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Financial Planning and Retirement

Social Security Turns 85

Social Security Turns 85

Author: Dan Kline, Director, Financial Planning

The Social Security Act, signed into law by President Roosevelt on August 14, 1935, celebrated its 85th birthday this year. In 2020, about 65 million Americans will receive over one trillion dollars in Social Security benefits. To celebrate this landmark program that is a major source of income for America’s older population, we’ll review the Social Security Act’s interesting history in this blog post.

How the Social Security Act Began

The Social Security Act was intended to pay retired workers aged 65 or older a continuing income after retirement. A precursor to Social Security, the Civil War Pension, which began in 1862, paid benefits to disabled (service-connected) veterans of the Civil War, including their widows and orphans upon their passing. Even though the civil war was a century ago, Irene Triplett, who passed away just this year, was the last American to collect a Civil War pension check.

The Social Security Act (the Act), would pay benefits based on payroll tax contributions that the worker made during his or her working life. Taxes would first be collected in 1937 and monthly benefits would begin in 1942. Those who turned age 65 prior to this start date would receive a lump sum payment.

The earliest known applicant for such a lump-sum benefit was Ernest Ackerman in 1937, who retired one day after the Act began. During his one day of participation in the program, a nickel was withheld from his pay for Social Security and when he retired, he received a lump sum payment of 17 cents.

How the Social Security Act Evolved

In 1939 there were two important amendments to the Act. The first added the benefit of payment to the spouse and minor child of a retired worker. The second added survivor benefits to be paid to the family following the premature death of a covered worker. This amendment also moved up the start date of monthly benefits to 1940.

Another interesting story is that of Ida May Fuller, who received the first monthly retirement check in the amount of $22.54 at age 65. Ida had paid into Social Security for three years, a total of $24.75. During her lifetime she collected a total of $22,888.92 in Social Security benefits.

Additional amendments were made to the Act over the years, including:

  • In 1961, the age at which men are first eligible for “old-age” insurance was lowered to 62 (women were provided this benefit in 1956).
  • In 1965 President Johnson signed the Medicare bill, administering a new social insurance program extending health coverage to almost all Americans aged 65 or older. Former President Truman, present at this signing, received the first Medicare card at the ceremony. Also, in 1965 a divorced wives’ benefit was added to the Act. The divorced wife needed to have been married for 20 years for this benefit. Eleven years later, a divorced husbands’ benefit was added. The divorced benefit 20-year marriage requirement was reduced to 10 years in 1977.
  • In the 1970’s, Supplemental Security Income (SSI) was added to the Social Security Administration, requiring the administration to covert over 3 million people from similar state programs to SSI.
  • 1972 was the last year in which Congress decided if and when a cost-of-living adjustment (COLA) was provided. The largest (Congress provided) COLA of 77% was provided to Social Security recipients in 1950. Beginning in 1975, COLAs were based on the annual increase in consumer prices. Since being tied to consumer prices, the largest COLA has been 14.3% in 1980 (inflation was 13.5% at the time). There have also been three years with no COLA – 2009, 2010 and 2015. Delayed retirement credits (DRCs) were also introduced in 1972, providing credit to those who delayed their benefit past age 65. DRCs now provide an 8% increase in one’s benefit for each year one delays beyond their full retirement age.
  • In 1983, The Greenspan Commission saved the Social Security trust fund just months before it would have run out of money. Fixes included the taxation of Social Security benefits and increasing the age of full retirement from 65 to 67 over a phased 22-year period.
  • In 2000, The Senior Citizens’ Freedom to Work Act eliminated the retirement earnings test for those beneficiaries at or above the normal retirement age.
  • In 2012 Social Security went online, allowing someone to obtain their own benefit statement. This also gave people the ability to apply for benefits online.
  • In 2015, Congress, in the Bipartisan and Budget Act of 2015, eliminated the File & Suspend “loophole.” Additionally, the legislation removes the still available restricted application for spousal benefits. This claiming option, available to those born before January 2, 1954 will be gone as of January 1, 2024, when the last of those eligible will have turned 70.

Today, the latest board of trustee’s report suggests that the Social Security program will be solvent until 2035. There is speculation that it will only pay 80% of scheduled benefits at that time. A few small adjustments to the program, such as raising the payroll tax or increasing the full retirement age, may increase the sustainability of the program for decades. Based on historical changes, we have confidence any forthcoming changes will have minimal effect on those currently in their 50’s and 60’s or those already receiving benefits.

I hope you enjoyed this small history lesson on Social Security benefits. Knowing when to apply for your benefits can be a complicated decision depending on your individual situation. We advise working with a financial advisor who is familiar with your situation and has experience in Social Security retirement claiming strategies before applying for your benefits. You can also learn more about key factors to consider before claiming your benefits in our previous blog post.

 

About the Author

Dan Kline is a Financial Planner with the Private Client Advisory and Financial Planning teams within the Wealth Management group at FNBO. He specializes in providing comprehensive personalized financial planning incorporating investment, tax, protection, retirement and estate planning strategies.

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