OLD AGE, SURVIVORS INSURANCE PROGRAM (OASI) 1935: SOCIAL SECURITY

By John E. Hansan, Ph.D.

Background: Social security is the term commonly used to describe the Old Age, Survivors Insurance program (OASI) created by Title II of the Social Security Act of 1935. The original OASDI legislation was developed as one part of the federal response to the economic vulnerabilities of workers and their families revealed by the Great Depression of the 1930s. The Social Security Act of 1935 also created a nationwide system of Unemployment Insurance (Title III) and Public Welfare with a system of federal/state administered cash assistance programs for the needy Aged (Title I), the Blind (Title X), and Dependent Children (Title IV).

To fully understand the purpose and nature of the original OASI legislation, it is important to note that in the 1930s, the predominant social mores and values of the era viewed only “white men” as workers. When the legislation was being shaped, the nation’s unemployment rate was 25 percent. Regardless of how social security is perceived today, it is essential to remember that in 1935, OASI was specifically designed to remove older people from the workforce, not keep them in it.

Structure: OASI was designed as a “universal contributory social insurance” program to protect workers and their families against loss of income due to retirement or death of the wage earner. To be eligible for social security, a person must work in covered employment and pay Federal Insurance Contributions Act (FICA) taxes for at least 10 years (40 quarters). Until 1950, Social security covered only employees in manufacturing and commerce. Government employees, public school employees, farmers and domestic workers and others were excluded. As a result, the vast majority of women and minorities were not eligible to participate in the program from the beginning, leaving them fewer years with which to build up their benefit levels.)

Basic Principles of Social Security Insurance: There are a number of basic principles underlying the structure of our social security system:

The system is work related — Benefit levels for retirees and their families are related to earning history and wage levels. Those who make higher contributions receive higher benefits on retirement.

Benefits are not means-tested — Benefits are paid regardless of an individual’s income from saving, pensions, insurance, or other forms of non-work income. Workers do not have to prove financial need to receive benefits.

Universal compulsory coverage — Workers may not opt out of the social security system. By mandating participation, adverse selection is avoided.

Law defines benefits — Any person who meets the legal requirements qualifies for benefits. Disagreements may be taken to court.

YEARS IN WHICH MAJOR CHANGES WERE MADE TO SOCIAL SECURITY

1935 – The Social Security Act signed by President Franklin 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%.

(Note: An excellent source for the full history of the Social Security Act of 1935 and its several titles can be found at: http://www.ssa.gov/history/ )