Is privatization for Social Security the answer?

First of three parts

Subsequent to the Great Depression of 1929 in the United States, the Roosevelt administration began to look at creating a universal insurance system that would provide benefits to qualified individuals when they officially retired from employment. The concept was well received by the American public because of the economic hardship the Great Depression placed on the workers during the late 1920s and early 1930s.

In 1935, the Social Security Act, which covered workers in commerce and industry, was signed by President Franklin D. Roosevelt and marked the beginning of an era to protect individuals when they move into their “golden years.”

According to the Social Security Reform Center, there are four important principles that underlie the foundation and structure of Social Security. First, the system is work related, i.e., benefit levels for retirees and their families are directly related to earning history and wage level—the higher the contributions, the higher the benefits. Second, benefits are not means tested, i.e., benefits are paid regardless of income from savings, pensions, insurance, or other forms of non-work income. Workers do not have to prove need to receive benefits. Third, the system is considered universal compulsory coverage, i.e., workers may not opt out of the Social Security system. By mandating participation, adverse selection is avoided (adverse selection arises when individuals who draw the most from an insurance system are the very ones who join it). And lastly, any person who meets the legal requirements qualifies for benefits. People have the right to dispute their legal requirements in a court of law.

Social Security is essentially an entitlement program regarding retirement insurance and funded automatically through payroll tax contributions from working Americans and their employers rather than through the traditional federal annual appropriations process. All individuals who meet the legal criteria to be eligible for benefits will receive them from the federal government.

From the time Social Security was signed into law, there have been several amendments made to the original legislation. The changes that were made involved adjustments to ensure the benefits for the recipients of Social Security would be protected. The first major adjustment was the creation of the Federal Insurance Contribution Act two years after Roosevelt signed the SSA into law. The establishment of FICA required workers and employers to pay taxes, i.e., payroll, to support Social Security and keep the system intact. The FICA tax, also known as the Social Security tax, is paid equally by the employee and the employer. The tax is composed of two elements: OASDI (old age, survivor, and disability) and HI (hospital insurance or Medicare). The OASDI portion of the tax is paid on wages up to the maximum covered wage base for the year. The HI portion of the tax is paid on all wages without limit.

Other adjustments that have been made to the Social Security system involved nine payroll tax increases initiated by the U.S. Congress and signed by five Democrat and five Republican presidents. The payroll percentages and when they took place are as follows: 1937—2 percent; 1950—3 percent; 1956—4 percent; 1961—6 percent; 1973—9.2 percent; 1978—9.9 percent; 1983—10.8 percent; 1985—11.4 percent; 1993—12.4 percent; 2004—15.3 percent.

The major amendments to the original legislation included dependents and survivors to be eligible to receive benefits (1939); the inclusion of jobs outside commerce and industry (1950); disability insurance and allowing women to retire at age 62 (1956); men allowed to retire at age 62 (1961); the creation of Cost of Living Adjustment to ensure benefits were indexed to inflation (1972); increase in the COLA to counter inflationary fluctuations in the economy (1986); an increase in taxable benefits for upper income retirees to 85 percent (1993).

During the late 1970s, economists proclaimed that the Social Security system was “actuarially sound” and there were no major issues regarding the system that required adjustments by Congress.

It was during the early 1980s when it became apparent to lawmakers in Washington D.C., that the Social Security system had some serious problems regarding stability and not being actuarially sound. Consequently, the National Commission on Social Security Reform was created. The Commission called for an increase in the self-employment tax; partial taxation of benefits to upper income retirees; expansion of coverage to include federal civilian and non-profit organization employees; an increase in the retirement age from 65 to 67 to commence in 2000. Subsequent to these changes, economists proclaimed that the system had moved back to being “actuarially sound.”

Dr. Jesus D. Camacho
Delano, California