From the earliest days of civilization, we have had the poor, the disabled and the unemployed. The belief that society should provide assistance to the needy is an early societal concept that is both compassionate and prudent. In this article, we'll focus on one area of the U.S. social welfare system: Social Security. We'll discuss its origins, look at how the withholding tax for employees and employers has increased over the years and expose the single greatest threat to its future.
In the early days of our nation, the colonists imported British Poor Laws to assist those who were in need due to poor health or age, or those who were able bodied but unemployed. The government provided assistance to the former group, while the latter group was required to work on various public projects.
From 1800 to 1929, Americans lived through 23 recessions and four depressions, or one every 4.8 years. After several years of hardship during the Great Depression, more and more people began to look to the government for assistance. The stage was thus set for the most expansive social program in America's history.
Social Security
When populist Louisiana Governor Huey Long was elected to the U.S. Senate in 1930, he proposed a program called "Share the Wealth," under which the federal government would confiscate the wealth of the nation's rich to guarantee an annual income of $5,000 to every family in America ($5,000 in 1930 dollars equates to $69,000 today). His program would have included an old-age pension for everyone over 60.
Instead, after his election in 1932, President Franklin Delano Roosevelt proposed a massive government expansion focused on the "Three R's": relief for the poor, recovery of the economy and reform of the financial system to prevent future depressions.
Opponents argued that it would cause a loss of jobs while proponents contended that a Social Security system for older citizens would encourage workers to retire, thus creating jobs. There were loud cries of "socialism," and many in Congress felt the bill was rushed. There were also several heated debates concerning the constitutionality of the program. When it reached the Supreme Court, much of FDR's New Deal was struck down.
Rather than surrender, FDR responded by gaining new presidential authority from Congress, including the power to appoint new federal judges in districts where the sitting justices were age 70 or older and refused to retire. He was successful and appointed 44 lower court judges and six new justices to the Supreme Court, thus tipping the political legal scales in his favor. The matter was then returned to the Supreme Court where much of his New Deal was upheld, including Social Security. FDR finally signed the Social Security Act into law on Aug. 14, 1935.
However, the dissenters didn't disappear. In fact, the constitutionality issue wasn't resolved until 1937 when it was upheld by two Supreme Court decisions on the same day: Steward Machine Company v. Davis and Helvering v. Davis.
Because Article 1, Section 8 of the U.S. Constitution grants Congress the power to collect taxes specifically for the "general welfare of the United States," the Social Security Act was deemed constitutional. This is strikingly similar to the court's ruling on the Affordable Care Act (the ACA or Obamacare) when it held that the federal government has the power to mandate that all Americans purchase health insurance. This was upheld by the current Supreme Court on the grounds that the fine imposed on those who fail to comply with Obamacare is considered a tax. In 1937, eligible workers began contributing to Social Security.
Social Security's Withholding History
Social Security wasn't without its problems in terms of the benefits to society. In the beginning of the program, up to half the labor force was excluded, including agricultural workers, government employees, many teachers, nurses, hospital employees and others. Moreover, two-thirds to as much as 80% of African-Americans were excluded. The first monthly benefit check was received by Ida May Fuller on Jan. 31, 1940, in the amount of $22.54 (approximately $375 today).
During the first 12 years of the program, a 1% tax was withheld from the wages of eligible workers, which was matched by their employers. However, beginning in 1950, the rate of tax withholdings began to rise until it peaked at 6.2% in 1990 (see chart on the right). In 1965, Medicare was added to the Social Security Act, and one year later, employees and employers were required to contribute an additional 0.35%. The following chart illustrates the percentage of tax withheld from eligible workers from inception to the present day. It should be noted that this does not include the withholding tax for Medicare.
Mortality History
Perhaps the greatest threat to the viability of Social Security is the increase in Americans' longevity. For example, in 1940, the year that first Social Security monthly benefit check was written, a 65-year-old male had a life expectancy of 12.7 years (65 + 12.7 = 77.7). A female of the same age could expect to live until 79.7, an additional 14.7 years. According to a 2009 periodic life table for the Social Security population, the life expectancy of a 65-year-old male has risen to 17.5 years, 4.8 years longer than in 1940. The life expectancy of a female at age 65 is now 20.2 years, an increase of 5.5 years. The payout period of Social Security is expanding, a trend that is expected to continue.
Most understand that life expectancies are influenced by gender and race. However, were you aware that affluence impacts longevity? According to a research paper published in 2007 by the Social Security Administration's Office of Retirement and Disability Policy, there is a difference in both the level and the rate of improvement in mortality by socioeconomic status. In other words, not only do upper-income earners enjoy a longer life expectancy, they have also experienced a greater improvement in longevity.
In the case of the minimum wage earner, his Social Security benefit of $11,088 is 76.5% of his pre-retirement income. Conversely, the worker who earned the equivalent of the Social Security annual wage base maximum would receive a benefit of $31,044, which is 28.2% of his pre-retirement income. Because there is a maximum on Social Security's contributions and benefits, the top two wage earners would receive the same benefit. Hence, as a worker's income rises beyond the wage base maximum, his income replacement percentage would fall accordingly. Therefore, the higher a person's income, the more important it is to have additional sources of retirement income.
