Small Business Questions & Answers


Filed under Managing Your Taxes

Ask Toolkit About Social Security's Bio

by Sweet Sue | June 11, 2013

Subject :Taxes

Dear Toolkit,

I enjoyed your recent column on the evolution of income tax in America. Can you give us Social Security's life story as well?


Sweet Sue

Dear Sweet Sue,

What we now nostalgically refer to as The Great Depression was the catalyst that got the "contract between the generations" (the formal Social Security Act) signed into law on August 14, 1935. Economic depression beginning with the stock market crash of 1929, the galloping urbanization of America after World War I, and the increasing life expectancy of the general population due to medical and nutritional advances all contributed to the urgent need for a social safety net. In short, nobody was staying down on the dust-bowl farm taking care of the increasingly old folks anymore!

Keep in mind that the broader history of social insurance in America started back in 1789. These events and ideas are recapped in admirable detail on the Social Security Administration's Chronological History page. While Social Security per se was initially designed solely as a retirement plan, there are many other forms of social insurance—workers' compensation, unemployment insurance, disability and dependent supplements and so forth—that have also evolved over the history of our nation.

President Franklin D. Roosevelt brought up the idea of social retirement insurance to Congress in 1934. He wasted no time in creating a Committee on Economic Security to make recommendations on how to develop such a program. (The Social Security Act of 1935 was initially called the Economic Security Act, but its title changed during the legislative process.)

Among the committee's founding fathers and mothers of Social Security, you will find poli sci professor, Tom Eliot, New Dealer extraordinaire (and cousin of the poet, T.S. Eliot of Wasteland and Cats fame). This was a colorful and visionary bunch of social architects, and we encourage you to check out that link and learn who they were. You'll also find some appropriately severe old photographs of these Movers and Shakers at that site.

The Act passed in 1935, taxes (initially 2 percent) started being collected in 1937, and monthly benefits began in 1940. (Word has it that about $4 trillion has been paid out in Social Security benefits to date—if you can imagine 4 trillion of anything.) The tax rate remained at 2 percent until 1950 when it was bumped to 3 percent. In 1956, disability benefits were added and the rate went to 4 percent, and increased to 6 percent only five years later. It rose again in 1972 when cost of living adjustments (COLAs) were added. Subsequent increases brought the rate to its current 12.4 percent on a wage base capped at $113,700 for 2013. (For details of employer/employee shares, self-employed tax rates and additional taxes for Medicare, see our Social Security Tax column.)

The Social Security Administration has collected all sorts of fascinating trivia about its illustrious past. For example, the Social Security card was designed by a Mr. Fred Happel of Albany, New York. In 1936, he was paid the astounding sum of $60 for his efforts. The numbering system is a bit haphazard. You can learn all about it here and here, assuming you have the fortitude to wade through the lengthy explanations about regions and areas and who got the first number and who else got the lowest number. (About 400 million numbers have been issued so far—and none is ever recycled!)

By the way, that acronym—FICA—which you see on your paycheck, stands for Federal Insurance Contributions Act. FICA simply means the tax provisions of the Social Security Act as they appear in the Internal Revenue Code. (The word "contribution" was used instead of "tax" simply to get around a Constitutional glitch.)

To learn about your modern-day benefits, go to the SSA's Home Page . . .