Social security: the early years

William Bedford, Pilgrim leader, Plymouth, 1620

• …in ye times of most distress…spared no pains night nor day, but with abundance of toyle and hazard of their owne health, fetched them woode, made them fires, drest them meat, made their beads, washed their lothsome cloaths, cloathed them and uncloathed them; in a word, did all ye homly & necessary offices for them.

Scots’ Charitable Society, 1684

• No prophane or diselut person, or openly scandalous shall have any pairt or portione herein.

Early 1700s: Theistic view of chairty

• God established principles, but also is a personal intervener

• The better-off should know the poor individually

• The most important need for the poor was to learn of God

• It is important, at times, to withhold charity

Cotton Mather, 1698

• “Instead of exhorting you to augment your charity, I will rather utter an exhortation…that you may not abuse your charity by misapplying it.

1753, Charles Chaunceyre: 2 Thessalonians 3:10

• The Command in my Text is plainly a Statute of Heaven, tying up your hands from Charitable Distributions to the slothful poor. And, so far as it appears to me, it would be an evident Breach of the Law of the Gospel, as well as of Nature, to bestow upon those the Bread of Charity, who might earn and eat their own bread, if they did not shamefully idle away their own Time.

1833 Ohio Law and Poorhouses

• If any person shall refuse to be lodged, kept, maintained and employed in such house or houses, he or she shall not be entitled to receive relief from the overseers during such refusal.

The Society for the Prevention of Pauperism, 1824: 10 Causes of Poverty

• Ignorance

• Idleness

• Intemperance

• Want of economy

• Imprudent and hasty marriages

• Lotteries

• Pawnbrokers

• Brothels

• Gambling houses

• Charities that gave away money too freely

Opposition to SS

• IT WAS WELFARE

The Depression

• prior to 1930, you worked until savings carried you through retirement.

• family was a major source of support.

• almshouse (poorhouse) where there was no family

• veterans benefits

• private market old folks homes, insurance

• private pension plans: 15% of workforce by 1930

Dr. Francis E. Townsend:

• Savior of the elderly?• $200 per month per over-60, must be spent

• financed by “transactions tax”

Birth of Social Security

• Je 8, 1934• FDR charged Congress to: “promote the

general welfare”

• greater focus on unemployment than old-age income

• 1-17-35, FDR submits OA dependency as top priority

• signed into law on 8-14-35

Who pays?

• Half employee, half employer

• tax incidence

• Why?• FDR was afraid we would lose SS after the

depression!

Basic Features

• Title I was assistance (Welfare), administered on state level

• Title II was insurance: funded by 1% wage by ee, matched by er.

• American style (equity): contribute more, receive more, but progressive structure

• Minimize redistribution

Basic Features (cont.)

• Title III: unemployment compensation, administered by states

• The deserving poor• Title IV: aid to dependent children

• Title X: relief to the blind

• Title V: crippled children, medical research

Re-Vision

• Benefits not scheduled to begin until 1-1-1942

• 1937: great public concern that the fund was too large!

1939 amendments

• emphasis on “social adequacy” rather than “equity”

• benefits payable in 1-1-40• benefits =f(average (not total) earnings) =

increased benefit level• benefits payable even if some earnings

(<$15 per month)• Survivors benefits!

1939 amendments (cont.)

• intergenerational transfers and 3 legged stool.

• wife receives either her benefit, or half of the husband’s benefit at age 65

Current Program

• OASDHI• Old Age

• Survivor

• Disability

• Health

• Insurance

• No welfare

• No unemployment

Will benefits be there?

• nature of the problem• what are the funds?

• what are the demographics?

1983 reforms

• increased retirement age• 67 for you!

• some benefits taxable

• include federal employees

• interfund borrowing

Reform proposals

• Decrease benefits• raise age

• tax benefits

• Raise revenues• no cap on taxes

• raise rates

• invest at market rates

Reform Proposals (continued)

• Privatization• Background

• Funds currently invested in Treasury Securities

• Return = +f(risk)

• Proposed• Let SSA invest in corporate bonds

• Let individuals invest their own retirement– Pay attention to general equilibrium models!

Will Social Security be there when you retire?

• The answer is...

• Yes!