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History of Social Security

1935 - The Social Security Act, which covered workers in commerce and industry, was signed by President Roosevelt.

1937 - The Federal Insurance Contribution Act (FICA) required workers to pay taxes to support the Social Security system. Payroll taxes were 2%.

1939 - Social Security was expanded to cover dependents and survivors. Payroll taxes were 2%.

1950 - Coverage was expanded to job outside of commerce and industry, and benefit levels were increased. Payroll taxes were 3%.

1956 - Disability Insurance was created, and expanded over the following years. Early retirement at age 62 for women was permitted. Payroll taxes were 4%.

1961 - Early retirement at age 62 for men was permitted. Payroll taxes were 6%.

1972 - Automatic cost-of-living-adjustments (COLAs), which index benefits to inflation, were introduced. The formula to calculate increases initially overstated inflation by 25%, and people born between 1910 and 1916 received an unintended windfall. Payroll taxes were 9.2%.

1977 - The mistake in the benefit formula was corrected. The "notch" refers to the difference in benefits paid to the group that received the windfall and those who retired following the formula correction. Social Security was thought to be actuarially sound. Payroll taxes were 9.9%.

1983 - The National Commission on Social Security Reform was created in response to the actuarial unsoundness of the system. The commission called for 1) and increase in the self-employment tax; 2) partial taxation of benefits to upper income retirees; 3) expansion of coverage to include federal civilian and nonprofit organization employees; and 4) an increase in the retirement age from 65 to 67, to be enacted gradually starting in 2000. Again, Social Security was declared actuarially sound. Payroll taxes were 10.8%.

1985 - The Social Security Trust Funds were moved "off-budget" so that the funds earmarked for the Social Security system would be tracked separately from the rest of the budget. Payroll taxes were 11.4%.

1986 - COLAs were increased to respond to minor levels of inflation. Payroll taxes were 11.4%.

1993 - The amount of taxable benefits for upper income retirees was increased to 85%. Payroll taxes were 12.4%.

1996 - The Social Security Trustees' Report stated that the Social Security system would start to run deficits in 2012, and the trust funds would be exhausted by 2029. All members of the Advisory Panel agreed that some or all of Social Security's funds should be invested in the private sector. To keep the unchanged system actuarially sound, payroll taxes would have to be increased 50%, to 18% of payroll, or benefits would have to be slashed by 30%.

1997 - All members of the presidentially-appointed Social Security Advisory Panel agreed that some or all of Social Security's funds should be invested in the private sector. To keep the unchanged system actuarially sound, payroll taxes would have to be increased 50%, to 18% of payroll, or benefits would have to be slashed by 30%."

1999 - The Social Security Trustees' Report stated the Social Security Retirement System's unfunded liability increased by $752 billion since the 1998 Trustee Report was published. This brings the total long-term unfunded liability to more than $19 trillion.


The Facts

Created in 1935, Social Security has helped to protect millions of workers from poverty in their senior years, but demographic realities have changed over the past 70 years and are still changing. If Social Security doesn't change with them, the system will be unable to meet its promises to tomorrow's retirees and will burden the next generations, our children and grandchildren, with backbreaking taxes.

President Bush would let Americans save some of their Social Security taxes in personal retirement accounts (PRAs) that they own and that Congress can never legislate away. PRAs would strengthen Social Security by helping all Americans to increase their retirement income and pass on a nest egg to build a better economic future for their families.

Is Social Security in crisis? 

Social Security's financing is certainly in dire straights. The amount promised in benefits is far more than the system can afford to pay. In 2017--just 12 years from now--Social Security will pay out more money than it takes in. This difference will have to be made up by dipping into other government spending, raising taxes, or cutting benefits. Over the next 75 years, Social Security faces a $27 trillion shortfall.

The real crisis is that Social Security's high taxes prevent too many families from accumulating savings. Just as bad, the return that most workers get on the money they pay into Social Security is abysmal. Raising taxes to fund Social Security--which some propose as an alternative to real reform--would just make this savings crisis worse.

But won't the Trust Fund pay for benefits? 

No. Tomorrow's workers will pay for tomorrow's benefits because Social Security is a pay-as-you-go program.

There is no money in Social Security's Trust Fund. For years, Social Security has taken in more money than it has paid out; but instead of saving these surpluses, the government spends them and writes the Trust Fund an IOU, a special-issue government bond. When Social Security cashes in these IOUs to pay benefits, starting in 2017, the money still has to come from somewhere--cutting other spending, raising taxes, or slashing benefits. Remember, this starts in just 12 years. Personal accounts directly address the trust fund problem. The government can tap into the Trust Fund today when it needs money, but it would not be able to take money from worker's own personal accounts.

Can we fix Social Security by making small changes to the current system? 

No. Social Security's shortfall is so big that small changes don't cut it. Some say, for example, that we should raise payroll taxes just enough to make the system solvent, but this would have a major impact on average workers' household budgets and would cost hundreds of thousands of jobs, slow the economy, and take a bite out of household savings. Even worse, because of the way the Trust Fund works, higher taxes probably wouldn't fix the problem and wouldn't take future tax hikes off the table.

Would rolling back the Bush tax cuts fix Social Security? 

No. Repealing the Bush tax cuts would do nothing to address Social Security's costs, which are set to explode in coming years. The Bush tax cuts spurred job creation, which increased payroll tax revenues, thereby delaying the date that Social Security's cash flow goes negative and the Trust Fund runs dry. They actually improved Social Security's long-term balance sheet. Repeal would make things worse.

Does reform mean lower benefits? 

No. A reform plan that creates personal retirement accounts could actually pay more in benefits than today's Social Security. Under the current system, benefits are not guaranteed and, according to the program's trustees, will be cut by 27 percent in 2041, when the Trust Fund runs dry. That's what happens under current law if we do nothing.

There are two parts to Social Security reform. First, reform should bring benefits in line with what the system can afford to pay. Second, personal retirement accounts would allow younger workers to enjoy benefits in retirement that are greater than today's Social Security will be able to pay in 2042 and beyond. PRAs would also give low- and middle-income workers a chance to build nest eggs to pass on to their children or grandchildren.

Are personal accounts risky for inexperienced investors? 

No. Under the President's plan, account holders could choose from among several safe investment choices, such as a broad stock and bond funds. Accounts would be invested automatically in a lifespan fund unless a worker expressly asked to choose among funds. Lifespan funds adjust a worker's investments as he or she ages. For younger workers, a lifespan fund would invest primarily in stock index funds. As these workers grow older, their lifespan funds would gradually and automatically shift more money into bonds. In short, lifespan funds allow younger workers to take advantage of the higher returns that stock investments offer while ensuring that the portfolio gets safer as the worker gets closer to retirement.

Would reform cut current retirees' benefits or the benefits of those near retirement? 

No. The President has said that current retirees' benefits would be untouched. Social Security has enough money now to pay for current retirees' benefits, and most reform proponents agree that it wouldn't be fair to change the benefits of those who depend on Social Security or are near retirement.

Can we really afford personal accounts? 

Yes. In terms of finance, the costs of doing nothing are far higher. Transition costs are like refinancing your mortgage—paying an upfront cost to save money in the long run. Setting up personal accounts could cost a few trillion dollars—a lot of money but still far less than Social Security's expected $27 trillion shortfall, which reform would wipe out. Every year that reform is delayed increases the cost of fixing Social Security's finances.

In terms of Social Security's savings crisis, we can't afford not to act. Too many Americans are unable to put money aside for their future and their families after paying Social Security taxes. Giving low- and middle-income workers the chance to build nest eggs and accumulate savings in their communities is too valuable to pass up.

Back in 1950, as the baby boom was just getting started, each retiree's benefit was divided among 16 workers. Taxes could be kept low. Today, that number has dropped to 3.3 workers per retiree, and by 2025, it will reach--and remain at--about two workers per retiree. Each married couple will have to pay, in addition to their own family's expenses, Social Security retirement benefits for one retiree. In order to pay promised benefits, either taxes of some kind must rise or other government services must be cut.

This future is coming with steady speed. Social Security's annual cash surpluses will begin to fall in 2008, the same year that the first baby boomers reach early retirement age. Over roughly the next 10 years, those Social Security surpluses, about $100 billion a year at their peak, will continue to shrink and then disappear completely. Without those surpluses to reduce the size of the federal deficit, Congress will have to raise taxes to bring in billions of dollars of new revenues, cut programs, or let annual deficits climb.

And then the real problems hit. Somewhere around 2017, on top of replacing Social Security's $100 billion annual surplus, Congress will have to find billions more so that Social Security can pay all of the benefits that it has promised. Within about five years, that additional money will reach $100 billion a year (not counting inflation). From there, the annual demands will reach first $200 billion a year, and soon $300 billion a year.

Then there is Medicare. Together, Social Security and Medicare will consume an estimated 60 percent of income taxes collected by 2040. What's left would have to finance the entire rest of the government.

Without reform, Social Security's future is inevitable, like it or not. We can either prepare now, or dither about what year it will happen.

Other facts about the origin and implementation for the social Security acts and influences can be found at: