As I mentioned in my last blog, I spent a few days last month in D.C. This was my third trip to the capital so I made it past the must-see attractions to some of the lesser known monuments. The FDR Memorial was the most pleasant surprise. I had expected a single sculpture, but quite like FDR’s presidency, the memorial stretched on and on with sculptures depicting the long span of his tenure in office. Aside from honoring the man my grandma once thought was the one and only US president, the memorial highlighted the vast challenges the country faced at the time: widespread unemployment, a growing number of homeless and hungry, and a struggling elderly population.
It is estimated that in 1934 over half of the elderly population in America had less than they needed to be self-sufficient. It was in that climate, 80 years ago on August 14th, 1935 that the Social Security bill was signed into law by President Roosevelt.
Fast forward to today. The program now has sixty million beneficiaries receiving $850 billion in benefits annually. Its continued viability is a concern for many of us, who either rely on benefits to meet our living needs or are counting on them as part of our future retirement income. The retirement fund has enough reserves to continue paying full benefits until 2035. Once the reserves are depleted, the tax collected from workers will only cover 79% of retirement benefits. The disability fund is in even worse shape, and only has enough to cover another year of payments before benefits will have to be cut by nearly 20% to current beneficiaries. Is this octogenarian about to go on life support or is clinging to life just the life story of Social Security? Let’s take a look back to find out:
1935: The Social Security bill passed. Federal Old-Age Benefits for primary workers started at 65 based on the amount of payroll tax contributions the worker made during his or her working life.
1936: The first Social Security numbers were issued. The lowest SSN ever (001-01-0001) was issued (to Grace Dorothy Owens).
1937: Federal Insurance Contributions Act (FICA) taxes were first collected. Trust funds were created to receive this revenue and benefits were paid from the trusts. Since then $8.7 trillion has been paid to the trust funds and $7.4 trillion has been paid out as benefits.
1939: Dependent benefits to the spouse and minor children of a retired worker and survivor benefits to the family of a deceased worker were added.
1940: Monthly payments began to 220,000 people totaling $35M. The first monthly payment was for $22.54 to 65 year-old Ida May Fuller. Ida paid in $24.75 in taxes to the program and collected $22,888.92 in benefits until she died at age 100! The average person was expected to receive benefits for 14 years.
1940’s: Social Security payments were quite low and elderly Americans were receiving more from state welfare programs than they were from Social Security.
1950-1952: Benefits were nearly doubled for existing beneficiaries as a result of adjusting for 10 years of inflation. Benefits were also greatly augmented for future beneficiaries. By 1951, people were receiving more money from Social Security than from welfare.
1956: The Social Security disability insurance program was created for disabled workers 50-64 and disabled adult children.
1960: Disability benefits were expanded to disabled workers of any age and their dependents.
1961: Retirees were allowed to start reduced benefits at age 62. At this time, there were five or more workers for every one person getting benefits.
1972: The federal government took over administration of old-age and disability benefits that had previously been handled by the states; the federal program was entitled Supplemental Security Income (SSI). Provisions expanded certain benefits, including delayed retirement credits for those who postponed benefits past age 65. Cost of Living Adjustments (COLA) were made automatic and tied to the CPI. The amount of income subject to FICA tax (the wage base) began to increase annually.
1975: Reports indicated that without changes, the Social Security trust fund would be exhausted by 1979.
1977: Changes were made to address the shortfall in funding, including raising the payroll tax rate, increasing the wage base and reducing benefits slightly. The changes extended the long-term viability of the program by 50 years.
1983: Short-term financing became a major issue. For the first time, Social Security benefits were subjected to income tax and the retirement age was increased for future beneficiaries from 65 to 67.
2000: People who attained full retirement age were granted the right to collect full benefits regardless of how much money they earned from employment.
2010: For the first time, the amount of benefits paid exceeded the amount of revenue being collected in the form of payroll tax, income taxes on benefits and interest on the trust fund.
Today: There are fewer than three workers for every individual receiving benefits. Beneficiaries are expected to receive payments on average 20 years. There are 60M beneficiaries receiving approximately $850B (with a b!) per year in benefits. The Social Security retirement fund has enough to cover the shortfall of revenue until 2035 (2034 if these funds are used to shore up the disability fund).
What has changed over the years? The scope of Social Security has been expanded at least 7 times (highlighted in red) and been meaningfully reduced only twice (in green). Longer life expectancies keep the average person on benefits six years longer than in 1940. The number of working people per beneficiary has fallen by nearly half.
What hasn’t changed is that Social Security remains wildly popular with between 80% and 90% of Americans supporting tax increases to keep it in effect. It continues to be a cornerstone of retirement income for the elderly, representing nearly 85% of retiree income for over 40% of retirees. As Social Security continues to age, it is going to need care to keep it alive and we haven’t seen significant changes in over 30 years. As we go forward, we might take another cue from FDR: “It is common sense to take a method and try it. If it fails, admit if frankly and try another. But above all, try something.”