Reforming: Social Security A Welfare Analysis

T he U.S. Social Security System was conceived as a means to ensure a minimum standard of living for the elderly, and it has done so. Poverty rates among the old have dropped, and many retirees can now look forward to a comfortable retirement, funded in part by their Social Security benefits. However, the system' s ability to provide future retirees with a comparable retirement income has been called into question, and plans that would fundamentally change the system have been proposed. When the Social Security System was established in 1935, it envisioned the creation of a large reserve fund to ensure the continued financing of the system. Benefits were not scheduled to be paid to those reaching the age of 65 until 1942 and were to be based on total lifetime earnings of contributors. Before the first dollar was paid out, the system was amended in 1939. Benefits were to begin in 1940 and would be based on average earnings over a minimum covered period, thereby raising the benefits received by the average worker. In addition, coverage for a retiree' s dependent children and spouse were added. These changes resulted in an increase in initial payments made by the system and eliminated the idea of building up a reserve fund. Social Security became grounded as a pay-as-you-go system—con-tributions made by current workers would be transferred in the form of benefits to current retirees. Current workers then would rely upon their children' s generation to finance their retirement benefits. When Social Security was established, it covered only workers engaged in commerce and industry (excluding railroad workers), about 60 percent of the workforce. Over the years, most notably in the 1950s and 1960s, coverage was expanded so that today 96 percent of all jobs are covered by Social Security. There are five categories of excluded workers: 1) federal civilian employees hired prior to 1994; 2) railroad workers (although the railroad retirement program is coordinated with Social Security); 3) state and local employees, if they are covered under a separate retirement program (currently 25 percent of state and local workers are excluded); 4) household and farm workers whose earnings are below some minimum requirement; and 5) self-employed workers with earnings below $400 a year. 1 Over the years, the types of benefits have expanded, particularly relating to dependent coverage and survivors. Disability coverage was added, and early retirement programs were instituted. In …