Ask DWM: The History & Future of Social Security

Social Security is a cornerstone of American social policy, providing financial support to retirees, disabled individuals, and survivors of deceased workers. The program has helped millions maintain a basic standard of living and protected vulnerable populations from poverty. Over the years, Social Security has expanded and adapted to changing demographics and economic conditions, but it now faces substantial financial challenges as the nation prepares for an era where more retirees will be drawing benefits than ever before. To fully appreciate the program’s significance and anticipate the future of Social Security, it's essential to understand its origins, growth, and current outlook.

In the early days of America, reliable, guaranteed retirement benefits weren’t needed or desired by most Americans. The effective social security system was family. In early America, we had an agrarian economy. Extended families farmed together, lived together, and provided for their elders in the later years of their lives. As our country entered the Industrial Revolution in the late 19th century, families and communities began to change dramatically. The Industrial Revolution shifted the U.S. economy from agrarian to industrial, bringing about massive urbanization. People left their family farms and moved to cities to work in factories and mills, seeking new economic opportunities. This migration disrupted traditional family structures that once served as informal social security systems. Families were no longer living together on farms, and older generations found themselves with fewer resources and less support from their children, who were often working in distant cities.

The financial instability faced by many elderly Americans came into sharp focus with the Great Depression in the 1930s. Millions lost their jobs, and those who were older, unable to work, and lacking personal savings were hit the hardest. Many were left without reliable means of support, leading to widespread poverty. This economic crisis underscored the need for a formalized system of retirement income that would offer financial security to those who could no longer work.

In response to the Great Depression’s widespread poverty and unemployment, President Franklin D. Roosevelt introduced the New Deal, a series of government programs aimed at stabilizing the economy and providing relief to struggling Americans. A key element of the New Deal was the Social Security Act, which Roosevelt signed into law on August 14, 1935. The Social Security Act introduced a national old-age insurance system, funded by payroll taxes from workers and employers, with the aim of providing retired workers a modest monthly income. This approach allowed the program to operate as an earned benefit, where workers would contribute during their working years and receive benefits in retirement.

Initially, Social Security focused primarily on providing income to retirees, covering only certain categories of workers, primarily in industrial and commercial jobs. Agricultural and domestic workers, a significant portion of the workforce at the time, were excluded, though later amendments would bring many of these workers into the system. The idea was revolutionary: for the first time, the federal government was committing to provide financial security for retirees. Social Security quickly expanded to meet the evolving needs of American society. In 1939, just a few years after its creation, the program was amended to include benefits for the spouses and children of deceased workers, establishing survivor benefits and further broadening Social Security’s role as a family support program. This change ensured that families who had lost a primary breadwinner would still have a financial safety net.

In the 1950s, Social Security expanded again to include disability benefits. This addition marked an essential evolution in the program, as it began offering support to workers who could not continue employment due to severe disabilities. In subsequent years, the program extended disability benefits to the spouses and dependent children of disabled workers, reinforcing Social Security's commitment to supporting families in need. A major milestone came in 1965 when Medicare was established as a part of the Social Security Act. Medicare, which provides health insurance to Americans over 65, responded to the growing costs of healthcare for older individuals, many of whom were unable to afford private insurance on their fixed incomes. Today, Medicare operates alongside Social Security, providing critical health coverage for older adults and significantly reducing poverty and financial strain among retirees.

Over the decades, Social Security has adapted to changes in life expectancy, economic conditions, and demographic shifts, but these changes have also placed the program under financial strain. As life expectancy increased and birth rates declined, the ratio of workers to beneficiaries shrank, meaning fewer people were paying into the system to support a growing number of retirees. Additionally, inflation in the 1970s began eroding the purchasing power of benefits, prompting Congress to introduce automatic cost-of-living adjustments (COLAs) in 1972, which adjusted benefits in response to inflation. By the early 1980s, Social Security faced a funding crisis, leading Congress to pass the Social Security Amendments of 1983. These reforms included gradually increasing the full retirement age from 65 to 67, raising payroll taxes, and taxing Social Security benefits for higher-income retirees. These changes helped extend Social Security’s solvency, but only for the short-term.

Today, the issues facing the future of Social Security share striking similarities with those present in the 1980’s. In 2023, insured retirees were the beneficiaries of a huge 8.7% increase in their benefits, but this has only hurt the long-term viability of the program. The baby boomer generation, now reaching retirement age, has increased the number of beneficiaries substantially, while lower birth rates have led to fewer workers supporting each retiree. According to recent projections, Social Security’s trust fund reserves may be depleted by 2032. If this happens without further changes to the program, benefits may be automatically reduced by 20%+, as incoming payroll taxes would only cover a portion of promised benefits.

To avoid this reduction, policymakers are exploring options to sustain Social Security for future generations. Some proposals include raising payroll taxes, adjusting the retirement age, or modifying benefits for higher-income retirees. The option to raise the retirement age or to have a flat 20% cut hurts all retirees, but particularly those of lower means. For many impoverished Americans, Social Security is the only asset available to them in retirement. To modify Social Security to a needs-based benefit protects those of lower means, but still jeopardizes the retirement plans of those with higher income. Many financial plans are prepared based off the “backbone” of Social Security. Even those considered wealthy have built their life around the assumptions of what was believed to be a guaranteed benefit. Fixed expenses such as mortgage payments may no longer fit into a plan, forcing a person to downsize to ensure security for the rest of their life. Nonetheless, it is hard to compare an inconvenient lifestyle change for the wealthy to a drastic income cut for the poor. This option is far from perfect, but a progressive mechanism in determining Social Security benefits would protect the benefits of the most vulnerable. Although the effects certainly wouldn’t be negligible, it seems to be the most logical solution.

As someone who is part of the young workforce, the last option seems to be the least appropriate. My generation worries that we’re paying into a trust fund that we’ll never get a dime out of. Despite older generations such as the baby boomers inheriting a country much riper with economic opportunity than we see today, we may end up with higher payroll tax to ensure their financial security. Lowering our take-home wages in order to provide for those who inherited far better economic conditions would be a slap to our faces. Unfortunately, this seems to be the trend as detailed in two blogs written earlier this year: War on the Young and Give Our Young People a Chance.

However, we all understand how slow Congress is on these matters. Rarely do we see our legislative body prioritize long-term issues over short-term. We likely won’t see any substantial action taken on the issue until we get closer to the 2032 date. When action is eventually taken, we hope our legislative representatives can enact a change that provides financial security to our most vulnerable retirees without footing the bill to a disadvantaged young generation.

From its inception during the Great Depression to its role today, Social Security has evolved to meet the needs of a changing American society. Since the last significant legislation affecting Social Security, our country has changed drastically with shifting demographics and slower wage growth. A lack of action could result in a crisis that impacts all Americans, retirees and workers. Social Security was designed to be a safety net for millions, promising security in old age, but if we don’t address its challenges now, that promise may be compromised. If we allow inaction to continue, we risk burdening younger generations with an unsustainable system while undermining the financial stability of current and future retirees. This isn’t just about numbers on a balance sheet; it’s about protecting a core American value: taking care of those who came before us while building a better future for those who follow.

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