The Development of Social Security in America Essays

The Development of Social Security in America Essays The Development of Social Security in America Essay The Development of Social Security in America Essay (PROG-WI); 10. Rep. John Dingell, Sr. D-MI); 11. Sen. Augustine Lonergan (D-CT); 12. Secretary of Labor Frances Perkins; 13. Rep. Frank Crowther (R-NY); 14. Sen. William H. King (D-UT); 15. Rep. David J. Lewis (D-MD); 16. Sen. Byron Patton â€Å"Pat† Harrison (D-MS); 17. Sen. Joseph Guffey (D-PA); 18. Sen. Edward Costigan (D-CO); 19. Rep. Samuel B. Hill (D-WA); 20. Rep. Fred Vinson (D-KY); and 21. President Franklin D. Roosevelt. SSA History Museum Archives. 6 socialsecurity. gov/policy the original program. Coverage under the program was by occupational category, with most covered workers employed in â€Å"commerce and industry. Among the excluded groups were the self-employed, government employees, persons already age 65, the military, professionals (doctors, lawyers, etc. ), employees of nonprofit organizations, and agricultural and domestic workers. 18 Financing was to be generated from a payroll tax imposed equ ally on employers and employees (with no government contribution). The tax rate was initially set at 1 percent on each party, with scheduled increases every 3 years, to an eventual rate of 3 percent each by 1949. Payroll taxes were to begin in January 1937, and the first benefits were to be payable for January 1942. The wage base (the amount of earnings subject to the tax) was set at $3,000. This level was sufficient to include 92 percent of all wages paid to the covered groups. Stated another way, about 97 percent of all covered workers had their entire earnings subject to the tax (SSA 2010). 19 The First Social Security Payments The Social Security Act of 1935 set the start payroll taxes in 1937 and the start of monthly benefits in 1942. This was a kind of â€Å"vesting period,† in which a minimum amount of work would be required to qualify for monthly benefits. This period also allowed time to build some level of reserves in the program’s account before payments began flowing to beneficiaries. The vesting period arrangement presented a conundrum: How should the program treat those workers who turn age 65 during this period, or who die before January 1942? These individuals would have contributed something to the system, and it was thought that they should receive some return for their contributions. Thus, the original program paid two types of one-time, lump-sum benefits in the 1937–1939 period. A person attaining age 65 during this time would be entitled to a one-time payment equal to 3. 5 percent of his or her covered earnings; and the estate of a deceased worker would receive a â€Å"death benefit† computed in the same way. Because the payroll tax in these years was only 1 percent for workers, this would mean a substantial â€Å"return† on their payroll taxes. The first person to take advantage of these benefits- and thus the first Social Security payment ever made- was a Cleveland, Ohio streetcar motorman named Ernest Ackerman. Ackerman worked one day under Social Security- January 1, 1937. His wage for that day was $5. He dutifully paid his payroll tax of one nickel and he received a one-time check from Social Security for 17 cents. 22 In the 1937–1939 period, more than 441,000 people received Social Security benefits totaling over $25 million (see Table 3). Of the total monies paid to beneficiaries during this period, 39 percent was for so-called â€Å"life cases† (like Ackerman), and 61 percent went for â€Å"death benefits. † The Amendments of 1939 Even before monthly benefits were due to start in 1942, the Social Security Act of 1935 was changed in quite fundamental ways by major legislative amendments in 1939. This legislation emerged from the work of an advisory council jointly formed in 1938 by the Senate Finance Committee and the Social Security Board. Conservative members of the Finance Committee (especially Arthur Vandenberg, R-MI) wanted to use the council to revisit the debate over the reserve, while the Social Security Board (especially Arthur Building on the Cornerstone The Social Security system with which we are familiar today is far different from the one created in 1935. In each of the three major policymaking areas (coverage, benefits, and financing), the program has undergone a slow but dramatic evolution. Coverage was initially very limited. Only slightly more than half the workers in the economy were participants in the program under the 1935 law. Today we could describe Social Security’s coverage as nearly universal, with about 93 percent of all workers participating in the program. Benefits were initially paid only to retirees and only to the individual worker, himself or herself. There were no other types of benefits and no benefits for dependent family members. Benefits were also far from generous. Financing has always been an issue. Although some aspects of this matter were decisively settled in 1935, others have continued to be sources of ongoing policy contention and political debate. Social Security has evolved over the past 75 years principally through the form of a dozen or so major legislative enactments. In broad terms, the period from 1935 through 1972 is the expansionary period for the program, and the period since 1972 has been a period of policy retrenchment. 20 The major Social Security legislation is highlighted in Table 2. 21 Social Security Bulletin, Vol. 70, No. 3, 2010 7 Table 2. Major Social Security legislation Law The Social Security Act The 1939 amendments The 1950 amendments Date enacted August 14, 1935 August 10, 1939 August 28, 1950 Major features Established individual retirement benefits. Added dependents and survivors benefits and made benefits more generous for early participants. Financing at issue. Adjusted, on a major scale, coverage and financing. Increased benefits for the first time. Provided for gratuitous wage credits for military service. Raised benefits; liberalized retirement test and expanded gratuitous wage credits for military service. Extended coverage. Disability â€Å"freeze. † Added cash disability benefits at age 50. Early retirement for women. Added benefits for dependents of disabled beneficiaries. Disability benefits at any age. Established early retirement for men. Liberalized eligibility requirements for other categories. Added disabled widow(er)s benefits. Added automatic annual cost-of-living adjustments. Raised taxes and scaled back benefits. Long-range solvency at issue. Tightened disability eligibility rules. Eliminated student benefits after high school. Legislation in 1952 Legislation in 1954 The 1956 amendments The 1958 amendments The 1960 amendments The 1961 amendments The 1967 amendments The 1972 Debt-Ceiling Bill The 1977 amendments The 1980 amendments Omnibus Budget Reconciliation Act of 1981 The 1983 amendments Omnibus Budget Reconciliation Act of 1993 Senior Citizens Freedom to Work Act of 2000 July 18, 1952 September 1, 1954 August 1, 1956 August 28, 1958 September 13, 1960 June 30, 1961 January 2, 1968 July 1, 1972 December 20, 1977 June 9, 1980 August 13, 1981 April 20, 1983 August 10, 1993 Raised taxes and scaled back benefits. Long-range and short-range solvency at issue. Raised taxable portion of Social Security benefits from 50 percent to 85 percent. Eliminated the retirement earnings test for those at the full retirement age. April 7, 2000 SOURCE: Congressional Research Service (CRS) Report RL30920, Major Decisions in the House and Senate on Social Security, 1935–2009. Altmeyer, its chairman) wanted to use the council to promote expansion of the benefits beyond the basic individual retirement program codified in the 1935 act. In the end, both groups got some of what they wanted. The legislation advanced the start of monthly benefits from 1942 to 1940; it added dependents benefits; and it replaced the system of one-time death payments with regular monthly survivors benefits. Advancing the start of monthly benefits from 1942 to 1940 meant that the first Social Security monthly benefit would be paid in January 1940. By chance, the first person to become a monthly Social Security 8 beneficiary was a retired legal secretary from Ludlow, Vermont- Ida May Fuller. Fuller retired in November 1939 at age 65 and received the first-ever monthly Social Security benefit on January 31, 1940. Her monthly check was for $22. 4. The amendments of 1939 provided benefits for wives and widows (but no corresponding benefits for men) and also for dependent children. The wife of a retired worker and each minor child could receive a benefit equal to half the covered worker’s benefit, and widows could receive 75 percent of the worker’s benefit (all for no additional payr oll taxes). 23 socialsecurity. gov/policy Table 3. Number of Social Security beneficiaries and payment amounts, 1937–1939 Year 1937 1938 1939 Total Beneficiaries 53,236 213,670 174,839 441,745 Payments ($ in millions) 1,278,000 10,478,000 13,896,000 25,652,000 SOURCE: SSA (1940, Table 5, p. 47 and Table 15, p. 34). A smaller, but important, change was also introduced in 1939. Under the 1935 law, benefits were computed based on the total cumulative wages a worker had under covered employment. Thus, a long-time covered worker would receive a higher monthly benefit than one who worked less time under the program- even if they both had the same level of wages. So, for example, if â€Å"worker A† worked 20 years under Social Security and earned $20,000 a year and â€Å"worker B† worked 30 years at $20,000 a year, worker B would receive a higher benefit because his or her cumulative wages would be greater than that of the other worker- even though they were both earning $20,000 a year. 24 As part of the refinancing in the amendments of 1939, benefits were shifted from this cumulative basis to that of average monthly wages. One effect of this change would be that everyone who had the same average monthly wage would receive the same benefit amount, regardless of how many years they were covered under Social Security. The intent here was to make benefits more adequate by insuring that persons with the same earnings level would receive the same benefit. (Keep in mind that in these early years, the benefits were still viewed as replacement of income lost because of cessation of work. So the idea is that persons earning at a given level need the same level of income replacement, regardless of how long they have been covered by the program. ) However, to maintain some equity for long-time program participants, a 1 percent increment was added to the benefit formula for each year of program participation. Thus, a longtime participant would still receive a higher monthly benefit than a short-time one, even if they both earned the same average wages. (Here again, we see the attempt to balance adequacy and equity. ) The 1939 legislation also introduced the first modification of the retirement test. Under this relaxed provision, a retirement benefit was payable for any month in which the beneficiary earned less than $15 (any earnings over this limit produced a zero benefit for that month). This was the beginning of a gradual erosion of the requirement that a beneficiary be fully retired to receive a retirement benefit, a process that would culminate in the elimination of the retirement earnings test (RET) in 2000 for those at or above the full retirement age (FRA). The 1940s: A Decade of Start/Stop Tax Policy The decade of the 1940s was in most respects a quiescent period for Social Security policymaking: No new categories of benefits were added, no significant 9 This was a major expansion of the program. Indeed, one might well say that this was the â€Å"second start† of Social Security in America. The 1939 legislation changed the basic nature of the program from that of a retirement program for an individual worker, to a family-based social insurance system (based on the then-current model of the family, in which the man was the breadwinner with a nonworking wife who cared for the minor children). The 1939 law also made benefits to early program participants significantly higher than under the original law, although benefits were lowered for later participants. And it made benefits for married couples higher than those for single workers, by virtue of the addition of dependents benefits. In addition, benefits for single workers were lowered somewhat from their 1935 values. Thus, early program participants and married couples benefited from the changes in 1939, while single persons and later participants had their benefits reduced. This combination of policy changes was a principal way in which the actuarial balance of the system was to be maintained. These policies considerably increased the cost of the program in the near term. This pleased the opponents of the large reserve because it immediately reduced the size of the reserve. It was claimed that in the long run the changes were revenue neutral, and thus it is unclear what real change the amendments made in the long-range financing of the system. However, this claim for revenue neutrality was not well documented at the time, and it has now come under considerable doubt (DeWitt 2007). The 1939 legislation also introduced the trust fund for the first time as a formal legal device to serve as the asset repository for Social Security surpluses. (Under the 1935 law, Social Security’s funds were more literally a bookkeeping entry in the Treasury Department’s general accounts. ) Social Security Bulletin, Vol. 0, No. 3, 2010 expansions of coverage occurred, the value of benefits was not increased (there were no cost-of-living adjustments (COLAs) in these early days), and the tax rates were not raised during the entire decade. 25 This last nonevent (no tax rate increase) was, however, a significant anomaly. The 1935 law set a schedule of tax increases beginning in 1939. Tax rates were scheduled to rise four times between 1935 and 1950. These periodic increases were necessary in order to meet President Roosevelt’s demand that the system be self-supporting, and they were the basis on which the actuarial estimates were derived. However, as part of the trade-offs in the amendments of 1939, the first rate increase (in 1940) was cancelled. Then with the coming of World War II, the program’s finances were dramatically altered. With virtually full employment in the wartime economy, more payroll taxes began flowing into the system than the actuaries originally anticipated, and retirement claims dropped significantly. The net result was that the trust fund began running a higher balance than was previously projected. This led to the Congress enacting a series of tax rate â€Å"freezes,† which voided the tax schedule in the law. Each time a new tax rate approached, the Congress would void the increase with the expectation that the normal schedule would resume at the next step in the schedule- but this expectation was never met. In all, eight separate legislative acts froze taxes at their 1935 level all the way to 1950 (see Table 4). The Table 4. Projected versus actual Social Security tax rates (employee and employer rates combined), 1937–1950 Year 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 SOURCE: Authors compilation. esult of these rate freezes was unclear at the time (the Congress focused only on the short-run consequences), but it is probable that the effect of these taxing policies produced the first long-range actuarial deficits in the program (DeWitt 2007). The Amendments of 1950 There were three particular features of the program before 1950 that were the source of discontent among advocates and beneficiaries: (1) the program had no provision for periodic benefit inc reases, (2) benefit levels overall were quite low, and (3) the program only covered about half the workers in the economy. There was also continuing debate over the size and role of the trust fund and the long-range status of the program’s finances. The low level of benefits was of particular concern. Even by 1950, the average state old-age welfare benefit was higher than the average Social Security retirement benefit, and the number of persons receiving welfaretype, old-age benefits was greater than the number receiving Social Security retirement benefits. (The average Social Security retirement benefit at the end of 1947 was only $25 per month for a single person (DeWitt, Beland, and Berkowitz (2008, 162). Moreover, because the law made no provision for any kind of benefit increases, whatever amount beneficiaries were awarded in their first monthly payment was the benefit they could expect for the rest of their lives. So, for example, Ida May Fuller (discussed earlier) lived to be 100 years old and thus collected checks for 35 years. Imagine, then, the effect of 35 years of inflation on the purc hasing power of her $22. 54 benefit. The 1950 legislation (like the 1939 legislation) emerged out of the recommendations of an advisory council. 6 The most dramatic provision in the new law raised the level of Social Security benefits for all beneficiaries an average of 77 percent. Although this was not, strictly speaking, a COLA (but rather an effort to raise the overall level of benefits), it did establish a precedent for the idea that benefits should be raised periodically. However, the precedent also meant that benefits were not raised automatically, but only when a special act of Congress was undertaken to do so. Thus, for many years afterwards, benefit increases would remain spotty, until automatic COLAs began in 1975. The match between the pre-1975 benefit increases and the actual rate of inflation was far from perfect. In some years, benefits were increased more than socialsecurity. gov/policy 1935 law 2. 0 2. 0 2. 0 3. 0 3. 0 3. 0 4. 0 4. 0 4. 0 5. 0 5. 0 5. 0 6. 0 6. 0 Actual rates 2. 0 2. 0 2. 0 2. 0 2. 0 2. 0 2. 0 2. 0 2. 0 2. 0 2. 0 2. 0 2. 0 3. 0 10 inflation, and in other years they were increased less, or not at all. This mismatch was particularly large in the run-up to automatic COLAs in the early 1970s. In 1972, for example, benefits were increased by 20 percent, while inflation had only risen by 1. 3 percent from the year before. Cumulatively, during this period, benefits increased 391 percent, while inflation only increased 252 percent from 1940 through 1974 (see Table 5). The question of the program’s coverage of occupational categories was also of central concern in the 1950 legislation. Up to this point, coverage had not changed significantly since 1935, and at least two-fifths of the workers in the economy were still excluded from the program. The Social Security Advisory Council explicitly recommended that the Congress adopt the goal of universal coverage, stating â€Å"The basic protection afforded by the contributory social insurance system under the Social Security Act should be available to all who are dependent on income from work. †27 The Congress adopted a large part of the council’s recommendation, bringing 10 million additional workers under coverage. The main groups brought under coverage were most self-employed workers and domestic and agricultural workers. Employees of state and local governments were given the option of voluntary coverage, as were employees of nonprofit institutions (subject to certain conditions). The coverage rules, however, were complex and marked the beginning of a policymaking process for coverage that involved complicated special rules for various occupational groups. 28 Nevertheless, we could say that in the amendments of 1950, the program was put on a glide path toward universal coverage (see Chart 2). The 1950 legislation also addressed the issue of the program’s financing. Tax rates were increased for the first time, and the program’s long-range solvency was assessed; the financing was set such that the program could be certified by the actuaries as being in long-range actuarial balance. 29 This part of the legislation effectively ended the debate over the role of the reserve, and it established the precedent that major changes to the program must be assessed for their long-range impact on program financing (DeWitt 2007). The role of the 1 percent â€Å"increment† introduced in 1939 was to insure that long-time program participants would receive proportionately higher benefits than Social Security Bulletin, Vol. 0, No. 3, 2010 Table 5. Social Security benefit increases compared with inflation, 1940–1974 (in percent) Calendar year 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1940–1974b Increase in benefits Base year None None None None None None None None None 77. 0 None 12. 5 None 13. 0 None None None None 7. 0 None None None None None 7. 0 None None 13. 0 None 15. 0 10. 0 20. 0 None 11. 0 391. 0 Actual increase in inflationa 5 11 6 2 2 8 14 8 -1 1 8 2 1 1 0 1 3 3 1 2 1 1 1 1 2 3 3 4 5 6 4 3 6 11 252 SOURCE: Bureau of Labor Statistics data. Calculations by the author. NOTE: . . . = not applicable. a. Based on Consumer Price Index for Urban Wage Earners and Clerical Workers, nonseasonally adjusted annual averages. b. Cumulative averages. workers who just barely met the coverage requirements. However, as part of the financing adjustments of 1950, the increment was eliminated to pay for a portion of the increase in benefit levels. (That is, future 11 Chart 2. Growth in Social Security coverage, selected years 1935–2007 100 Percent of civilian workers 90 80 70 60 50 40 1935 1939 1940 1944 1945 1949 1950 1955 960 1965 Year 1970 1975 1980 1985 1990 1995 2000 2007 SOURCE: House Ways and Means Committee 2008 Green Book, Table 1-46, p. 1–106. benefits were lowered for long-time participants so that benefits could be increased immediately. ) Up to this time, members of the military were not covered by Social Security and therefore did not pay Social Security taxes (and could not earn credits toward an eventual It may be no exaggeration Perhaps the most significant benefit). The 1950 law introduced to say that the 1950 change in 1952 was one that did the principle of gratuitous wage Amendments really saved the not happen. Much of the debate credits for military service- which concept of contributory social was treated as covered work, even over the legislation concerned a insurance in this country. proposal for a â€Å"disability freeze. † though no payroll taxes were The idea here is to eliminate from assessed to finance the credits. The Robert M. Ball the computation of a worker’s combination of these changes was benefit any years in which the so significant that the 1950 law has worker had little or no earnings because e or she traditionally been known within Social Security policy was disabled. Including years of little or no earnings as the â€Å"new start† to the program. 30 effectively lowers any eventual retirement ben1952 and 1954: Small Policy Adjustments efits, or, in certain cases, prevents the worker from and Steady Program Growth achieving insured status at all. The â€Å"freeze† was thus designed to prevent these adverse impacts on The amendments of 1952 rais ed benefits by 12. 5 perretirement benefits. Because federal involvement in cent, surprisingly soon after the major boost of 1950. ny aspect of disability policy was strongly opposed They also raised the â€Å"earnings test† limits by 50 perby key interest groups, the Congress ultimately cent and expanded the gratuitous wage credits for enacted an unusual statute that created a freeze, but military service. which had an expiration date before its effective The 1954 amendments produced a major expandate. Even so, it was an acknowledgment- at least in sion of coverage- bringing an additional 10 million principle- of the policy logic of a disability freeze, 12 socialsecurity. gov/policy workers into the system. This law extended coverage to most remaining uncovered farm workers, selfemployed professionals, and state and local government employees (on a voluntary group basis). Benefits were also increased an additional 13 percent. which would subsequently be enacted 2 years later in the amendments of 1954. Disability- unlike the attainment of retirement age or the death of a wage-earner- inevitably involves some degree of judgment in assessing eligibility. It is difficult to determine whether someone is too disabled to work, and hence it is possible that unqualified individuals might become eligible for these benefits. This problem of the inherent difficulty in making a disability determination was part of a concern about whether the costs of such coverage can be meaningfully predicted and controlled. Concerns over the potential costs of disability coverage slowed the addition of these benefits in Social Security. 31 What is most significant about the disability freeze- from an administrative perspective- is that it required the same process for making a disability determination as would be required for determining eligibility for cash disability benefits. Thus, the entire ureaucratic apparatus and the basic policy structure of a disability program were all put in place starting in 1954, even though we think of disability benefits as having arrived in 1956. The Coming of Disability Benefits The freeze legislation of 1954 paved the way for the introduction of cash benefits in 1956 (and provided some degree of reassurance that the administrative challenges of a disability program were manageable). Ev en so, there was significant disagreement regarding disability benefits and whether they should be added to the program. The legislation was in fact adopted by what was, in effect, a single vote in the Congress (DeWitt, Beland, and Berkowitz 2008, 14–15). The initial disability program was limited in scope (reflecting the worries about costs). It paid benefits only to those insured workers aged 50–64 and offered nothing for the dependents of those workers. And the law introduced a special type of insured-status rule for disability: fully insured, with 20 out of the last 40 quarters worked, and currently insured, with 6 out of the last 13 quarters worked). 32 There was a 6-month waiting period before benefits could be paid, and there was no retroactivity. To fully fund the new benefits, tax rates were raised a combined 0. 5 percentage points, and a separate disability trust fund was created. Disability benefits were liberalized in 1958 by extending them to the dependents of a disabled worker, eliminating the currently insured rule, and Social Security Bulletin, Vol. 70, No. 3, 2010 permitting up to 12 months of retroactivity with an application. These benefits were liberalized again in 1960 by extending the primary benefit to disabled workers of any age. This quick liberalization was due to the disability program not being as problematic as some had expected. In addition to creating the disability program, the 1956 legislation contained additional policy changes. Coverage was expanded to members of the military, to previously excluded self-employed professionals, and, optionally, to police and firefighters in state or local retirement systems. Early retirement at age 62 was made available to women (but not men); special rules were adopted permitting women to become insured with fewer quarters of coverage than men, allowing women to average their earnings over a shorter period than men in order to increase their benefit amount. The 1960s: Small Policy Adjustments and Steady Program Growth In addition to the disability liberalization, in 1960 the children’s survivor benefit was raised from 50 percent to 75 percent of the workers primary insurance amount. In 1961, men were granted the option of early retirement, insured status and RET rules were relaxed, and the minimum benefit was increased by 21 percent. The amendments of 1965 (which created the Medicare program) also liberalized the definition of disability by changing the original definition from â€Å"of long continued and indefinite duration† to â€Å"12 months or longer or expected to result in death. This legislation also lowered the eligibility age for widows from 62 to 60, extended children’s benefits to age 21 if a fulltime student, provided benefits to divorced wives and widows if they had been married at least 20 years, and reduced the insured-status requirements for persons attaining age 72 before 1969. Legislation in 1966 granted eligibility to the special age-72 class, even if they had never contributed to Social Security. (These were known as â€Å"Prouty benefits,† named after the Senator who introduced the provision, Winston Lewis Prouty, R-VT. The 1967 amendments provided disabled widows and disabled (dependent) widowers benefits at age 50. On one hand, the definition of disability was tightened to stipulate that disability meant the inability to engage in any substantial gainful activity existing in the national economy, and not just in the local area. (This was consistent with original congressional 13 intent, which had been broadened by court decisions. ) On the other hand, the insured-status requirement for disabled workers aged 31 or younger was relaxed. Additional gratuitous wage credits were granted to the military, and ministers were brought into coverage, unless they opted out on grounds of conscience or religious principles. Financing During the 1950s and 1960s From the end of World War II up until the early 1970s, overall wages in the economy tended to increase about 2 percent per year above prices. This natural wage growth meant that, other things being equal, the Social Security system would see additional income because of these higher wage levels. However, the actuarial estimates used in Social Security were based on an assumption of static wage and price levels because there were no automatic adjustments in the program for either benefit increases that were due to inflation or increases in the wage base as a result of economic growth. Because both benefit increases and changes in the wage base were the result of irregular congressional actions, the actuaries used current law as the basis for their projections. But, because wages did in fact grow faster than prices- and because price adjustments were irregular- from time to time the Congress would find itself in the happy position of having more money in the program than had been projected in previous actuarial estimates. Thus, it became possible to increase benefits without fully commensurate increases in tax rates or the wage base. (These increases were sometimes coupled with expansions of coverage, which paid part of the costs associated with the benefit increases. ) This process was employed several times during the two-decade period from 1950 through 1960, as shown in Table 6. The Amendments of 1972: The Last Major Expansion There were two major bills enacted in 1972, which together, greatly expanded the program; this legislation marked the approximate end of the expansionary period in Social Security policymaking. The first was a simple bill to raise the limit on the national debt. In the Senate, a rider was attached to the debt-limit bill creating the automatic annual COLA procedure beginning in 1975. This was a huge policy change that was adopted in a surprisingly casual manner, although it had been debated for several years, and 14 Table 6. Benefit increases compared with tax rates and the wage base, selected years 1952–1972 Year 1952 1954 1959 1965 1968 1970 1971 1972 Benefit increases (%) 12. 50 13. 00 7. 00 7. 00 13. 00 15. 00 10. 00 20. 00 Tax ratea (%) Unchanged + 0. 5 (each) + 0. 25 (each) Unchangedb -0. 10 Unchanged 0. 40 Unchanged Wage base ($) Unchanged Unchanged + 600 (annual) Unchangedb + 1,200 (annual) Unchanged Unchanged + 1,200 (annual) SOURCE: SSA (2010, Table 2. A3, pp. 2. 4–2. 5). a. Does not include Medicare or self-employment tax rates. b. Rate was unchanged in 1965, but was increased 0. percent in 1966, and the wage base was raised $1,800 as part of same legislation. the Nixon administration was in support of the idea (DeWitt, Beland, and Berkowitz (2008, 267–281). The fact that Social Security benefits are raised whenever there is price inflation in the economy is a major aspect of their value and is a significant contributor to overall program costs. Not only was an â€Å"auto matic† mechanism introduced to raise benefits along with prices, but the wage base and the annual exempt amounts under the RET were also put on an automatic basis, tied to the rise in average wages (also beginning in 1975). Subsequent legislation in late 1972 provided additional expansions of the program, which included introducing delayed retirement credits to raise the benefits of workers who postponed filing for Social Security, a new special minimum benefit for workers with low lifetime earnings, benefits for dependent grandchildren, benefits to widowers at age 60, Medicare coverage after 2 years of receiving disability benefits, a reduced disability waiting period from 6 to 5 months, and disability benefits for children disabled before attaining age 22. The legislation also created the Supplemental Security Income (SSI) program. ) The 1977 Amendments: The Beginning of Retrenchment By the mid-1970s, there were serious financing problems evident in the Social Security program. This was due principally to the adverse economic conditions of the mid-1970s (â€Å"stagflation†). The Social Security actuaries reported in 1973 that for the first time, the socialsecurity. gov/policy program was no lo nger in long-range actuarial balance, and there were difficulties projected in the near term as well. In fact, during the 1975–1981 period, the program was in annual deficit, and assets of the trust funds had to be redeemed to make up the shortfalls. 33 The projected long-range deficits would continue for a decade (until the major legislation of 1983). 34 Moreover, a major flaw was present in the 1972 legislation that created the â€Å"automatics† for price and wage adjustments. This technical flaw had the effect of greatly inflating benefits far beyond the intent of Congress and the traditional expected rates of income replacement. This too had to be addressed in the 1977 legislation. The 1977 amendments were principally targeted toward the issue of program financing. To correct the indexing error, the adjustments for prices and wages were â€Å"decoupled† (DeWitt, Beland, and Berkowitz 2008, 285–287 and 298–323). The practical effect of decoupling was to lower benefits, and the change was applied only to new beneficiaries. To further soften the impact of this reduction, the Congress devised a 5-year phase-in period, during which time benefits were gradually reduced such that they would be at the proper level for those beneficiaries retiring 5 years from the effective date of the decoupling. This attempt at â€Å"softening the blow† backfired as those in the phase-down group saw themselves as victims of an unfair â€Å"notch† in benefits. 35 In addition to the decoupling, the 1977 legislation further addressed the financing issue with a combination of tax increases and benefit reductions. On the revenue side, the law set up a schedule of rate increases such that by 1990, the tax rate would be 6. 2 percent (this is still the current rate). Also the wage base was increased in an ad hoc manner beyond the increases authorized in the 1972 law (a total increase of $12,000 in three steps). The automatic provision would then start again from this higher wage base. On the benefit side, there were three additional provisions reducing benefits: (1) the initial minimum benefit was frozen at $122 per month, (2) benefits for spouses and surviving spouses were offset by an amount related to any government pension that spouses received based on their own work not covered by Social Security (the Government Pension Offset), and (3) the RET was shifted from a monthly to an annual basis. Also on the benefit side, there were three provisions increasing benefits: (1) the exempt amount under the RET was increased in an ad hoc adjustment by raising it for 5 years for those retirees aged 65 or older, (2) the duration of marriage requirement for divorced and surviving divorced spouses was cut in half- from 20 years to 10, and (3) the value of delayed retirement credits was increased. The net savings from these changes (expressed as a percent of payroll)36 follow: Decoupling: + 4. 79 percent of payroll Additional benefit changes: + 0. 8 percent of payroll Tax changes: + 1. 78 percent of payroll In other words, 26 percent of the savings came from tax increases and 74 percent from benefit cuts. The impact on overall financing was to reduce the longrange deficit from 8. 20 percent of payroll to 1. 46 percent of payroll (SSA 1977). The amendments were said to have restored solvency to the program for the next 50 years, rather than the full 75 years that had traditionally bee n used as the projection period. Clearly, the long-term financing issues had not been fully resolved by the 1977 legislation. The Disability Legislation of the 1980s The Disability Insurance program came under renewed scrutiny during the first half of the 1980s. Throughout the 1970s, disability incidence rates were steadily rising. This led to concern in the Congress and in the Carter administration that disability costs were soaring out of control. Around the same time, the General Accounting Office (GAO 1978) conducted a very small study of disabled SSI recipients and found that perhaps as many as 24 percent were no longer disabled. An internal study by the Social Security Administration (SSA 1981) found that about 18 percent of the expenditures for the Social Security disability program was being paid to beneficiaries who were no longer disabled (DeWitt, Beland, and Berkowitz 2008, 369–374). 37 Thus, in 1980, major disability legislation was enacted in an effort to control costs in the program, to review those already receiving benefits, and to remove those who no longer qualified as disabled. The legislation mandated that the reviews begin by January 1982, and it projected savings from the reviews of about $10 million over 5 years. A follow-up study by GAO (1981) sampled Social Security disability beneficiaries and suggested that as many as 20 percent were no longer disabled, costing the program $2 billion a year. 15 Social Security Bulletin, Vol. 70, No. 3, 2010 Upon taking office in early 1981, the Reagan administration decided to accelerate the review process, as this was now projected to be a significant source of budget savings. The reviews began in July 1981 and rather quickly ran into serious political controversy and to public outcries in opposition to the reviews. 38 Among other problems, the reviews required only an examination of existing medical records, not face-to-face contact with the beneficiary. This led to isolated instances of obviously disabled individuals having their benefits stopped- incidents that were given wide publicity in the media. Also, the initial round of reviews was targeted to those classes of beneficiaries most likely to have recovered. This seemingly sensible idea led to much higher initial cessation rates than Congress or the public expected, which led in turn to charges that SSA was engaging in a wholesale â€Å"purge† of disability beneficiaries. 39 SSA also adopted a number of policy positions in the reviews that proved highly problematic. For example, cessations were processed without requiring proof of medical improvement. 40 Also, when faced with multiple nonsevere impairments, SSA did not consider the combined effect of the impairments. 41 Massive litigation ensued in the federal courts, virtually swamping the court system. 2 These lawsuits led to decisions overturning various SSA policies, which prompted the agency to adopt a very controversial practice of issuing formal rulings of â€Å"nonacquiescence† with certain court decisions. 43 Because of their opposition to SSA’s policies, the governors of nine states (comprising 28 percent of the national workload) issued executive orders st opping their state agencies from processing any disability review cases. 44 The controversies around the disability reviews became so great that the Congress enacted the Disability Benefits Reform Act of 1984 to restrain the activities set in motion by the 1980 legislation. Key provisions of the act, as highlighted in Collins and Erfle (1985), follow: A finding of medical improvement (or other related changes) was necessary to cease disability benefits; The combined effect of multiple nonsevere impairments must be considered in disability determinations; SSA was required to promulgate new mental impairment rules, reopen all cases of prior cessations involving mental impairments, and reevaluate them under the revised rules; SSA was given explicit authority to federalize any state agency making Social Security disability decisions that refused to comply with federal regulations; and A â€Å"sense of Congress† was expressed stating that nonacquiescence was an invalid legal posture, and if SSA elected to continue this practice, then it was obligated to seek a definitive U. S. Supreme Court review of the constitutionality of the procedure. (SSA dropped the practice. This legislation established the current policy context under which the disability program continues to operate. The Amendments of 1983: The Modern Form of the Program As mentioned, the Social Security program was running annual deficits beginning in 1975, and the assets of the trust funds were being drawn down to make up the shortfalls. Moreover, the stress on the program’s financing worsened considerably, even after the financing changes of 1977 that improved the long-term position of Social Security. But the short term continued to be problematic. Indeed, the amendments of 1983 were signed into law in April, at which time the trust funds were projected to be entirely depleted in August. Thus, trust fund exhaustion and the attendant benefit â€Å"default† were only 4 months away. 45 Initially, the 1977 effort seemed successful. The 1978 and 1979 Annual Reports of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds indicated a