Social Security - The Expansions

Since its original inception in 1936, the Social Security program has been expanded and modified over the years. What once started as a program funded for individual workers grew in both scope and complexity.

1939 - The First Major Expansion

The first major expansion came in 1939. H.R. 6635 introduced the following changes:

• Added dependent benefits (spouses and children of retired workers)
• Added survivor benefits (if the worker died, their family received benefits)
• Changed benefit formula from cumulative wages to average monthly wages
• Delayed the scheduled tax increases that were supposed to occur in 1939

This slight expansion didn't increase the rate of taxation, but did increase the benefits to the surviving families of the worker. Additionally, they increased the benefit amounts and accelerated the start of payments from 1942 to 1940.

This law transformed Social Security from a worker retirement program to a family security program. It also set up the system such that current workers would receive higher relative benefits than those who came after them.

Congress realized it could expand benefits without raising taxes immediately. This set a pattern: promise more benefits, delay raising taxes. This was an early sign that political incentives were driving the program rather than mathematical realities.

1950s-1960s - The Gradual Expansion

The program remained relatively unchanged until the 1950s and 1960s in which a series of amendments were passed. The rate of paycheck witholding was increased to 1.5% in 1950 to 4.2% by 1965. Essentially, in the 32 years after the initial act was passed, Congress raised the tax rate by 450% to cover the growth of the program.

In addition to the increase in tax rates, the wage base was increased as well. From 1937-1950, social security was only taxes on earnings up to $3,000. By 1965, they had raised the base earnings to $4,800.

Finally, the largest change in 1965 was the addition of Medicare and Medicaid. An additional 0.7% of income was taxed to fund these programs.
A worker earning $4,800 in 1959 paid $120 in taxes (2.5% from the worker, 2.5% from the employer). by 1965, the same worker with the same earnings paid $403.20 in taxes (8.4% combined). In 6 short years, the taxes to fund social security (and the new Medicare) rose over 300%.

1971-1972 - The Dangerous Expansion

The early 1970s saw the most radical (and flawed) changes to the program. Congress decided to increase retirement benefits by 10% in 1971, and another 20% in 1972. Also in 1972, they added the annual Cost-of-Living Adjustments (COLAs) which were tied to inflation. Annual COLA increases began to be implemented in 1975. From this point forward, benefit payments to retirees were on a steady course to constantly increase due to inflation.

How did they decide to fund this increase in payouts to beneficiaries? They introduced automatic wage based indexing. They raised the wage base to $9,000 and also tied that to inflation. In theory as inflation rose, so would salaries.

However, there was a fatal technical flaw. It double-indexed both benefits AND wage calculations. Wages did not grow with inflation (most likely tied to the departure from the gold standard, but that's another story). The result: benefits grew much faster than justified by actual wage growth.

Congress initially thought inflation would stay low; instead it skyrocketed to 11.1% by 1974 .

What started as a 2% tax (1% from the employee and 1% from the employer) had now risen to a 11.7% tax on income in order to fund the program. Additionally, in 1972 they scheduled a sharply increasing wage base from which to collect social security contributions. These measures would not be enough to resolve the fundamental issues with Social Security.