Policy Analysis: Social Security Act
The Social Security Act of 1935 has seen many amendments and policy changes since
its’ inception over eighty years ago. The past of the Social Security Act, as well as its’ future are
crucial for providing millions of Americans with the means to live in a disabled or retired phase
of life. The historical background of the policy, the problems that necessitated it, the policy’s
description, and a policy analysis of the Act’s goals will be conducted using the social policy
analysis model developed by Karger and Stoesz to look into the origin of the policy and its future
outcomes (2014).
Historical Background of the Policy
The purpose and origin of insurance, which is economic security, can be traced as far
back as the ancient Greeks who stored olive oil for long periods of time, so that it could be used
in times of economic insecurity (Social Security History, 2017). From here, there was a
transformation of informal to formal insurance starting in the Middle Ages. This began with the
formation of guilds, which gave workers a common society that allowed them to obtain
temporary benefits during times of disability or unemployment until he was able to contribute to
society once again (Social Security History, 2017). In the following centuries various countries
in Europe, such as England, began passing legislation that would benefit the welfare of their
citizens in times of hardship. The English Poor Law of 1601, is an example of early social
insurance that gave the state responsibility for helping maintain the welfare of its’ citizens
(Social Security, 2017). During the English 17th century, private insurance was developed in
European nations and was used primarily by the wealthy to protect their assets in times of
hardship or misfortune (DeWitt, 2010). By the early 1930’s, thirty-four nations already had some
form of a national social insurance program prior to that of the US (Social Security History,
2017).
While citizens in the US still used private insurance, the first type of social insurance in
the country was the system of Civil War pensions, in which the federal government paid
pensions to Union veterans and their surviving families during and after the war (DeWitt, 2010).
In addition to Civil War pensions, the US saw a growth in social insurance advocacy during the
time period just prior to the enactment of Social Security in 1935. These programs included the
Mothers pension and the state old-age pension, among others (DeWitt, 2010). These programs
provided benefits to some citizens, but were often inadequate, ineffective, and did not provide a
substantial number of citizens with benefits. The US was in dire need of a national social
insurance program for its’ elderly, disabled, and unemployed populations. This need for a
national policy was due to the US undergoing rapid industrialization in the early 20th century
(DeWitt, 2010). The Industrial Revolution in the US brought increased urbanization, public
health sanitation, and longer life expectancy. With an urbanized workforce, families were not at
home working, or taking care of relatives as they had in a pre-industrialized era (DeWitt, 2010).
These factors, along with the devastating impacts of the Great Depression, and a lack of work
pension plans, opened the door for a realistic discussion about creating a national social
insurance program for the citizens of the US.
The Franklin Roosevelt administration is credited with the installment of the Social
Security Act in US history. The Act also was a key policy goal in Roosevelt’s New Deal
initiative. Roosevelt submitted the Act’s proposal to Congress on January 17, 1935, and the act
was debated in Congress for 18 days (DeWitt, 2010). The Act was signed into law just eight
short months later on August 14, 1935, and encompasses seven programs that are still used today
including, old-age assistance, federal old-age benefits, unemployment insurance, aid to
dependent children, grants to states for maternal and child welfare, public health work, and aid to the blind (DeWitt, 2010). Since the enactment of Social Security in 1935, the policy has seen
numerous legislative amendments over the last eighty years. The first set of amendments to the
Act occurred in 1939, which changed the system from individual worker benefits, to familybased
benefits (DeWitt, 2010). The policy also underwent amendment changes in the 1950’s,
which finally included domestic and agricultural workers as benefit recipients (DeWitt, 2010).
Further major amendment changes in 1972, 1977, and 1983 were intended to promote long-term
goals of the program, but ended up producing short-term benefits. These amendments currently
leave the modern program of social security facing issues of insolvency and inability to pay
future beneficiaries their full benefits.
Description of the Problem That Necessitated the Policy
The increase in urbanization in the US during the Industrial Revolution, improved public
health sanitation, as well as improved general standards of living impacted the average life span
of an American in the early 20th century (Ellis, Munnel, & Eschtruth, 2016). In comparison to the
pre-industrial era, citizens were living much longer than they had thirty or forty years prior to the
Industrial Revolution. Before the industrialized era in the US families worked at home and were
able to provide for their loved ones who were either elderly or disabled (Ellis et al., 2016). There
was no worry of economic stability for the family, since the family was able to provide enough
for itself within the home or on one’s own property (Robinson, 2017). The era of
industrialization changed this way of life. With families moving into cities, and working longer
hours away from home for paid wages, loved ones that weren’t capable of working were left
with less economic security since the family could not provide daily cares while at working
outside the home (Ellis et al., 2016).
Overall, the general improvements in basic standards of living, which included increased
public sanitation, and better education practices, allowed citizens to live longer and therefore
work longer. When a worker reached old age, was unemployed, or disabled, it became difficult
to provide for oneself (Robinson, 2017). Since many workplaces did not offer pensions at the
time, those who were in old age or recently unemployed, found themselves in economic
insecurity, and were not able to support themselves fully (Ellis et al., 2016). These issues in
combination with the Great Depression and 1929 stock market crash left the US and its’ society
in a vulnerable position. The impacts from these experiences forced policy makers to begin the
discussion of enacting a national policy that could improve economic security across the country
for those impacted most by these events, primarily, the elderly, unemployed, and the disabled
(Ellis et al., 2016).
Policy Description
The original Social Security Act of 1935 established a federal national social insurance
for individuals who were age 65 and older, and for those who were unemployment (King and
Cecil, 2006). The original act, which is now referred to as the Old-Age, Survivors, and Disability
Insurance (OASDI) program, also gave individual state grants to aid the blind, the elderly,
dependent children, and federal grants for states social service, public health, and vocal
rehabilitation programs (Social Security Administration, 1993). The goals of the initial program
were to, in the short term, give retirees and the unemployed economic stability in the wake of the
Great Depression, 1929 stock market crash, and increased industrialization. Long-term goals of
the program mainly involved creating a plan to keep the social security trust funds solvent for
beneficiaries in the coming generations.
The original program was financed by payroll taxes that employees and their respective
employers paid into equally (King and Cecil, 2006). The Social Security Board was the
administration during the early stages of the program that implemented the original Act by
enrolling workers into the program, recording benefit earnings, and collecting payroll taxes
(King and Cecil, 2006). Six years after the program was signed into law, in 1941 the Social
Security Board of Trustees, which is still an active agency, was established to determine the
financial status of the program. The board consisted of the Secretary of Labor, Health and
Human Services, the Commissioner of Social Security, as well as two public trustees that were
appointed by the president and later confirmed by the senate (Goss, 2010). The report that the
board created annually is required to include the financial operations of the social security trust
funds over the last year, the expected financial operations of the trust funds for the next five
years, and an analysis of the actuarial status of the program (Goss, 2010). These measures were
put in place to help maintain the long-term goal of solvency for the social security program.
While the original program included benefits for workers employed in commerce and
industry, the act originally excluded domestic and agricultural workers. This legislation
adversely impacted minorities, especially African Americans, who were typically employed in
these professions until amendments in 1950 allowed the inclusion of these groups into the social
security program, along with state and federal employees (Robinson, 2017). Additional
amendments to the program allowed benefits to be paid to spouses and dependent children in
1939, and disabled citizens in 1956 and 1958 (SSA, 1993). These amendments, along with
numerous others over the years have impacted the way social security has been shaped during
the last eighty years.
Today, social security, better known as the OASDI program, covers roughly fifty-nine
million beneficiaries, and provides nearly universal coverage to ninety-six percent of jobs in the
US (Robinson, 2017). Similar to the original legislation in 1935, today the program is funded by
payroll taxes that are monitored by the Federal Insurance and Self-Employment Contribution Act
(FICA and SECA) (Robinson, 2017). Wage earners are subject to an average six percent payroll
tax that is dedicated to social security which is matched by the wage earners employer for a total
of twelve percent in taxes going into the social security program. As of 2015 the highest income
subjected to the social security tax was $118,500, and any income above this value was exempt
from the social security payroll tax (Robinson, 2017). The OASDI program functions as a payas-you-go
system where the funding for the program’s trust fund comes from the earnings of
current wage earners and is used to pay for current beneficiaries (Robinson, 2017).
The Social Security Administration, (SSA) previously known as the Social Security
Board, is the entity that calculates benefits, and oversees the administrative side of the program.
The administration is credited for being very efficient in that it only uses 0.9% of total
expenditures for its’ administrative costs (Puckett, 2010). To help calculate monthly benefits the
SSA uses what is called the ‘average indexed monthly earning’, which is an average of thirtyfive
years of work history. The administration then uses a formula that is applied to this average
to calculate the primary insurance amount (PIA), which gives a baseline for the benefits that the
recipient will receive (Robinson, 2017). A retirement beneficiary can start collecting social
security anywhere from age sixty-two to age seventy. It is in the retiree’s best interest to start
collecting later rather than sooner, because the beneficiary can expect to see up to a 25% increase
in benefits if the retiree chooses to wait to retire sometime after age 62, and the increase in
benefits goes up 32% if they retiree waits to retire until age 70 (Robinson, 2017).
The original goals of the program as mentioned earlier, involved getting immediate
coverage to older and unemployed citizens, maintaining trust fund solvency for future
generations by establishing an administration to oversee earnings, taxes, and benefit
distributions, and a board of trustees to determine financial security of the program in the
following decades. As the program has developed, so have the goals it seeks to achieve. Since
the 1970s, the program has implemented three policy goals it sets to achieve annually for the
coming generations (Biggs, Brown, & Springstead, 2005). The first policy goal is to maintain a
replacement rate, which is the constant ratio between retirement benefits and the average
lifespan. By implementing replacement rate, the program is able to relatively increase benefits as
wage increases in the economy (Biggs et al., 2005). A second policy goal is to maintain a
progressive benefit system where lower wage earners receive relatively more benefits than
higher wage earners. This is accomplished by the use of a non-linear benefit formula that gives a
higher replacement rate to individuals with lower average earning throughout the course of their
life (Biggs et al., 2005). The third policy goal seeks to decrease the likelihood of the system
failing due to fluctuations in unanticipated changes in wage growth. Since benefit and tax levels
are linked to wage growth, the system requires strength to combat economic deviations and
demographic changes (Biggs et al. 2005). In combination, these goals are believed by
administrative and economic professionals working for this program to meet the needs of those
covered under the social security policy.
Policy Analysis
Social security is a program that is intended to function for the next century, and the
future of the program has been under much debate the past few decades. The goals of the policy
exemplify a just and democratic way of legally implementing the nations first federal social insurance policy, however the initial policy could have been more inclusive to minority groups
with the initial signing of the Act in 1935. As mentioned earlier in the policy description,
domestic and agricultural workers were key groups of people excluded from the initial Act,
therefore, while the Act attempted to contribute to greater social equality, it marginalized African
Americans in the US since this was the primary group employed in these excluded professions
(Robinson, 2017). Exclusion from benefits for this group impacted over half of the total African
American population in the US during the 1930s and 1940s. Although these groups were able to
gain admittance into the program via the 1950 amendments, the impacts of being excluded from
the first fifteen years of the Act adversely impacted the African American community and the
effects are still seen today (Robinson, 2017).
The goals of the social security program attempt to help redistribute income for lower
wage earners in a higher proportion than higher wage earners upon retirement, so that lifetime
lower wage earners remain out of poverty when they retire. The monthly benefits distributed
from the policy have helped millions of US citizens stay out of poverty, and maintain a better
quality of life than if the recipient did not have access to social security benefits. However, the
future of the program’s solvency has been under debate for the past few decades due to the
increased number of recipients claiming benefits at a faster rate than the number of workers
paying into the system. The future policy actions that occur within the next decade will impact
how social security is administered in the following years. In order to maintain the goals of the
original and current program, new options must be explored to maintain the solvency of the
OASDI trust funds so that benefits can continue to be distributed to recipients.
If a realistic solution is not achieved within the next decade, the policy goals of social
security will be met with great difficulty, and this will adversely impact millions of current and future Americans. In order to maintain social equality, a standard quality of life, and positive
social relations between the nation and program recipients, there are a few policy changes that
have been discussed to keep the social security program solvent for the next century. According
to the 2009 Board of Trustees Report, the funds of the OASDI program will become insolvent by
2037 if no action taken by the US government (Goss, 2010). Some options for keeping the
program trust funds solvent include increasing taxes, cutting benefits, increasing the minimum
retirement age, eliminating the taxable income maximum, reducing the current COLAs, or using
private or personal savings accounts to accumulate retirement savings.
Most economic professionals predict that a simultaneous increase in payroll taxes and
decrease in benefits will have to occur for period of time to keep social security solvent.
However, some policymakers suggest that this does not have to be the only option to improve the
wealth of the programs trust funds. If the program eliminated the maximum tax cap of $118,500,
so that all wage earners would be subject to the social security tax, this would decrease the social
security funding gap by 86 percent (Hoffman and McKenzie, 2014). This program change, along
with increasing the payroll tax by 0.25 percent, with an employer match equaling 0.5 percent, the
funding gap is eliminated by another 22 percent totaling for an 8 percent increase in overall
revenue for the trust funds (Hoffman and McKenzie, 2014).
The option of raising the national retirement age can bridge the funding gap for the social
security program. If the retirement age is raised starting in 2023 by two months each year until it
reached age 68 could help close the funding gap by 18 percent. The gap elimination increases to
44 percent if the retirement age were raised every two months until age 70 is reached (Hoffman
and McKenzie, 2014). COLAs can be made to close the funding gap of the program as well.
Since the COLA is currently based on the consumer price index (CPI), the readjusted COLA could show changes in spending based on price fluctuations, and therefore reduce benefits by 3
percent after ten years and 8.5 percent by thirty years. This would close the funding gap by 23
percent. However, this would only be effective if an ‘elderly index’ was created to better reflect
the spending patterns of retirees, since the CPI is currently not an accurate predictor of retiree
spending (Hoffman and McKenzie, 2014).
Another major option that has been debated among policymakers and politicians is
moving workers payments into a private or personal account. Private retirement accounts (PRAs)
are accounts that take away a percentage of a worker’s social security tax from the trust fund and
place it into a private account (Hoffman and McKenzie, 2014). In addition to PRAs, the idea of a
new individual retirement account (IRA) has been put forth by some policymakers to give
workers an option for wealth-building, and has the option of giving tax incentives for lower wage
earners (Hoffman and McKenzie, 2014). Both accounts have their flaws, due to most older adult
and lower income groups being less financially literate than groups that have a college education
or are employed in a relevant profession that gives them financial experience. Also, since returns
on investments in these accounts are based on the patterns of the stock market, there is risk
associated with investing in some PRAs and IRAs, without having basic financial literacy skills.
The US may find some solutions to social security insolvency by looking into what other
nations have done to improve their own social insurance. One policy proposal put forth is to base
the future of social security off the Chilean model. The original Chilean social insurance model
worked as a pay-as-you system, and in 1981, Chile moved away from this system to individual
retirement accounts. Under the new system of individual accounts, employer contributions were
eliminated, and the wage earner paid ten percent of their wages into a pension fund (Tully and
Crooks, 2014). The program in Chile is run by financial managers that are in charge of educating citizens about four funds with various levels of risk that citizens can pay into. These funds
include, government bonds, bonds from financial institutions, domestic stocks, and international
securities. Twenty-five years after the shift to individual accounts, Chile has seen accumulated
assets totaling nearly $70 billion (Tully and Crooks, 2014). A long-term US solution that has
been recommended based off the Chilean model has been titled the Secured Transparent
Retirement Account Program (STRAP) (Tully and Crooks, 2014). This policy places emphasis
on the establishment of individual accounts and decreasing the investment risk as the wage
earner becomes older. STRAP would include a government approved savings program where
wage earners and their respective employers each contribute six percent to an individual account
during their career, and the wage earner could begin to withdraw funds from the account starting
at age 62 (Tully and Crooks, 2014).
In conclusion, none of the above proposed policy options are the right or wrong way to
improve the current status of the social security program, but they consistently embody the
values of professional social work, and give the US government realistic options to reflect, and
hopefully act upon.
References
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