Social Security Act

Explanation and Analysis of the Document

Title I—Grants to States for Old-Age Assistance

A major issue of contention during congressional hearings was the respective federal and state roles in implementing the old-age assistance program. Some senators, primarily those from the South, argued that the bill gave too much power to the federal government. Jim Crow laws in the South allowed for segregation, and southern legislators did not want Washington to deny their states aid because of discriminatory practices. The final document reflects a weaker federal supervisory role as well as a clear sharing of financial responsibility between state and federal sectors.

Section 1 authorizes the federal government to make annual payments to states that have approved old-age assistance plans. These plans are for needy elderly individuals, hence the term old-age assistance. The more general Social Security retirement program for employees (“Federal Old-Age Benefits”) is described in Title II.

Section 2 lists the requirements for an approved state plan. Subsection (a)(1) prevents states from offering pension plans to only certain areas of the state, constituting political or racial discrimination in the program's application. Subsection (b) does not list conditions for eligibility (one of the complaints of the southern legislators), but rather lists three conditions that plans may not impose, related to age, residency, and citizenship.

Section 3 addresses cost sharing between the federal and state governments in paying for public assistance. The federal government reimburses each state with a qualified plan for one-half of its direct payments in old-age assistance, with an additional 5 percent to defray administrative costs.

Title II—Federal Old-Age Benefits

Section 201 establishes the Old-Age Reserve Account, the pool of funds available to pay to Social Security beneficiaries. The amount of the account is based on assumptions used to calculate the total amount of money needed to provide pension benefits for qualified Americans. These estimates were crucial, as the CES had to calculate how much it would need to collect in taxes. President Roosevelt was adamant that this portion of the program be self-funded.

Subsection (b) dictates that the account funds be invested solely in government bonds or in securities guaranteed by the U.S. government. The reserve account was a remarkably large amount of money to be held for any purpose. As the historian Edward D. Berkowitz notes, “The figure ($47 billion) represented eight times the amount of money then in circulation in the United States; nearly five times the amount of money in savings banks; enough money to buy all the farms in the United States, with $14 billion to spare” (Perkins, p. 281). Thus, it was critical that account funds remain in low-risk securities with high liquidity, such as U.S. Treasury bills and bonds. The Second Liberty Bond Act of 1917, referenced in (b)(2), gives the government authority to issue Treasury securities, guaranteed by the full faith and credit of the United States government.

The CES argued at length over benefit payments. Should every qualified pensioner receive a lump sum, as had been proposed by Townsend? Or should benefits reflect the employee's wages, with higher wage earners receiving correspondingly higher benefits? The committee reasoned that even though a level benefit would be easier to administer and in some ways more equitable, that would violate typical American attitudes about work. In the words of Frances Perkins, Americans believed that “a man who works hard, becomes highly skilled, and earns high wages ‘deserves' more on retirement than one who had not become a skilled worker” (Kennedy, p. 267). Section 202, the result of the committee's deliberations, details the benefit calculation for Social Security retirement based on income. The benefit formula has changed many times since 1935. In this legislation, a person's total wages (up to the maximum of $45,000) were added together to calculate his or her retirement benefit. Today, Social Security retirement benefits are calculated based on average, not total, wages. The maximum wage base has been adjusted for inflation over the years.

Eligibility for Social Security became a highly contested point of discussion among the committee members. Both President Roosevelt and the members of the CES envisioned a system that would cover all Americans—but the realities of financing such a system became all too clear. If the retirement benefits were financed by employee and employer contributions, how could the earliest retirees possibly contribute enough to fund their own looming retirements? The options were to charge this group extremely high tax rates, give them virtually no benefits, or delay the payment of benefits for many years. Roosevelt refused to consider any of these options and would not allow a future liability in the reserve account. If the first group of retirees received their full benefits, however, Social Security would be unable to meet its obligations by as early as 1965. The CES solved this dilemma by reducing the number of people eligible for Social Security and increasing the employment tax rate, thus ensuring benefits for the earliest retirees without jeopardizing the financial status of the entire system.

Treasury Secretary Henry Morgenthau proposed that the program exempt agricultural and domestic workers, and employees in organizations with fewer than ten workers. Despite intense opposition from Frances Perkins, the committee accepted these exemptions, which are reflected in Section 210. Other people not covered by this act are state and federal employees or those employed in the nonprofit sector. Subsequent amendments to the Social Security Act of 1935 have removed most of these exemptions.

Title III—Grants to States for Unemployment Compensation Administration

Title III describes the arrangement for financing unemployment insurance through federal matching grants to states with acceptable unemployment insurance plans. Section 303, subsection (a)(4) mentions the Unemployment Trust Fund, described in detail in Section 904. Although the tax-offset arrangement is more clearly discussed in Section 904, this section of Title III indicates that both the federal and state governments will pay funds into the Unemployment Trust Fund; it is not simply a federal grant.

Title IV—Grants to States for Aid to Dependent Children

Similarly to the old-age assistance plan, Title IV allows the federal government to provide financial aid to states with approved plans for helping dependent children. This was a particular problem during the Great Depression, as an increasing number of men abandoned their families when they could no longer find work.

Title V—Grants to States for Maternal and Child Welfare

In Edwin Witte's words, Title V is “a revival, increase, and extension of” (p. 165) the Sheppard-Towner Maternity and Infancy Protection Act of 1921, which funded nutritional advice and public health services for expectant mothers. Although it was discontinued in 1929 for political and financial reasons, a number of women's organizations strongly supported the act and successfully lobbied the committee to include what became Title V in the Social Security Act.

Section 502, subsection (a) (part 1) allocates funds to states in terms of a lump sum ($20,000 per state) and proportional to the number of babies born in a given year. Those states with the highest birthrates (relative to the average for the country) receive the most aid. Unlike other programs, Maternal and Child Health Services fall under the management of the United States Children's Bureau, created in 1912 to foster child health and welfare.

The section concerning Services for Crippled Children (part 2) was added by the committee primarily because the members thought that Roosevelt, a victim of polio, would be interested in promoting state services in this area.

The Child Welfare Services section (part 3) faced substantial Catholic opposition. Because initially federal funds would match money spent at the state and local level, Catholic representatives worried that federal grants to religious organizations involved in the care of children would violate the separation of church and state. This violation would constitute government meddling in the ways these religious charitable organizations were run.

After negotiations with key representatives from the Catholic community, the committee modified the original language of Title V, particularly part 3. Parts 1, 2, and 3 did not require federal matching funds or state participation. All of the parts emphasize that services target rural populations; Catholic charities operated primarily in urban areas and so wanted federal aid to focus elsewhere.

Section 531 (part 4, Vocational Rehabilitation) was tacked onto the Social Security Act after Commissioner of Education John W. Studebaker requested that the legislation include an amendment calling for increased funding for vocational training for the disabled. The United States already had such a federal program, created by the National Vocational Rehabilitation Act of 1920, referred to in subsection (a).

Title VI—Public Health Work

Members of the committee drafted this section of the Social Security Act to support the United States Public Health Service. Title VI was particularly popular with southern legislators, whose larger rural populations would benefit from expanded public health services. The medical community embraced increased funding because many doctors believed that it would divert attention from public health insurance. Roosevelt had initially asked the committee to develop plans for a national health care system. As soon as word of this got out to the medical community, physicians throughout the nation sent thousands of letters to Washington opposing any form of government-subsidized health insurance. Faced with such opposition, the Social Security Act did not address the concept of national health care.

Title VII—Social Security Board Establishment

Title VII sets forth the requirements and duties of the Social Security Board. Section 701 prevents any one political party from monopolizing the board.

Title VIII—Taxes with Respect to Employment

Title VIII details the ways in which employers and employees are taxed to collect funds for retirement benefits. Because Roosevelt envisioned a self-funded rather than a government-financed program, the committee considered various options, deciding on a combination of employee and employer contributions. Unemployment insurance would be funded by a payroll tax on employers based on a percentage of their payrolls; this tax would be offset by unemployment taxes paid to the state. Retirement benefits would be financed through contributions from employees as well as employers.

The major question was the tax rate for employers and employees. The original bill sets a rate on both employees and employers of 0.5 percent for five years, gradually increasing the rate to a maximum of 2.5 percent in 1957. However, this meant that the Social Security system would pay out more than it earned until 1957. Some estimated that the fund would develop a deficit by 1965, which would continue to build until 1980. The committee initially envisioned using funds from general tax revenues to make up the difference, but Roosevelt refused to entertain such an option. As a result, Treasury Secretary Morgenthau proposed higher tax rates. Sections 801 and 804 detail the schedule of employee and employer taxes respectively; the rate increases from 1 percent to 3 percent.

Section 803 refers to the Revenue Act of 1934, which modified the nation's income tax structure by increasing the tax rate on estates, corporations, and those with higher incomes.

In an era before computers, the administrative tasks associated with collecting and accounting for Social Security contributions were challenging. Section 802 designates the employer as the party responsible for deducting employee contributions. Section 808, subsection (a) lists a number of other methods for paying taxes; Section 809 discusses a system of stamps issued by post offices. The committee intentionally left the subject of administration open ended in the 1935 act so that the Social Security Board could study European social insurance systems.

Section 811 reiterates the categories of employees (and consequently employers) not covered by the act. One of the negative consequences of this section is that a vast majority of women and African American workers, who typically worked in the excluded jobs, initially were not covered by Social Security.

Title IX—Tax on Employers of Eight or More

Title IX discusses the financing of unemployment benefits. Employers with fewer than eight employees are exempted. Section 901 indicates the tax schedule; the committee considered a system based on employer experience (record of unemployment claims), as used by Wisconsin, but instead agreed on a flat tax rate. Section 902 describes the tax offset, by which unemployment taxes paid to the state may be credited against this federal tax. Section 903 contains some worker protections: Workers do not have to take jobs that will involve strikebreaking, below-market wages, or prevention of unionization.

The language concerning the Unemployment Trust Fund is similar to that of Title II, Section 201, which describes the Old-Age Reserve Account. Accounting for unemployment contributions and disbursements, however, was more complex, as the act calls for a joint federal and state system of unemployment insurance rather than a single federal program. The committee debated whether to have segregated funds for each employer, or a single fund. Subsection (e) establishes a single fund with separate accounts for each state agency.

Section 907 narrows the definitions of employer, in subsection (a), and employee, in subsection (c). Sections 909 and 910 provide an additional tax credit for employment stabilization. The basic idea behind these two sections is that employers who build up substantial unemployment reserves (in other words, paying out fewer unemployment benefits than taxes taken in) should receive a tax credit over and above the one described in Section 902. The employers would receive this credit only if their state plan allowed them to reduce their contribution rate and if there is a verifiable record of employment stability at the facility or company. This provision rewards employers who retain employees yet maintains a safety net in the event the company suffers a setback.

Title X—Grants to States for Aid to the Blind

Title X was a late addition to the Social Security Act. The CES did not specifically study programs for the blind, but several interest groups came forward during congressional committee hearings on the bill. The Senate Finance Committee proposed a blind pension program similar to the old-age pension plan. The advocate Helen Keller lobbied for allocating half the funds to other services, but the Senate committee viewed this as primarily benefiting social workers and retained Title X as a pension program.