Testimony of Commissioner Jo Anne Barnhart
Hearing before the Social Security Subcommittee
House Committee on Ways and Means
May 17, 2005
Thank you, Mr. Chairman and Members of the Subcommittee. It gives me great pleasure to be invited here today to testify about how Social Security has developed and evolved over time. Since its inception in 1935, Social Security has developed into one of the most successful domestic program in our nation's history.
Let me begin by telling you about what we do and how we do it. Last year, Social Security paid over $493 billion in monthly cash benefits to over 47 million workers and their families to replace, in part, the loss of income due to retirement, disability, or death. By providing these benefits, Social Security helps ensure economic security for millions of Americans. Social Security is the major source of income for most of the elderly population. In fact, over 90 percent of individuals age 65 and over receive Social Security benefits. About two-thirds of these beneficiaries receive most of their income from Social Security. For over one-fifth of them, Social Security is their only source of income.
As you know, Social Security involves more than paying cash benefits. In this fiscal year, SSA will:
- Process almost 6 million claims for benefits;
- Take applications, secure and evaluate evidence for, and issue 18 million new and replacement Social Security number (SSN) cards;
- Process 267 million earnings items to maintain workers' life-long earnings records;
- Handle approximately 52 million phone calls to our 800-number; and
- Issue 136 million Social Security Statements.
SSA does all this while keeping administrative expenses under 2 percent of total outlays of Social Security and SSI benefits.
You can see that Social Security plays a key role keeping millions of our most vulnerable citizens, the elderly and children, out of poverty. We take very seriously our commitment to giving the American people the service they deserve; improving program integrity through sound financial stewardship, ensuring the program's solvency for future generations, and maintaining the quality of staff the Agency needs to provide a high level of service and stewardship. Now I would like to provide some background as to how Social Security began and how it has continued to develop and evolve over time.
The Creation of Social Security
The Social Security Act of 1935 was a response to the economic crisis resulting from the Great Depression. At the height of the Great Depression, many older Americans were living in poverty. The Committee on Economic Security was appointed by President Franklin Roosevelt to confront the crisis. The Committee recommended that the federal government create a national system of unemployment and old-age benefits. Acting on those recommendations, and behind the driving force of President Roosevelt, Congress enacted the Social Security Act, which was signed into law on August 14, 1935.
The Act established a federal social insurance program for the aged financed through payroll taxes paid by employees and their employers (two percent on the first $3,000 in earnings divided equally between employee and employer). The financing was based on the concept of "pay-as-you-go" or PAYGO. Under the PAYGO system, Social Security contributions of current workers fund the Social Security benefits of current beneficiaries. Congress selected this method of financing because of the great number of older Americans who were living in poverty at the time of the Great Depression. With the severity of the economic situation at the time, and because most of them would not have been able to find employment and then contribute to the system long enough to be eligible for benefits, Congress decided that this generation of older persons should receive Social Security benefits, despite not having contributed to the system. Thus, most of the first generation of Social Security recipients contributed either very little or not at all to Social Security.
The original old-age insurance system created by Title II of the Act provided retirement benefits to insured worker at age 65. The benefit was based on total wages, but a weighted formula was used to provide a greater return on payroll taxes paid in to low-wage earners. At that time, no benefits were provided for spouses and children. If a worker attained age 65 but was ineligible for benefits or died before reaching the age of 65, Social Security provided a lump sum payment to the worker or his/her estate. Collection of payroll taxes began in 1937 and benefit payments were scheduled to commence in 1942. This provided time to build up the Social Security Trust Fund. Any surplus funds collected were to be invested in U.S. government securities.
1930s/1940s: Family Protections Added
In 1939, Congress amended the Social Security program to shift its focus from protection of the individual worker to protection of the family. The new legislation provided benefits to aged wives/widows, young children of a retired or deceased worker, young widows caring for a child, and dependent parents of a retired or deceased worker.
In addition, in response to public pressure, the amendments allowed initial benefits to be paid beginning in 1940 instead of 1942, as originally scheduled.
Following the implementation of the 1939 amendments, the system remained essentially unchanged throughout the 1940s.
1950s: Expansion of the Program
The 1950 amendments made substantial changes to the scope of the program. This legislation broadened the program to cover many jobs that previously had been excluded, such as farm and domestic workers and, on a voluntary basis, State and local government employees not under a pension plan. This legislation also greatly increased benefit levels. Wage credits were also provided to those in military service. To finance these improvements, the amendments created a revised schedule for gradually increasing tax rates for employers, employees and the self-employed and increased the contribution and benefit base (the maximum amount of earnings subject to payroll tax and used in benefit computations).
Four years later, in 1954, another expansion in worker coverage took place. Social Security coverage was extended to farm self-employed workers and to professional self-employed workers (except lawyers, doctors, dentists and other medical groups). In addition, coverage was extended to State and local government employees covered under a pension plan (except firemen and policemen), on a voluntary basis.
By the mid-1950s, 20 years after the enactment of Social Security, almost 90 percent of workers were given protection under the program. In addition to this expansion, the 1954 amendments increased benefit levels and raised the contribution and benefit base.
In the early 1950s there was a growing recognition that the dangers of economic insecurity due to disability needed to be addressed. As a result, the 1954 amendments began the process of protecting workers from income loss due to disability. Congress enacted a disability "freeze" provision on a disabled worker's earnings record. While no cash benefits were payable under the provision, workers who were permanently disabled and met the insured status test at the time they became disabled could have their Social Security eligibility preserved by excluding periods of disability when computing subsequent retirement or survivors' benefits. This provision prevented loss of retirement and survivors' benefits due to disability.
Social Security disability cash benefits were authorized under the amendments of 1956. The program established a cash program beginning in 1957 for totally disabled workers between the ages of 50-65. The program established the Disability Insurance (DI) trust fund and was financed by an increase in the employee/employer payroll tax.
The amendments also provided benefits to a dependent child, over the age of 18, of a retired or deceased worker if the child became disabled before the age of 18. In addition, benefits to female workers and wives were made available at age 62 instead of age 65, but at a reduced level to take into account the longer collection period. At age 62, widows and dependent parents could receive benefits at an unreduced rate. In 1958, the program extended benefits to spouses and children of disabled workers.
1960s: Disability Program Expanded & Medicare Began
By the mid-sixties, the OASDI program was essentially the program that exists today. Coverage was nearly universal so that almost all individuals retiring in the years following would be eligible for benefits. Two amendments were passed in the early 1960s. In 1960, the age requirement for disability, which was originally limited to those who were at least 50, was abandoned. In 1961, all retirees were now allowed to collect reduced benefits at age 62 instead of 65.
Concerned over the cost of health care for the elderly population, Congress passed "Medicare" legislation in 1965. The legislation consisted of two major components. Part A was hospital insurance that provided basic protection against hospital costs and other related care. This portion would be financed by an additional payroll tax on employers, employees and the self-employed. Part B was supplementary medical insurance that provided coverage for physicians' services and other health care. Enrollment in Part B was voluntary and was funded through general revenues and premiums paid by enrollees. Separate trust funds were created for each part of the program. In addition to the Medicare program, the amendments included an increase in benefits and as well as an increase in the earnings base.
Throughout the remainder of the decade, benefit levels continued to increase, as did the earnings base. In addition, in 1967, Social Security began providing monthly cash benefits for disabled widows and disabled dependent widowers; these benefits were available as early as age 50.
1970s/1980s: COLAs Introduced & Long-Term Financing Addressed
Throughout the program's history, Congress has maintained the value of Social Security benefits by periodically enacting across-the-board increases in benefits. However, in 1972, Congress decided to link benefits directly to changes in the Consumer price Index (CPI). The first automatic COLA adjustment took effect in June 1975. Prior to this time, Congress voted for increases in benefits directly. In addition, the legislation increased the contribution and benefit base and provided for automatic adjustments in this ceiling.
Based on economic projections in the mid-1970's, it was then estimated that initial benefits as a percent of pre-retirement earnings (replacement rates) would increase significantly for future retirees. Initial benefits were rising faster than either wages or prices. In 1977, Congress raised the payroll tax rates and increased the contribution and benefit base. Congress also corrected the most serious flaw in the method for computing the initial benefit level. Congress modified the benefit formula in order to provide that, from generation to generation, comparable workers would receive comparable replacement rates. Unfortunately, constant replacement rates for initial benefits become unsustainable when the worker to beneficiary ratio deteriorates. Today, we know that the ratio is about 3 workers for every beneficiary and is expected to fall to unsustainable levels (about 2:1) around 2030.
In the late 1970s and early 1980's, high inflation rates caused a serious and immediate financing crisis for the program. President Ronald Reagan appointed a blue-ribbon panel known as the Greenspan Commission to study the financing issues and recommend legislative changes. As a result of the Commission's findings, Congress made significant changes in the program in April 1983. The major provisions included:
- Gradual increase in the normal retirement age from age 65 to age 66 by 2009 and 67 by 2027
- Expanded coverage to newly hired federal civilian employees and those working in non-profit organizations
- Acceleration of scheduled tax increases for employers and employees
- Permanent increases in self-employment tax rates
- Inclusion of up to half of Social Security benefits in the taxable income of higher income beneficiaries (this money would then be transferred to the Social Security trust funds).
The 1983 amendments were designed to achieve solvency for the 75 year projection period by initially building large Trust Fund reserves which could be used to cover costs in the future. As designed, it was clear that near the end of the 75 year period, the Trust Funds would run cash flow deficits prior to its exhaustion. A sustainable reform of the system requires actuarial balance over the 75 year projection period and stable or rising Trust Fund balances at the end of that period.
1990s and Beyond
While a number of amendments have been legislated since 1983, many of these, such as the Social Security Administrative Reform Act of 1994 that established the Social Security Administration as an independent agency, have impacted more or how Social Security operates as an agency. There have been few programmatic changes. The 1993 amendments made up to 85 percent of Social Security benefits subject to income tax for individuals whose income, plus one-half of their benefits, exceed $34,000 (single) and $44,000 (couple), with the additional revenue credited to the Health Insurance (HI) trust fund. And in April 2000, legislation was enacted to eliminate the retirement earnings test at the full-benefit retirement age, giving today's retirees the opportunity to supplement their incomes and to continue to contribute to society through work, if they choose, without reducing their Social Security benefits.
However, while the actions taken in the 1980's resolved the immediate short-range financing crisis, the issue of long-range solvency arose again in the 1990's. These issues were addressed directly by the bipartisan 1994-96 Advisory Council on Social Security and have been the center of a continuing national debate since then. Throughout this debate, the importance of preserving Social Security for those members of our society who depend upon it -- the elderly, women, minorities, and people with disabilities -- has always been of primary concern to policymakers.
As I stated earlier, Social Security quickly evolved from a program for retired workers to one affording economic protection to the entire family. Over one-third of today's Social Security beneficiaries are not retirees. The program has since developed into one that provides a large measure of economic well-being for millions of Americans. Today, Social Security provides not only retirement benefits but valuable survivorship and disability insurance for workers and their families.
As you well know, the Social Security program is gender and race neutral. We treat individuals with identical earnings histories the same in terms of benefits. However, due to demographic trends, certain groups - like women - benefit from various features of the Social Security program.
These features include a progressive benefit formula, automatic cost-of-living adjustments and guaranteed benefits for dependants and survivors.
Women - who on average live longer, make less money and spend more time out of the workforce raising children than men - find these elements of the program's benefit structure particularly helpful.
Social Security has provided a solid floor of financial protection that has allowed the great majority of Americans to retire with the dignity that comes from financial independence, without fear of poverty or reliance on others for nearly 70 years. In addition, it has developed into the most important program to prevent families from falling into poverty upon the sudden and often unexpected loss of income due to the worker's disability or death.
As my testimony illustrates, the history of the Social Security program is a history of change. And Social Security will need modifications in the future to address the challenges the program is currently facing. Today, the country's demographics are working against us: Baby Boomers are rapidly approaching retirement, families are having fewer children, and people are living longer. As America ages, it will become more and more difficult to pay promised benefits without making changes.
While we are in sound fiscal health in the near term, I believe - as do my fellow Trustees - that the future projected shortfalls should be addressed in a timely manner to allow for a gradual phasing in of the necessary changes. The sooner adjustments are made, the smaller and less abrupt they will have to be.
Payroll taxes coming into Social Security will cover all currently promised benefits until 2017. In that year, Social Security will need to use the interest earned on the bonds to help pay benefits and then begin redeeming the bonds themselves.
These bonds - backed by the full faith and credit of the United States Government - will be gone by 2041. Unless changes are made there will only be enough money coming into the system to pay 74% of promised benefits at that time.
Ask yourself how your personal life would be affected if all of a sudden you learned that your salary was being cut by 26 percent. For most Americans this sort of reduction would be difficult - if not impossible - to absorb. For the two-thirds of Americans receiving benefits from Social Security who depend on our checks for the majority of their income, it is a drastic measure that we must avoid. Our parents and grandparents could feel assured about the promise of a secure future. I believe that we have an obligation to ensure that Social Security's safety net is also there for our children and grandchildren.
As a nation, we have a proud history of grappling with difficult issues, and we have done this best when we work together. Social Security is no exception. Since 1935, Congress has legislated changes as necessary to meet the changing needs of the American people and to ensure that the program was adequately funded to provide for these changes. I am confident that we will do so again.
I want to again thank the Chairman for holding today's hearing. As President George W. Bush said,
"This country has many challenges. We will not deny, we will not ignore, we will not pass along our problems to other Congresses, to other presidents, and other generations. We will confront them with focus and clarity and courage."
With the President's leadership and that of this committee, I am certain that we will address the needs of our changing society and provide for a Social Security program that our citizens can count on to be there for them. Let me take this opportunity to make clear that current and near-beneficiaries can be assured that their scheduled benefits are secure and will be paid.
Our actions must signal to younger generations of Americans that we are committed to strengthening Social Security. By doing so, we restore their faith and confidence in the most successful domestic program in our nation's history.
As the discussions on strengthening the program continues, the Social Security Administration will be available to provide assistance to the Congress in the analysis of any proposed changes and we will continue to faithfully serve the American people to the best of our ability.
I want to thank you again for inviting me to testify. I would be happy to answer any of your questions.