Pensions and Social Security

Pensions and Social Security are programs designed to provide some measure of financial security to people during their retirement years. A variety of policies and programs have developed over time to address the kinds of problems faced by many, although not all, of the elderly. The situation can be [Page 656]particularly challenging for those widows and widowers who seldom worked and thus depend on resources acquired by their spouses.

To address the problem of many elderly losing their savings and jobs during the Great Depression, a variety of new social welfare programs came into existence under Franklin D. Roosevelt's New Deal, including a new system of old age insurance, Social Security. It offered some federal aid for traditional local means-tested public assistance measures, such as assistance for the elderly and children, but it also provided a social insurance system for those 65 and over, regardless of financial need. Unlike European systems, which used general tax revenues to finance old age security, the U.S. approach stressed the combined assets of the private sector and its employees. In 1939, the addition of survivors insurance provided benefits to widows and other surviving dependents of a worker who died prematurely.

Originally, the act excluded domestic and agricultural workers, many of them African Americans, due largely to pressure from southern legislators. Eventually, however, most workers were brought into the system and, today, nearly all retired people receive Social Security benefits. Expansion of coverage reflected a shift in the philosophy and financial principles of Social Security. Whereas the government originally stored contributions and paid them back with interest to those over 65, current workers now pay the benefits of those already retired. This shift of current obligations to future workers has led to predictions of crisis in the system, including a recent forecast that, given the rapidly aging population, Social Security will run out of funds by 2042.

The idea of a social security crisis is not new. Fears about Social Security's insolvency arose in the late 1970s and early 1980s, when various factors led to a decline in the program's trust funds. Responses included an increase in payroll taxes, a gradual rise in the age at which individuals could first receive benefits, and taxation of benefits received by taxpayers with incomes over certain levels. Although policymakers hoped these changes would shore up the system for the next 75 years, the latest labor force and demographic data suggest that the reserve fund will be depleted in about 40 years. Today, about 1 of every 8 people in the United States is age 65 or older. The change in the dependency ratio between workers and beneficiaries is changing dramatically. In 1936, 15 workers supported each retiree. By 2025, the ratio may fall to 2.25 to 1. Even though baby boomers are earning more and have better private pension packages than their parents, a sense of crisis remains.

Various solutions to the Social Security problem have been suggested in more recent years. President Ronald Reagan promoted tax-exempt Individual Retirement Accounts (IRAs) as a way to build retirement income. Another approach, the use of employer-based retirement savings programs, or 401(k) plans, grew rapidly in the 1990s. In the latter, employers supplement workers' contributions, although a specific benefit is not guaranteed. These plans are essentially supplements to Social Security benefits, not a replacement, so funding remains an issue.

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