Question

How did the Social Security Act change the way retirement benefits were viewed?

Answer 1

The Social security Act

This Act provided for unemployement insurance,old-age insurance, and means-tested welfare programs. However . the old-age insurance program-the precursor to todays Old-Age,survivors, and Disability Insurance or Social Seccurity program was not designed specifically to deal with economic crisis of that era.

In 1939, amendments added child, spouse, and survivor benefits to the retirement benefits authorized by the 1935 Act. Those amendments also allowed for monthly benefits to begin in 1940.

Although the program was not changed substantially during the war years and the initial postwar period, the 1950s were a transformational decade in the program's history: benefit amounts were increased substantially, coverage under the program became close to universal, and a new disability insurance benefit was offered

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 1937) in covered employment (initially covering only about half the jobs in the country, which were in commerce or industry). Specifically, monthly benefits equaled 1/2 of 1 percent of the first $3,000 of cumulative wages, plus 1/12 of 1 percent of the next $42,000, plus 1/24 of 1 percent of the next $84,000. So, for example, someone who retired in January 1942 (when benefits were scheduled to begin) after earning a total of $6,000 during the 5-year period from 1937 to 1941 would receive a benefit equal to $17.50 a month.

This can be thought of, loosely speaking, as a typical benefit because the average worker at the time earned about $100 a month (which totals $6,000 after 5 years). Thus, although the Social Security Act was enacted in the middle of the Great Depression, it originally envisioned relatively small benefits that were not payable for several years.

Retirement benefits were to be based on average wages, not cumulative wages. Specifically, they equaled 40 percent of the first $50 of average monthly wages in covered employment, plus 10 percent of the next $200 of AMW. This basic benefit was increased by a 1 percent bonus for each year the worker earned at least $200 in covered wages. The monthly retirement benefit equals $26.25 in this case, or 50 percent more than was payable under the original Act. This specific result holds generally for persons reaching retirement in the early years of the program.

The amendments of 1939 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 65. Aged widows (and those caring for dependent children) were eligible for benefits paid at a 75 percent rate.

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.

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 1935, such a worker would have had a small payment (3.5 percent of his small cumulative earnings) issued to his estate. According to the Act of 1939, 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.

In sum, the amendments of 1939 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. In fact, the Advisory Council on Social Security of 1938, whose work led to the 1939 amendments, was created in 1937 at the suggestion of Senator Arthur Vandenberg . 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.