The Social Security System

The Social Security System

Executive Summary

The Social Security System was not designed to be the main source of income for all retirees in the United States; however, because of dozens of modifications, that is what it has become. The system has been through some ups and downs, but the baby boomers that are approaching retirement age will break the current system for good if we don’t modify it now.

The current worker pays 6.2 percent of their income to Social Security and their employer pays a matching 6.2 percent for a total of a 12.4 percent Social Security payment. This 12.4 percent is not put in a savings account and given to you when you retire. Your money is being paid to those who are already retired. By the time that you retire, you will only get what you put in plus about two percent. You could earn that by putting your money in an account at the bank. The 6.2 percent plan allows the worker to take their portion of the Social Security tax and set up personal accounts in which they can invest their money into secure markets that pay back traditionally between 6 and 12 percent. Your employer’s 6.2 percent would still be sent to pay Social Security costs such as disability and survivor’s benefits as well as to pay the transition costs associated with changing to this new plan.

Introduction

For many years the Social Security system in America has aided the elderly with retirement benefits. Today, however, the system faces a disaster as the number of retired Americans increases. A new system is needed to save Social Security and ensure American workers have adequate savings for their retirement.

Our goal is to inform the young people of America of a new plan which will allow workers to privately invest their Social Security tax dollars. The gains of such a system are much greater than anything the traditional system has been able to provide. We hope that as younger Americans become more informed about this plan to improve Social Security, they will have a powerful impact among politicians in getting it implemented.

Social Security System: A Brief History

The first type of Social Security plan was developed in imperial Germany in 1889. It was introduced by Chancellor Otto von Bismarck as a way to wean the public off of socialism. Bismarck stated: “Whoever has a pension for his old age is far more content and far easier to handle than one who has no such prospect.” (Church, 1982) In the following few decades, most developed nations adopted similar social insurance plans.

The United States first began its Social Security plan under President Franklin D. Roosevelt by an act signed in 1935. This first plan was very modest, covering only workers in commerce and industry. Taxes were to be collected beginning in 1937 at 1% of the first $3000 of a workers pay, with a minimum payment $30 a year. Benefits initially averaged a meager $22.60 a month. The reason for this was because President Roosevelt never intended Social Security to be the major source of income for the retired, but rather as a means to ward off the destitution so prevalent after the depression. F.D.R. is quoted, “We can never insure 100% of the population against 100% of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family…against poverty-ridden old age.” (Church, 1982) Through the years Social Security benefits have grown much greater than the vision of President Roosevelt to the point of being the most important source of income for the majority of the elderly.

By 1939, new amendments allowed nearly 100% of the population to be insured under Social Security. They also allowed for benefits to be paid to dependents of the primary worker (spouse and children), upon retirement of the worker, and survivors insurance upon premature death of the worker.

Between 1950 and 1972 congress raised retirement payments eleven times. Raising the rates seemed to be a popular thing for politicians to do. Probably the most fateful moment of Social Security came in 1972 when a bill was passed to automatically adjust payments according to the Consumer Price Index. From 1975 to 1981 the CPI rose at some of the fastest inflationary rates in history. This put a huge strain on the system as Social Security payments also jumped. During the 1970’s, the maximum annual benefit rose by 200%. In 1977 payroll taxes were increased