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The Design of the Original Social Security Act

The new social insurance program the Committee on Economic Security (CES) was designing in 1934 was different than welfare in that it was a contributory program in which workers and their employers paid for the cost of the benefits--with the government's role being that of the fund's administrator, rather than its payer. This was very important to President Roosevelt who signaled early on that he did not want the federal government to subsidize the program--that it was to be "self-supporting." He would eventually observe: "If I have anything to say about it, it will always be contributed, both on the part of the employer and the employee, on a sound actuarial basis. It means no money out of the Treasury."

But some members of the CES did not understand "self-supporting" with quite the same purity as the President did. They saw no reason why general revenues could not be used-- especially in the context of the overall approach to old-age security. FDR, and the members of the CES, believed that old-age assistance was a temporary stop-gap which would eventually completely disappear as social insurance became established. At a November 27, 1934 meeting the staff displayed a large wall-chart showing two trend lines, one for old-age assistance and one for the social insurance program. The line for old-age assistance was heading down while that for social insurance was heading up. At the point where they intersected, social insurance would have assumed the bulk of the burden of providing old-age security in America. Thus, general revenue expenses for old-age assistance would steadily diminish, thanks to Social Security. The staff reasoned that it was sensible to take a portion of this savings and use it to finance the Social Security program in the out-years--thus keeping payroll tax rates lower than they otherwise would have to be. Using this rationale, the CES proposal presented to FDR contained a tax schedule which financed the program by payroll taxes until 1965, at which point a general revenue subsidy would kick-in. Eventually, under the CES plan, general revenues would finance about one-third of the cost of the benefits.

The Committee's report was late. It was due to Congress on January 1, 1935 but it was not finished and presented to the President until January 15th. Immediately upon receiving the report the President sent notice to Congress that he would be transmitting the report to them on the 17th, then he sat down to read the report. FDR very carefully went over the actuarial tables and discovered to his surprise that the program was not fully "self- supporting" as he had directed it should be. He summoned Secretary Perkins to the White House on the afternoon of the 16th to tell her that there must be some mistake in the actuarial tables because they showed a large federal subsidy beginning in 1965. When informed that this was no mistake, the President made it clear it was indeed a mistake, although of a different kind! He told the Secretary to get to work immediately to devise a fully self-sustaining old age insurance system. The report was transmitted to the Congress on the 17th as the President had promised, but the actuarial table in question was withdrawn until it could be reworked. Bob Myers, later to be SSA's Chief Actuary, was given the assignment to rework the financing and the system finally devised projected a $47 billion surplus by 1980--with no general revenue financing.


The Beginning of Small General Revenue Subsidies

And so, Social Security was from its first day of operation a fully self-supporting program, without any general revenue funding. But FDR's sense of purity was ultimately left behind when Congress voted the first subsidy provisions to be added to Social Security. Ever since World War II it was recognized that there was a problem for people who entered the service of their country in the military. Immediately following World War II Congress passed a brief change to Social Security which provided some small general revenues to pay benefits to WWII veterans who had become disabled in the years immediately following the War and who did not qualify for a veterans benefit. From 1947-1951 a total of $16 million was transferred into the Trust Funds for this purpose.

Since military wages were not covered employment until 1957, spending several years in the military would result in reduced Social Security benefits. Even after military service became a form of covered employment, the low cash wages paid to servicemen and women meant that military service was also a financial sacrifice. As a special benefit for members of the armed forces the Congress decided to grant special non-contributory wage credits for military service before 1957 and special deemed military wage credits to boost the amounts of credited contributions for service after 1956. These credits were paid out of general revenues as a subsidy to military personnel. So, each year since 1966 the Social Security Trust Funds have in fact received some relatively small transfers from the general revenues as bonuses for military personnel.

In 1965-66 Congress also identified another "disadvantaged" group: elderly individuals (age 72 before 1971) who had not been able to work long enough under Social Security to become insured for a benefit. People in this group were granted special Social Security benefits paid for entirely by the general revenues of the Treasury. These were known as Special Age 72, or Prouty, benefits. Over time, of course, these beneficiaries will disappear as Father Time claims members of the group.

Finally, as part of the 1983 Amendments, Social Security benefits became subject to federal income taxes for the first time, and the monies generated by this taxation are returned to the Trust Funds from general revenues--the third and last source of general revenue financing of Social Security.

All three of these general revenue streams are so small relative to the payroll tax funding that for most practical purposes we could still accurately describe the Social Security program as "self-supporting."

(Table 1 shows the full extent of general revenue contributions to Social Security over the years for the purposes described above.)

Table 1: General Revenue Financing of Social Security

Calendar Year

$ Amount (in millions)

Percentage of Total Trust Fund Income

1947
1948
1949
1950
1951

1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996

1
3
4
4
4

94
94
414
458
465
538
526
494
499
515
717
741
757
675
670
843
844
6,662
105
3,220
160
55
43
34
-2,864
19
14
10
7
-332
7

.0005
.001
.002
.001
.001

.40
.37
1.45
1.37
1.25
1.31
1.15
.90
.80
.76
.95
.90
.82
.63
.55
.59
.57
3.88
.05
1.58
.07
.02
.01
.01
-.90
.005
.004
.002
.001
-.08
.001

NOTE: The large surge in income in 1983 and 1985 and the negative amounts in 1990 and 1995 are due to a change in the law as part of the 1983 Amendments. Prior to this change, the balancing of accounts was done on an annual basis. In 1983, the law was changed so that the accounting would be done on a prospective basis, with the total amount of anticipated subsidy for several years in the future to be paid in a lump sum at the beginning of the period. So, in 1983 $6.6 billion in general revenues was immediately transferred into the Trust Funds, in anticipation of expenses for the next several years. Now an accounting is done every five years, starting in 1985, and the amounts due to the Trust Fund and the Treasury are reconciled. Due to the large amounts "advanced" to the Trust Funds in 1983 and 1985, the Treasury overpaid the Trust Funds in these years and the Trust Funds had to reimburse the Treasury in years showing negative figures. To compute the real net subsidy to the Trust Fund since 1983, it is necessary to average the payments throughout the period.

 

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