Finance History Lesson: The Origin of Social Security
In 1934, the United States was in recovery. The Great Depression had ravaged the country and its people. From 1929 to 1932, unemployment rose 600% and industrial production was cut in half. Naturally, Congress was tasked with helping the country to recover. Initial efforts (like the Smoot-Hawley Act and early features of the New Deal) created little healing and possibly even slowed progress.
This is when the Roosevelt administration created the initial draft of the Social Security Act. After some debate and modification, it was signed into law in 1935. At this point, the Depression had drained the savings of thousands of elderly Americans and many of them were unable to compete for the very few job openings available. Roosevelt and Congress saw the need for a system to prevent those same elderly citizens from homelessness and destitution. The Social Security Act created a separate tax that would fund payments to the elderly in perpetuity based on their contributions. While it was not intended to completely replace a retiree’s income, Roosevelt said it would protect "against the hazards and vicissitudes of life." Additionally, the Act created funds for children, the widowed, and the unemployed.
In 1940, the first Social Security monthly retirement check was paid to Mrs. Ida May Fuller. From 1937 to 1939 she paid a total of $24.75 in taxes into the Social Security Trust. She would live for another 35 years and receive a total benefit of almost $23,000. I’d call that a good ROI!
Laws were passed in 1972 that required annual amounts to be adjusted for inflation. This is called a cost-of-living adjustment (COLA). Before that law was passed, increases for inflation were irregularly given by Congress.
Today, funding for Social Security payments comes from the taxation of the workers covered under the program (this is listed as "FICA" on your paystubs). This tax is 6.2% of your gross earnings but can be no more than $10,453.20 in total for the entire year of 2024. Your employer is responsible for contributing another 6.2% up to that same limit. Retirees can begin drawing a benefit their benefit between ages 62 and 70.