Part 1-Social Security
A Brief History
Our current Social Security system was not the first attempt to provide some form of economic security to Americans. Following the Civil War a “full-fledged pension system developed in America for the first time.” Widows and orphans and soldiers with disabilities qualified. By 1910, Civil War veterans and their survivors received benefits. During the following years, some private companies offered pensions, but by 1932 only about 5% of the elderly had a retirement pension through these companies. By 1935, 30 states had pension programs, but still a very small percentage of the elderly received benefits. (Social)
The Industrial Revolution changed the demographics of American society. We went from mainly an extended-family and agrarian society to one in which many workers flocked to the cities for manufacturing jobs. Sanitary, medical, and other conditions were improving which caused life expectancy to be extended. However, when people lost jobs due to layoffs or recession, the previous family support systems were unavailable. (History)
The Great Recession, which began in 1929, caused widespread damage to our economy: 25% unemployment; thousands of bank closures; a 50% decrease in our gross domestic product; and a 40% decrease in the wages of those still employed. Rather than depending on the government or charities, Franklin Roosevelt proposed a self-governing program where citizens contributed to their own economic security from a tax on their wages.
In 1934, President Roosevelt appointed the Committee on Economic Security, led by Frances Perkins (the Secretary of Labor and first female to serve as a cabinet member), to draft the Social Security Act, which was passed by Congress and signed into law on August 14, 1935. In the beginning, not all workers could participate, including agricultural workers, domestic workers, and the self-employed. Amendments were passed in the 1950’s that increased the number of beneficiaries, including those previously excluded. As the system began to experience financial shortfalls, more recent amendments in the 70’s and 80’s increased the payroll tax, raised the retirement age, and taxed benefits. (History) The Social Security program is officially called the Old-Age, Survivors and Disability Insurance (OASDI).
In 1937, Social Security (SS) wages were taxed at the rate of 1% on the employer and 1% on the employee on the first $3,000 of wages. Today, SS wages are taxed at 6.20% on the employer and 6.20% on the employee (12.4% total tax on wages up to the current cap of $176,100). (Understanding) The self-employed are taxed at the entire 12.4%. Up to 85% of Social Security wages may be taxable, depending on income. In 1960, there were 5.1 workers for every 1 SS beneficiary. Today, there are only 2.7 workers for every 1 SS beneficiary and in 2050 there will be only 2.2 workers for every 1 SS beneficiary. The core issue is a shrinking ratio of covered workers to beneficiaries, leaving the system underfunded in the long run.
The law that mandated the tax to fund Social Security is known as the Federal Insurance Contributions Act (FICA). Originally, FICA taxes only funded the Social Security program. In 1966, the Medicare part of the tax was added. Medicare will be discussed in the second part of this article.
How the Social Security System Works Today
To qualify for Social Security benefits a worker needs to pay into the system for a minimum of 40 quarters on wages of a current minimum of $1,810 per quarter. Social Security benefits are “based on your highest 35 years of earnings and varies depending on how much you earn and when you choose to start benefits.” (Understanding) Benefits can be paid to retirees and qualified spouses and/or dependents of beneficiaries. Qualified workers who are disabled are covered under the Social Security Disability Insurance program.
Full retirement benefits can be claimed between age 66 and age 67, depending on the year and month born. Benefits are reduced if claimed between age 62 and the full retirement age. Benefits can be increased by delaying claims up to age 70.
The average monthly Social Security benefit for a single worker in 2025 is $1976. (Understanding) Social Security benefits vary according to the state where the recipient lives. For example, the average monthly payment varies from a low of $1816 in Mississippi to a high of $2405 in New Hampshire. There is an annual Cost of Living Adjustment (COLA) on benefits. The COLA for 2025 is 2.5%. (Hagen) Up to 85% of SS benefits are taxable depending on total income earned during the tax filing year. However, recent legislation signed by President Trump will allow a $6,000 reduction in SS taxes for those over 65 with an income under $75,000, $12,000 for married couples under $150,000. The benefit is reduced for those with incomes above those limits. This reduction will end in 2028.
Social Security Disability Insurance (SSDI) benefits averaged $1258 per month in 2020. (Laurence) The amount of these benefits also vary from state to state. Benefits are based on the amount of “covered earnings” during the years of employment prior to the disability. SSDI benefits have no minimum age requirement, provided the “40 quarters” eligibility condition is satisfied.
The Social Security Trust Funds
The SS Trust Funds are comprised of the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) Trust Funds. The Department of the Treasury is responsible for managing these two accounts. The accounts provide an accounting system for tracking income and disbursements and hold the “accumulated asset reserves” (currently 2.7 trillion in the OASI fund and .69 trillion in the DI fund). (Trust) These reserves are held in the form of “special issue” investments earning an average rate of about 4.1% in 2024. (Interest) The cash from the sale of these bonds is deposited into the general fund of the U.S. Treasury. Some people believe that these bonds are no more than worthless IOU’s. However, they are backed by the “full faith and credit” of our government. As with regular bonds sold by the federal government, reneging on these obligations would result in severe political and economic repercussions.
“In 2025, about 69 million Americans will receive over 1.6 trillion dollars in Social Security benefits.“ (Fact) The annual cost of the Social Security program is projected to surpass income in 2024, and by 2034 the trust funds will be depleted. If no modifications are implemented before 2035, benefits are projected to decrease by approximately 23%. (CBO)
The Impact of the Social Security Program
From the beginning, Social Security was expected to provide only one part of retirement income. It was designed to supplement other income from pensions and savings. Just 51% of retirees have income from private pensions and only 57% of retirees have income from investment accounts. According to a Gallop poll, 58% percent of Americans say that SS is a major source of income. (Caporal) Nearly 90% of all Americans age 65 or older receive SS benefits, which represents 31% of their annual income. (Fact) If not for Social Security, 22 million adults and children would be living below the poverty line. (Romig)
To be objective, there are some who believe that the Social Security program is a giant Ponzi scheme. That is, it is simply using current workers to pay current retirees while increasingly going broke; that it is an unfair form of forced savings, or that we could accumulate more in savings if left to invest the payroll taxes on our own; that it hinders job growth by putting an extra tax burden on the backs of employers.
While those arguments have some merit, the program’s benefits clearly outweigh its drawbacks. It is doubtful that current beneficiaries, a huge and powerful voting block, would allow elimination or drastic changes to the program. Social Security is here to stay, but significant changes to the program need to be made promptly in order to insure fair and reasonable benefits to current and future retirees.
Possible Ways to Make the Social Security Program Sustainable for the Long Term
- Raising the payroll tax level (currently 12.4%).
- Raising the “cap” on wages (currently $176,100) beyond the regular annual increase; or eliminate the “cap” altogether.
- Raising the “full retirement” age (currently between 66 and 67).
- Reducing benefits to selected groups based on total annual income or net worth (“means testing” benefits).
- Including newly hired state and local government employees. (Waggoner)
- Adjusting the formula used to calculate benefits. For example, changing from the highest 35 years of earnings to the highest 38 or 40 years. (Waggoner)
If some of the above, and other changes, are implemented the Social Security program should be fully fundable far into the future. Thus, the program is capable of remaining a sustainable and vital part of the economic security for retired and disabled Americans. Unfortunately, our Legislative and Executive branches of government have been reluctant to address the problem of making Social Security solvent. Any action taken is likely to anger some voters. However, it is time to put the best interest of the country ahead of what is politically expedient.
Bibliography
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“CBO’s 2024 Long-Term Projections for Social Security.” Congressional Budget Office. Retrived 4-29-25. www.cbo.gov/pulication/60679.
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Hagen, Kailey. “Here’s the Average Social Security Benefit in Every State.” The Motley Fool. Feb. 28, 2025. Retrieved 4-29-25. www.fool.com/retirement/2025/28/average…
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Romig, Kathleen. Center on Budget and Policy Priorities. “Social Security Lifts More Americans Above Poverty Than Any Other Program.” Updated January 21, 2025. Retrieved 4-30-25. www.cbpp.org/research/social-security/social…
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Part II-Medicare
A Brief History of Medicare
In 1965, President Johnson signed legislation establishing the national health insurance programs known as Medicare and Medicaid. He wasn’t the first to propose such legislation, but was successful due to concessions regarding physicians’ fees, a separate Medicare trust fund, and a large majority in both the House and the Senate. Franklin Roosevelt tried to get health insurance included in the Social Security Act of 1935 but met opposition from the American Medical Association and conservatives in Congress. President Truman and President Kennedy had also advocated passage of a national health insurance program. (Van der Voort)
Medicare Insurance payments are required by all W-2 employees, most of whom become eligible for coverage at age 65. Employees and employers each pay 1.45% in FICA taxes for Medicare. The self-employed pay the entire 2.9%. Unlike the Social Security part of FICA which places a cap on taxable wages, the Medicare tax is levied on all wages. Also, the Affordable Care Act required an additional .9% tax on all wages above $200,000.
There are three other federal health insurance programs that are not part of Medicare. They are: Medicaid; the Children’s Health Insurance Program; and the Affordable Care Act.
Though Medicaid was part of the 1965 legislation, the FICA tax does not fund that program. Medicaid is a federal-state administered program for those below certain income levels who are not covered by employer or other private insurance plans.
The Children’s Health Insurance Program (CHIP) began in 1997 with the purpose of providing health insurance for uninsured American children that are not covered under Medicaid or private insurance. Since enactment, the number of uninsured children dropped from nearly 15% to 5.4%. (First)
The Affordable Care Act (ACA), signed by President Obama in 2010, was established to provide affordable health insurance to more Americans. Prior to ADA, only about 83% of Americans had health insurance. By 2018, over 91% were covered by health insurance. (Stasha)
A Brief Overview of How Medicare Works
If you (or your employer) paid the 2.9% FICA or payroll tax for at least 40 quarters, you qualify for Medicare at age 65. People with disabilities may qualify sooner. Medicare is divided into several parts: Part A covers hospital expenses but has a deductible fee; Part B covers medical and doctor’s expenses and has a monthly premium of $185 or more depending on income; Part D is for drug coverage. Medicare Parts A and B cover 80% of what Medicare considers “reasonable and necessary.” Many people will purchase Medigap or some other supplemental insurance to cover the 20% that Medicare does not pay.
Medicare Advantage (Part C) is an optional plan that includes parts A and B and usually Part D. This plan may also cover vision, hearing and dental services. Advantage participants will use doctors in the plans network. All or part of the Part B premium may be covered. (Medicare)
As of April 2023, 67.3 million Americans are enrolled in Medicare; 50.4% are in Medicare Advantage and 49.6% on Original Medicare. In 2023, $832 billion was spent on Medicare. (Hall) The result is an annual cost per Medicare recipient of $12,363. Medicare has 2 trust funds: the Hospital Insurance Trust Fund (fully funded until 2036); the Supplemental Medical Insurance Trust Fund (fully funded indefinitely since premiums are adjusted annually to cover cost). (Social)
Ron Ohlhausen
June, 2021
Updated July, 2025
Bibliography
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Hall, Alena. “Medicare Statistics And Facts in 2025. Forbes. February 14, 2025. Retrieved May 4, 2025. www.forbes.com/advisors/health-insurance/medicare…
Medicare.gov. “How does Medicare work.” Retrieved 5-1-25. www.medicare.gov/…/how-does-medicare-work.
Social Security. “Status of the Social security and Medicare Programs; A SUMMARY OF THE 2024 ANNUAL REPORT.” www.ssa.gov/OACT/TRSUM/Index.htmi
Stasha, Smiljanic. 27+ Affordble Care Act Statistics and Facts (2021). Policy Advice. Last modified February 14, 2021. Retrieved April 9, 2021. Policy advice.net/…/affordable-care-act-statistics.
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