The Evolution of the Old-Age Retirement Income Support System
Retirement and retirement income systems are relatively new and evolving institutions. Paradoxically, industrialization created both the need and the opportunity for the nation’s “old-age retirement income support system.” Improvements in nutrition, sanitation, and public health led to more people reaching old age and living longer once they were there.
A growing economy raised living standards, providing new opportunities for leisure as well as for the expansion of public and private income and health protections for older Americans. Movement from agricultural and small-scale production to manufacturing production raised wages even as it increased insecurity. Workers became subject to the vagaries of economic cycles. Employers, often interested in workers who could keep up with the speed and dexterity demands of new technologies, required orderly means of turning over their workforces. Unions wanted employment opportunities in the growing manufacturing economy for younger members.
American workers and their families needed protection against many identifiable risks—risks related to disabling industrial accidents, deaths of workers, and old age as well as risks related to outliving one’s savings or seeing retirement incomes eroded by inflation. Then, as is the case now, pensions—both public and private—provided a partial solution to the needs of working persons while simultaneously addressing the interests of employers and unions. By the mid- 1950s, “retirement” had emerged as a new institution and as a normative expectation of older Americans.
Although income from employer pensions, employment, assets, and welfare is important, Social Security—the Old-Age, Survivors, and Disability Insurance (OASDI) program—is the heart and soul of the nation’s retirement income system. Based on the social insurance approach to economic security, the program is designed to provide universal protections for the American public against selected risks.
In exchange for making modest payments through regular employer and employee payroll tax contributions over the course of their work lives, working Americans earn for themselves and their families the right to benefits when earnings are lost as a result of retirement, long-term severe disability, or death. Because social insurance, unlike private insurance or private pensions, is designed to provide widespread basic protection, the system provides proportionally larger benefits to low- wage workers, even though high-wage workers generally receive larger monthly benefit amounts. Social Security was intended as a supplement to personal savings, employer-provided pensions, and (for some) earnings from continued work during their old-age years—not as the sole source of income that it often is.
The Social Security Act of 1935 established Social Security, which was then known as old-age insurance or old-age benefits, as well as means-tested protections for the needy, aged, and blind. During its first 40 years, the act was amended many times, generally adding and strengthening its social insurance provisions and, at times, its public assistance (welfare) provisions. For instance, protections were added in 1939 for aged wives and dependent children of retired workers and for surviving wives and dependent children of workers and retirees. The 1950 amendments established Social Security Pension as the dominant source of protection for the old. Also, needs-based welfare protections were added for needy disabled individuals in 1950, as noted in 2006 by the Social Security Administration.
This was followed by the creation of the Disability Insurance (DI) program in 1956 and then Medicare and Medicaid in 1965. Initially, disability insurance provided cash benefits for long-term severely disabled workers 50 to 64 years of age and disabled adult children of workers. Medicare was intended primarily to provide hospital and medical insurance to workers over 65 years of age and was later expanded to provide benefits to disabled workers, whereas Medicaid was intended to provide medical coverage primarily to the needy aged, disabled, and families caring for children. In 1972, the Social Security Act was amended to place all categories of needy adults—elderly, blind, and disabled—into one federal program for needy adults, namely Supplemental Security Income (SSI). The 1972 amendments also created the cost-of-living adjustments (COLAs), which were implemented to ensure that retiree benefits kept pace with inflation, according to the Social Security Administration in 2006.
Beginning in the mid-1970s, legislative attention focused primarily on emerging financing problems. In 1977, and again in 1983, amendments were implemented to address short-term problems resulting from poor economic performance (e.g., high inflation, lower than expected wage growth) and long-term problems resulting from project demographic change (e.g., fertility declines, improved mortality, projected aging of the baby boom cohorts) and economic change (e.g., slower growth of wages and the economy) and (in 1977) a flawed benefit formula.
Today, although its short- and mid-term finances are very secure, the program faces another long-term shortfall, again a result of demographic change and of anticipated changes in the economy. Under the most commonly accepted set of assumptions, the retirement income system program has sufficient funds to meet all payments through 2041, after which there will be a roughly 26% short- fall. In the unlikely event that future congresses and presidents put off Social Security reform, beginning around 2041, the anticipated revenue stream would cover only 74% of promised benefits.