History of the Social Security Act

• Social Security is America’s largest retirement umbrella and provides essential health, life, and disability insurance protection.
• Nearly all segments of society, from the aged to low income to those who have become disabled, are protected by social security benefits.
• Social security benefits along with contributions to self-funded or company-funded retirement plans form the basis of sound retirement planning.

Financial Flashback: Social Security Act

The Social Security Act was signed into law on August 14, 1935, by President Franklin D. Roosevelt. Social Security continues to be a centerpiece of retirement income for most Americans. An estimated 97% of Americans aged 65 or older currently receive Social Security retirement benefits or planning to draw on benefits in a few years, according to the Social Security Administration (SSA).

Additionally, Social Security serves as an important safety net for families by providing death benefits to minor children if the family’s breadwinner passes away or disability benefits to individuals who become severely disabled. The Social Security Act also paved the way for important social benefits decades later, including unemployment insurance and welfare programs.

The benefits offered under the Social Security Act, much like the economic distributions provided during the early days of COVID-19, were catalyzed by a crisis. The Great Depression, which lasted from 1929 to 1933, left millions of people unemployed and caused a significant increase in poverty levels, particularly among the elderly. Programs offered under the Social Security umbrella were created to cushion families against the worst of these impacts.

Social Security Today

The Act’s hallmark ‘old-age’ program continues to stand in its broadened form, the Old-Age, Survivors and Disability Insurance program. Likewise, the assistance provided to the unemployed and vulnerable families following the Great Depression remains through state-administered unemployment insurance programs and the Temporary Assistance for Needy Families program (TANF).

The original Act also provided supplemental, income-based assistance through Supplemental Security Income (SSI) benefits, which is still available today. In addition, health insurance benefits for the aged were contemplated when the Social Security Act was passed, leading to policy research that led to the eventual creation of Medicare benefits for adults aged 65 and older, signed into law in 1960 by President Dwight D. Eisenhower. As a result, the Medicare program, much like Social Security retirement benefits, has become a near-universal benefit anticipated and used by most Americans.

Funding Structure of the Act

Perhaps one of the biggest elements of the Act, still in place today, is its funding structure. The Social Security Act marked a major departure from how social assistance programs were funded at the time. Before the Act, funding for social assistance came from government and charitable contributions. The Act formed the basis of employees financing the social safety net through a dedicated payroll tax, with employers required to match the employee’s contribution amount. 

Today’s payroll tax stands at 6.2% tax, applied to salaries up to a maximum $142,000. Thus, if an employee earns $100,000 per year, 6.2 percent or $6,200 is deducted from the employee’s paycheck and paid into Social Security. The employer must match this amount with a payment of $6,200 into the Social Security fund. Self-employed workers pay the employee and employer portions, totaling a payroll tax deduction of 12.4 percent.

Top Four Benefits of Social Security

Social Security offers several benefits to individuals and families of all ages and income levels. Below are four of the biggest benefits of the Social Security safety net.

Disability and Life Insurance Protection

Retirement income is usually one of the first benefits that come to mind with Social Security. And indeed, older adults are its biggest beneficiaries, comprising 80 percent of all recipients, or 52 million people. But the other 20 percent or ten million people are recipients of Social Security Disability Insurance (SSDI) and surviving children of deceased workers. Life insurance and disability insurance protection are funded by the payroll tax deductions that are paid. 

According to the SSA, the value of the life insurance benefits for a young employee who is married, has two children, and earns an average salary, amounts to $800,000. The Social Security Administration also estimates that roughly 90 percent of employees who are 21 to 64 years old are covered for a severe disability through the disability insurance component of Social Security insurance.

Social Security Benefits Rise with Inflation

The full retirement age for those born in 1960 or later is 67 years old. At that age, if you have worked at least ten years during your work life and meet other eligibility criteria, you are entitled to receive your full social security benefit. But whether you’re receiving this benefit now or are calculating how much you will receive once you get there, inflation is surely a factor in your consideration. 

Fortunately, Social Security was designed with inflation in mind by providing an annual cost of living adjustment. While the cost of living adjustment is usually somewhat less than the inflation rate, it bridges a portion of the shortfall from rising prices (as an example, Social Security benefits were increased by 5.9 percent in January 2022. However, as of the end of April 2022, the inflation rate was estimated at 7 percent).

Social Security Plays an Important Role in Reducing Poverty Among Children and the Elderly

Social Security benefits help lift children and the elderly out of poverty. According to an analysis from SSA, some 6.5 million children aged 18 or younger would not receive benefits without Social Security benefits. Likewise, 40 percent of the elderly, aged 65 and older, would live below the poverty line. And, for one in four older adults, 90 percent of the income they rely on for daily living comes from Social Security.

Image Credit: Shutterstock.com / UNITED STATES OF AMERICA - CIRCA 1985: A stamp printed in the USA dedicated to the social security act, circa 1985

While Social Security plays an important role in retirement, Social Security benefits are modest, totaling only $1,614 a month, or $19,370 a year as of January 2022. As such, saving for retirement through contributions to company-sponsored retirement plans where available and through mutual funds and income-producing real estate investments should remain a central plank of wealth-building.

Social Security is a Vital Source of Income for People of Color and Women

The Federal Reserve estimates that Black and Latino families earn half as much as white families and that the net worth of Black and Latino families is only 15 percent to 20 percent of white families’ net worth. One consequence of this wealth disparity is that people of color face a higher poverty rate during their employment years and when retired, leading Social Security income to play an outsized role.

Poverty levels for older adults in the Black and Latino community are approximately 2.5 the incidence of poverty among white seniors. While many factors are causing the wealth gap to extend into the retirement years of older adults of color, from low-paying jobs to jobs offering no retirement benefits, it underscores the need to increase education and retirement contributions, even at small levels, in these communities.

The pay rates for women are traditionally lower than those of men. Additionally, family obligations often cause women to take more time out of the workforce, lowering Social Security contributions. Couple that with women usually living longer than men, and these factors add up to a smaller retirement income having to be stretched over many more years for women.

The Money Wrap Up

Social Security plays a vital role in the lives of nearly all Americans. However, like many government programs, funding is stretched and often subject to politics. Therefore, it is critical to engage in policy dialogue regarding these programs and incorporate personal savings in your retirement planning.