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Social Welfare Policy



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Social Welfare Policy

In Chart 1, a timeline of key milestones in the history of the Social Security program is presented with an overview of selected program changes and demographic events, from the start of the program in up through The original Social Security Act of was amended even before the program became truly operational, but some of the principles embodied in the Act still underlie the program today. In addition, the fundamental changes made by the amendments in are, to a surprising degree, reflective of current policy debates regarding Social Security. The original Act provided for monthly retirement benefits, payable to persons 65 and older who were no longer working.

The benefit formula was based on cumulative wages earned since in covered employment initially covering only about half the jobs in the country, which were in commerce or industry. This preceding benefit formula never became operational because of the amendments of Nevertheless, it does embody two important principles that still guide benefit payments today: benefits depend on work in covered employment, and benefits replace a higher proportion of earnings for low earners.

The amendments made a seemingly subtle but, in reality, a fundamental change to the benefit formula. Retirement benefits were to be based on average wages, not cumulative wages. This specific result more generous benefits holds generally for persons reaching retirement in the early years of the program. However, because policymakers desired to make the amendments of cost neutral over the long term, the reverse is true for those who reached retirement after the Social Security program had matured.

In sum, with regard to retirement benefits, the amendments of shifted benefit amounts to early participants in the program and away from later participants. Retirement benefits, under the Act, were to be paid only if the individual was no longer engaged in regular employment. Changes to the earnings test are an important policy theme in Social Security's history. In fact, in , the retirement earnings test was completely repealed for beneficiaries older than the currently defined full retirement age. In , the amendments to the Act also ended what some have called the "money-back guarantee" provision. Under the Act of , a lump sum equal to 3. For persons who did receive retirement benefits, the lump sum paid to their estates upon death was equal to 3.

Because payroll taxes on the employee, under the Act, were not scheduled to rise above 3 percent of wages, the provision guaranteed that all workers in covered employment or their estates would, at minimum, have their payroll taxes refunded to them. The amendments of also ushered in one of the most fundamental developments in the program's history, namely, the creation of dependent benefits and survivor benefits. A wife of a retired worker was eligible for a 50 percent benefit, provided she was at least Aged widows and those caring for dependent children were eligible for benefits paid at a 75 percent rate. Spouse and survivor benefits were not available to men until later in the program's history.

Dependent children of retired or deceased workers received a 50 percent benefit. The addition of these benefits, coupled with the switch from benefit computations based on cumulative wages to those based on average wages, reinforced the insurance principles of the program and downplayed a savings or money-back approach. In fact, the specific money-back guarantee provision was replaced with a smaller lump-sum death payment to some survivors. Consider a worker who died at a relatively young age and, because of that, had small cumulative wages under Social Security. Under the Act of , such a worker would have had a small payment 3. According to the Act of , monthly benefit amounts could be paid to members of his family for many years on the basis of his average monthly earnings, not on his relatively short cumulative earnings history.

Beginning in , the tax was scheduled to increase, reaching an ultimate rate in of 3 percent each on workers and employers or a 6 percent combined rate. Because benefits were not scheduled to begin until , the program was scheduled to build up a sizable reserve in the early years. The amendments of delayed the scheduled tax increases, and subsequent legislation further deferred them, with the result being that the 1 percent rate continued to be applied until Again, though, the Act set a basic framework for today's Social Security program, whereby benefits are largely financed by payroll taxes assessed equally on employees and employers.

In sum, the amendments of shifted benefits toward early participants and away from later participants in the Social Security program, the structure of benefits toward families rather than toward individuals, the focus of Social Security on insurance rather than on savings, and additional payroll taxes into the future. All of these changes would have important effects on the development of the program.

The shift in benefits to early participants, when coupled with delays in tax increases, prevented the buildup of a large reserve fund, which was a key goal of some policymakers. Vandenberg had a number of concerns regarding the large reserve funds that were being built up as a result of the original Social Security Act, one of which was that the government would not truly "save" the reserves but rather use them to finance spending on other federal initiatives. The family benefit expansions were a priority of the Roosevelt administration and Social Security board chairman Arthur Altmeyer and led to protections for a number of economically vulnerable individuals. For example, since , the Social Security program has awarded benefits to more than 41 million children, approximately half of whom have received benefits as a result of a parent's death.

Approximately 25 million widow er s have been awarded benefits. Many reform plans from a variety of political viewpoints call for increasing benefits paid to aged widow er s. The provision of family benefits, however, weakened the connection between contributions and benefits. For example, providing spouse or survivor benefits to persons who have not worked or paid taxes has generated considerable attention, in particular, with regard to how working women are treated relative to those who spend time out of the workforce to care for children or other family members. The effort to shift benefits to early participants in the program and away from later participants was done for economic, distributional, and political reasons.

Under the Act of , Social Security benefits in the early years were projected, in many cases, to be quite low—often below amounts payable under some state old-age assistance programs. In addition, concerns about the overall economy in which had slipped back into recession between and no doubt made policymakers reluctant to limit domestic spending or to implement scheduled tax increases. Finally, there was probably substantial political appeal to shifting benefits to the early years and postponing tax increases. In any event, this approach and, perhaps more importantly, other changes made later created a situation in which Social Security was a very good deal for participants in the start-up phase of the program but less so for future retirees.

The debate over whether the program should build up a large reserve or trust fund to pay future benefits continued in the s. As previously discussed, the Act of was partly a result of Senator Vandenberg's explicit efforts to reduce the buildup of reserves. However, the robust wartime economy of the s led to higher-than-expected payroll tax revenues and fewer-than-expected retirement claims, resulting in an accelerated trust fund buildup relative to projections.

The congressional response to the acceleration of the reserve buildup was to prevent the scheduled increases in the payroll tax from taking effect. As a result, by the end of the s, the payroll tax still stood at the 2 percent combined rate. Although the Roosevelt administration agreed to the revisions of the tax schedule in the amendments of , it generally opposed the payroll tax freezes that occurred during the s Schieber and Shoven Indeed, President Roosevelt vetoed the legislation in that prevented a scheduled tax increase from taking effect, but the veto was overridden in Congress.

The Roosevelt administration argued that it was inappropriate to leave future administrations and Congresses with large benefit liabilities once the program matured and a limited reserve fund. However, a coalition of lawmakers who were opposed to reserve funding and tax increases prevailed. The paradox of the s is that the robust economy led to a substantial buildup of reserves even at the 2 percent combined payroll tax rate but that proponents of the reserve approach to financing lost the political argument over tax increases. As a result, debates about reserve funding died down until the amendments of and , and the Social Security program operated for many years as if it were approximately following a pay-as-you-go, or pay-go , approach to funding benefits.

One of the most striking facts about Social Security on the eve of its 15th anniversary was its relatively small size. In , the means-tested old-age assistance programs administered by the states actually had twice as many beneficiaries as did Social Security's retirement program and, further, typically paid higher benefits Schieber and Shoven , Some proponents of the Social Security program feared that the not yet mature system would be replaced by an expanded means-tested program or a noncontributory Townsend-like plan Ball By the end of the s, however, the system had been transformed through a series of amendments to the Social Security Act. At the end of the decade, the system had become much closer to being universal.

In , 61 percent of civilian workers were in jobs covered by Social Security, but by , the figure exceeded 86 percent Committee on Ways and Means , In addition, by decade's end, the Social Security program was paying much higher benefits and had added a new Disability Insurance DI component. The amendments of brought 9 million workers into covered employment Christgau , including regularly employed farm and domestic workers and, with some exceptions, self-employed persons. These new workers would generally not have much in the way of covered earnings from to Except for those just beginning their careers, newly covered workers would thus receive low retirement benefits.

A "new start" formula was instituted that allowed the computation of benefits on the basis of average monthly wages after if that yielded higher benefits. Similar to the amendments, this policy reflected a choice by policymakers to award adequate retirement benefits to persons who may have worked and paid taxes in covered employment for only a short period of time. The s also witnessed the beginning of increases to various amounts specified early in the program's history.

The cost of living had increased 72 percent during the decade of the s Christgau , but the benefit formula remained unchanged. In , the first general benefit increase in the program's history occurred, which averaged 77 percent Table 1. General benefit increases legislated in , , and further increased benefits by Although these benefit increases were ad hoc, they set the stage for the automatic inflation adjustments applied to benefits today. In a pay-go framework, benefit increases require increases in payroll tax revenue. The taxable maximum also referred to as the wage base , which is the maximum level of annual earnings to which the payroll tax is applied, rose by 60 percent during the s, and the combined payroll tax rate climbed from 2.

The payroll tax increase in was to fund the new Disability Insurance program. Initially, to hold down costs, disabled-worker benefits were limited to persons between the ages of 50 and 64 and were received by a relatively small number of persons around , in Today, disabled workers can be of any age under the full retirement age , and they number more than 5.

Another change in the benefit structure, although affecting relatively small numbers of beneficiaries initially, occurred in the s and set an important precedent. Women but not men were allowed to receive actuarially reduced retirement benefits as early as the age of The s witnessed several changes to the Social Security program, but, in a sense, they followed the path laid out by the amendments of the s. By the end of the decade, benefit levels had been increased twice 7 percent in and 13 percent in , the combined payroll tax had reached 8. Finally, men were allowed to claim actuarially reduced retirement benefits at the age of 62, and the disability program was expanded to all ages under Of course, the largest change in social insurance occurred not in the cash benefit programs, such as Social Security, but rather in the area of health insurance: the Medicare program was initiated in The s were a watershed decade in program history.

Benefit increases legislated by Congress accelerated sharply in the early s, which when combined with difficult economic conditions and a fully mature Social Security program caused concern about the program's financial status. These concerns culminated in the first large-scale legislative efforts to control program size the amendments of From that point forward, Social Security debates have no longer focused on expanding the program on a large scale but rather on limiting program growth or finding additional sources of revenue. General benefits increased by 15 percent in January and by 10 percent in January Legislation in provided another 20 percent increase in benefits.

A separate piece of legislation enacted that year increased the basic benefit rate for aged widow er s from In addition, in , policymakers created a special minimum benefit, which was designed to help long-term, low-earning workers. A regular minimum benefit already existed and had since the program's beginning , but it was often paid to workers who had short careers in covered employment rather than to workers who had low annual earnings.

Legislation in froze the amount of the regular minimum benefit, and, 4 years later, it was abolished for newly eligible beneficiaries. The special minimum benefit continues to this day, although it affects a small and declining number of beneficiaries. It is important in a policy sense, however, because many current Social Security reform proposals have specific provisions that would increase benefits for low lifetime earners. Although a 20 percent general benefit increase was paid in , legislation in that year also incorporated provisions that would replace ad hoc increases with automatic adjustments based on price growth. Support for automatically linking benefit increases to inflation was provided by a variety of policymakers, including those who feared that the ad hoc approach led to a "political bidding up" of benefit levels Myers , The legislation also called for adjusting taxable maximum amounts automatically on the basis of wage growth.

As it turned out, the technical approach to automatically adjusting benefit amounts was flawed, which provided successive cohorts of retirees with rapidly increasing benefit amounts. The flawed method was corrected by the amendments of , but individuals eligible for benefits before were allowed to keep the windfall benefits, and those workers retiring as late as were partially protected under transitional guarantees. Program costs as a percentage of gross domestic product GDP peaked in at about 5 percent. To put this in perspective, program costs as a percentage of GDP are projected to rise by about 2 percentage points during the next 25 years Board of Trustees , Table VI.

F5 —a period that covers the retirement of the large baby-boom generation. When discussing program expansion, it is worth mentioning the creation of the federal Supplemental Security Income program in This program replaced the means-tested old-age assistance programs that originated with the Social Security Act of as well as the assistance programs for the disabled that occurred after In , 4. Thus, the Social Security expansions begun in the s along with the natural maturing of the program ended any debate over whether income security for the elderly and disabled would primarily be handled through means-tested programs. By the end of the s, and in reversal of the situation in , means-tested programs for these groups had been eclipsed by a far more muscular Social Security program.

Nevertheless, means-tested programs still serve an important role: they supplement the contributory social insurance programs by providing a minimum floor of income. The last major amendments to the Social Security Act occurred in The trust fund buildup has reignited debates, not heard since the s, about reserve funding. The amendments of , to a large extent, followed the recommendation of the National Commission on Social Security Reform commonly known as the Greenspan Commission after its chairman Alan Greenspan.

The difficulties that led to the creation of the Greenspan Commission were economic in nature and largely unforeseen. Following the amendments of , forecasts indicated that the system would be characterized by marginally adequate funds in the near term and surpluses in the s and early 21st century. The economic conditions of the late s and early s exposed the near-term vulnerabilities of the amendments of Myers This period was characterized by higher-than-expected inflation which increased benefit payments and lower-than-expected wages which lowered payroll tax receipts. At the time of the Greenspan Commission, projections indicated that, by July , revenues and trust fund assets would be insufficient to make benefit payments National Commission on Social Security Reform , Appendix J.

It recommended and Congress adopted extending coverage to newly hired federal workers, subjecting a portion of Social Security benefits to income taxation and dedicating the revenue to the trust fund , accelerating scheduled increases in the payroll tax rate, and delaying cost-of-living adjustments from June until December of each year. The commission concluded that, even without changes, the program would begin to run surpluses starting in the s. The commission's recommendations, however, augmented those surpluses substantially. Finally, the commission discussed, but could not reach a consensus on, how to deal with long-range fiscal problems associated with the baby-boom generation. Some members supported an increase in the full retirement age under Social Security, while others supported future tax increases.

Ultimately, Congress adopted a phased-in increase in the full retirement age beginning in The surpluses are invested in and the trust fund holds special-issue Treasury bonds. Echoing some of the debate in the early years of the program, considerable discussion has centered on whether the government truly saves the current Social Security surpluses. The trust funds are clearly assets to the Social Security program and provide the legal authority to pay benefits once expenditures outstrip revenues, but debate remains concerning the economic significance of the surpluses.

If, on the one hand, the surpluses have reduced government borrowing from the public, they can be linked to more funds available for private investment thereby spurring economic growth and, in addition, less public debt. Both outcomes put the government in a better position to deal with the retirement of the baby boomers, and thus, under this line of thought, the surpluses are saved. If, on the other hand, Congress reacts to the presence of the surpluses by spending more or taxing less than it would otherwise do, the surpluses do not reduce public borrowing and are not truly saved.

Schieber and Shoven , argue that it is unlikely that the surpluses are fully saved, even when one accounts for the additional possibility that government has spent some of the surpluses on public investments such as roads, education, and so on. The authors suggest that "maybe half, at best" of the surpluses represent savings in an economic sense. They acknowledge, however, that it is difficult to answer the question definitively. Thus, in the policy and research communities, a wide range of views on the topic exist.

An interesting side note to the debate over the surpluses concerns the initial and subsequent intent of policymakers. There is evidence that policymakers in did not discuss the trust fund accumulation in terms of the saving argument just outlined. Rather, to the extent that surpluses were considered, they may have been seen as safeguards from having to fix the program again in the near term. Policymakers were most likely stung by criticism in that the system needed an overhaul just 6 years after the amendments of The extent to which the Social Security surpluses increase national or aggregate saving is still an important if unresolved issue in the reform debate.

Although relatively minor in the context of the overall program, the recent period has seen consistent policy action in one area: changes to Social Security's retirement earnings test RET. As noted earlier, the RET was initially an all-or-nothing feature that is, regular employment precluded benefit payment , which was applied at all ages. Over time, its features were liberalized, especially for older beneficiaries. The reasons for the liberalizations are many, but policymakers have shown a sustained concern over the long-run decline in labor force activity of older persons.

In , Congress sharply increased the exempt amounts for those at or above the full retirement age, and in , it completely eliminated the test for this group. Broadly, the history of the program can be divided into two periods: an expansionary period lasting approximately 40 years, which was followed by a period in which fiscal concerns were predominant. The original Act provided only for retired-worker benefits; today, benefits are payable to family members and divorced spouses. Further, Social Security originally covered only workers in commerce and industry about half the workforce at the time , whereas more than 95 percent of jobs are now covered under the program.

Benefit levels, which in the early years were often below amounts payable under old-age assistance programs administered by the states, have risen dramatically. Before the s, benefit payments were well under 1 percent of GDP , but thereafter they expanded rapidly. As a percentage of GDP , benefit payments peaked in at about 5 percent and now stand at 4. By , Social Security's claim on the economy is expected to rise to 6. In , about 1 in 50 Americans received Social Security; currently, 1 in 6 does. After , the number of beneficiaries relative to the total population begins to level off, however Chart 3.

Some authors have argued that the system reached maturity in the s because the percentage of elderly receiving benefits about 90 percent matched the percentage of workers in covered employment Schieber and Shoven , 94— Although the system has become larger and more expensive, Social Security growth has very likely affected the incidence of poverty among the elderly. The poverty rate among the elderly has fallen from It has been on par with that of the working-age population since the early s and below the rate for children since the mids Chart 4. The poverty rate of the working-age population has not exhibited a strong trend since the mids, and today's poverty rate for that group Replacement rates—the percentage of earnings replaced by benefits—rose through but have stabilized below peak values as a result of the amendments of Chart 5.

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