Social Security and the Old Age, Survivors Insurance Program (OASI)

by John E. Hansan, Ph.D.

Social security is the term commonly used to describe the Old Age, Survivors Insurance program (OASI) which was created by Title II of the Social Security Act of 1935. The original OASI legislation was developed as

one part of the federal response to the economic vulnerabilities of workers and their families revealed by the Great Depression of the 1930s. The Social Security Act of 1935 also created a nationwide system of Unemployment Insurance (Title III) and Public Welfare with a system of federal/state administered cash assistance programs for the needy Aged (Title I), the Blind (Title X), and Dependent Children (Title IV).

To fully understand the purpose and nature of the original OASI legislation, it is important to note that in the 1930s, the predominant social mores and values of the era viewed only White men as workers. When the legislation was being shaped, the nation’s unemployment rate was 25 percent. Regardless of how social security is perceived today, it is essential to remember that in 1935, OASI was specifically designed to remove older people from the workforce, not keep them in it.

Structure

OASI was designed as a “universal contributory social insurance” program to protect workers and their families against loss of income due to retirement or death of the wage earner. To be eligible for social security, a person must work in covered employment and pay Federal Insurance Contributions Act (FICA) taxes for at least 10 years (40 quarters). Until 1950, Social security covered only employees in manufacturing and commerce. Government employees, public school employees, farmers and domestic workers and others were excluded. As a result, the vast majority of women and minorities were not eligible to participate in the program from the beginning, leaving them fewer years with which to build up their benefit levels.)

Basic Principles of Social Security Insurance

There are a number of basic principles underlying the structure of our social security system:

• The system is work related. Benefit levels for retirees and their families are related to earning history and wage levels. Those who make higher contributions receive higher benefits on retirement.
• Benefits are not means-tested. Benefits are paid regardless of an individual’s income from saving, pensions, insurance, or other forms of non-work income. Workers do not have to prove financial need to receive benefits.
• Universal compulsory coverage. Workers may not opt out of the social security system. By mandating participation, adverse selection is avoided.
• Law defines benefits. Any person who meets the legal requirements qualifies for benefits. Disagreements may be taken to court.

Social Security has grown and evolved to become the primary source of retirement income for most Americans; and seven out of ten beneficiaries derive more than half of their income from Social Security benefits. For eligible beneficiaries, Social Security is also a family protection plan. It provides a guaranteed floor of income for spouses and dependent children of wage earners who die or become disabled during their working lives, workers who become disabled, widows age 60 and over, and widows age 50 and over with disabilities. The level of benefits received by participants is increased annually through cost-of-living adjustments (COLA).

By design, Social Security’s benefit formula is progressive, replacing a higher percentage of pre-retirement income for low-income workers (about 60 percent of income replaced) than for high-income workers (about 27 percent replaced.)

Major changes to Social Security since 1935

1935 – The Social Security Act is signed by President Franklin Roosevelt.

1937 – The Federal Insurance Contribution Act (FICA) required workers to pay taxes to support the Social Security system. Payroll taxes were 2%.

1939 – Social Security was expanded to cover dependents and survivors. Payroll taxes were 2%.

1950 – Coverage was expanded to job outside of commerce and industry, and benefit levels were increased. Payroll taxes were 3%.

1956 – Disability Insurance is created, and expanded over the following years. Early retirement at age 62 for women was permitted. Payroll taxes were 4%.

1961 – Early retirement at age 62 for men was permitted. Payroll taxes were 6%.

1972 – Automatic cost-of-living-adjustments (COLAs), which index benefits to inflation, are introduced. The formula to calculate increases initially overstated inflation by 25%, and people born between 1910 and 1916 received an unintended windfall. Payroll taxes were 9.2%.

1977 – The mistake in the benefit formula is corrected. The “notch” refers to the difference in benefits paid to the group that received the windfall and those who retired following the formula correction. Social Security was thought to be actuarially sound. Payroll taxes were 9.9%.

1983 – The National Commission on Social Security Reform iss created in response to the actuarial unsoundness of the system. The commission called for 1) and increase in the self-employment tax; 2) partial taxation of benefits to upper income retirees; 3) expansion of coverage to include federal civilian and nonprofit organization employees; and 4) an increase in the retirement age from 65 to 67, to be enacted gradually starting in 2000. Again, Social Security was declared actuarially sound. Payroll taxes were 10.8%.

1985 – The Social Security Trust Funds are moved “off-budget” so that the funds earmarked for the Social Security system would be tracked separately from the rest of the budget. Payroll taxes were 11.4%.

1986 – COLAs are increased to respond to minor levels of inflation. Payroll taxes were 11.4%.

1993 – The amount of taxable benefits for upper income retirees is increased to 85%. Payroll taxes were 12.4%.

(Note: An excellent source for the full history of the Social Security Act of 1935 and its several titles can be found at: http://www.ssa.gov/history/.)

How to Cite this Article: Hansan, J.E. (2011). Social Security and the Old Age, Survivors Insurance program. Retrieved [date accessed] from /programs/social-security-old-age-survivors-insurance-programs/.