s primary focus today) and the unemployed protection from poverty through funding obtained from payroll taxes.

Since its enactment, Social Security has survived challenges from the Supreme Court and become such a vital component of America’s social safety net that it was expanded 30 years after its creation. Its future is uncertain, however, as without reforms Social Security is expected to run out of money in 2034 due to the changing age demographics of the U.S. economy. Not only that, but both parties in Congress seem unable to reach a consensus on a fix.

Why was it needed?

During FDR’s first term as president, the U.S. was in the depths of the Great Depression which featured widespread unemployment (as high as 25% in 1933) and economic hardship. As a result, FDR embraced Social Security as part of the second round of his \"New Deal\" as a way to protect the elderly who could no longer work from living in poverty and to provide a safety net for those who lost their jobs.

With bipartisan support in Congress, the Social Security Act was passed with relative ease, and at a signing ceremony FDR called the bill \"sound, needed, and patriotic legislation.\"

\"We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, 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.\" — Franklin Delano Roosevelt.

What did the legislation do?

While the Social Security Act did authorize an initial infusion of federal funding for states so they could start providing pensions to the elderly and unemployment benefits to people out of work, the bulk the program’s funding was designed to come from payroll taxes. Initially, the tax was set at a rate of two percent that was taken out of each paycheck to provide benefits to the elderly, with the worker’s employer also responsible for paying a matching amount in payroll tax.

Unemployment insurance — essentially benefits people get when they’re out of work — was also included in the legislation, which was financed by a nationwide tax on all businesses with more than eight employees. States were encouraged to establish their own unemployment insurance programs, and by 1937 all of them (plus the District of Columbia and the then-territories of Alaska and Hawaii) had done so.

What impact has it had since then?

The creation of America’s first large-scale social insurance program was inevitably going to attract judicial scrutiny, and in 1937 the Supreme Court got its chance to weigh in. There were significant tensions between the executive and judicial branches after FDR’s ill-fated attempt to pack the Court with six new justices who’d be more accepting of his policies. But the Supreme Court upheld the constitutionality of Social Security in two separate rulings, nonetheless, on the grounds that the program fell within the federal government’s ability to tax and promote the general welfare.

Nearly 30 years after Social Security was created, President Lyndon Johnson expanded Social Security by creating Medicare and Medicaid — two federal health insurance programs aimed at helping the elderly and the poor, respectively. FDR had unsuccessfully tried to include similar public health insurance in an early version of the Social Security Act, but it was removed because of the objections of the healthcare industry.

Today, the biggest threat to Social Security’s future comes from the retirement of workers in the Baby Boomer generation, which has accelerated a long-running trend of increasing numbers of retirees being supported by a relatively smaller pool of workers. In 1950, each Social Security beneficiary was supported by 16.5 workers whose payroll taxes funded their benefits. By 2013, that ratio had fallen to 2.8 workers for each beneficiary, and this imbalance shows no signs of improving.

In recent campaigns, Democratic platforms have called for expanding Social Security by raising taxes, while Republican platforms oppose tax increases and want to raise the retirement age for younger generations while keeping benefits the same for those in or near retirement. The bipartisan Simpson-Bowles Commission suggested slowing the growth of retirement benefits for medium- and high-income workers while gradually raising the retirement age to keep Social Security solvent.

Whether the recommendations of the Simpson-Bowles Commission will be adopted by Congress remains to be seen. But there is certainty in the plain arithmetic: Social Security — a program that provided benefits to over 50 million retirees in 2016 according to our partners at USAFacts — will face drastic benefit cuts by 2034 if no action is taken by Congress.

— Eric Revell

(Photo Credit: Social Security ) / Public Domain)

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