Throughout human history, economic security has taken many forms. For the ancient Greeks, it was stockpiling olive oil. Olive oil could be stored for long periods of time; it could also help with nutrition during times of famine. During the Middle Ages, security took the form of guilds and societies that began to pay life insurance benefits to their members.1
Here, we will explore the history and future development of the Social Security program in the United States: the historical background, the current state, and future projections.
The History of Social Security
The US Social Security program was born out of one of the gravest economic crises in the world: the Great Depression. While the Great Depression affected virtually every country in the world, the United States was hit the hardest. The Great Depression came on the heels of the stock market crash of 1929, also called the Great Crash, and it was the third economic collapse the United States had experienced in less than 100 years (the first in the 1840s and the second in the 1890s).
The previous economic crises had given rise to the development of Civil War pensions and company pensions, but neither of them was comprehensive enough to deal with the strife caused by the Great Depression. Following the Great Crash, unemployment rose to above 25%, about 10,000 banks failed, and the GDP fell by almost half, from $105 billion to $55 billion. These economic strains continued in the 1930s, with over millions of people unemployed and most of the elderly population being dependent on someone to care for them.1
After several years of continued economic turmoil, President Franklin D. Roosevelt announced his plan to create a Social Security program, and the Social Security Act was officially signed into law on August 14, 1935. The main goal of the Act was to pay retired workers (aged 65 and older) a continuing income and establish several other welfare provisions.1
How Social Security Works Today
Today, Social Security is considered an integral part of most Americans’ retirement strategies. In 2020 alone, 69.8 million Americans received benefits from programs administered by the Social Security Administration (SSA), with 5.8 million new people receiving some form of Social Security in that year alone.2
Social Security is funded largely through payroll taxes on a “pay-as-you-go” model, with the current workforce’s contributions being used to fund the benefits for the current Social Security benefits. The plan, as well as the hope, is that by the time today’s workforce is set to retire, the younger generations will still be contributing to the program to fund Social Security for the next generation of retirees.2
The Future of Social Security The 2021 annual report of the Social Security Board of Trustees announced that funds for Social Security would be exhausted by 2034. This was a year ahead of the projections made in the previous year’s report. While this announcement may seem catastrophic, what this actually means is that cash reserves for the program will be exhausted, and retirees in 2034 could see their benefits reduced to 78%.3,4
It is difficult to say for certain what the future of Social Security will be. The hope is that Congress will act in time to resolve this shortage of funds problem. Regardless of what happens to this program, it is important to make sure that you have other strategies in place for your retirement so that, irrespective of the developments in Washington concerning Social Security, you can enjoy your golden years.