Social Security Reform Background

Updated March 7, 2005

History of Social Security

The Social Security Act was signed into law by President Franklin D. Roosevelt on Aug. 14, 1935. In addition to several provisions for general welfare, the new Act created a social insurance program designed to pay retired workers age 65 or older a continuing income after retirement.

The original 1935 Social Security Act introduced programs for needy aged and blind individuals; in 1950, needy disabled individuals were added. These three programs were known as the "adult categories" and were administered by state and local governments with partial Federal funding.

Over the years, the state programs became more complex and inconsistent, with as many as 1,350 administrative agencies involved and payments varying more than 300 percent from state to state. In 1969, President Nixon identified a need to reform these and related welfare programs to "bring reason, order, and purpose into a tangle of overlapping programs."

In 1971, Secretary of Health, Education and Welfare Elliot Richardson proposed that the Social Security Administration (SSA) assume responsibility for the adult categories. In the Social Security Amendments of 1972, Congress federalized the adult categories by creating the Supplemental Security Income (SSI) program and assigned responsibility for the program to the SSA.

The Future of Social Security

During the 1990s, Social Security faced long-term challenges. The 2000 Trustees Report stated Social Security could pay full benefits until 2037, but the standard 75-year test of actuarial balance was not met.

A major impetus to the public debate on Social Security reform came in January 1998 when President Clinton announced in his State of the Union Address that we should "save Social Security first."

The President also announced a series of forums around the country during the course of the year to engage the citizenry in an informed public debate, culminating in the first-ever White House Conference on Social Security in December 1998. Numerous proposals were introduced, suggesting strong interest in dealing with the long-term challenges facing the program.

The Importance of Social Security Today

Social Security has grown to become an essential facet of modern life. One in six Americans receives Social Security benefits, and about 98 percent of all workers are in jobs covered by Social Security. Social Security benefits comprise about 5 percent of the nation's total economic output.

From 1940, when slightly more than 222,000 people received monthly Social Security benefits, until today, when almost 45 million people receive such benefits, Social Security has grown steadily. Social Security benefits provide income security not just to the elderly. Nearly 1 in 3 beneficiaries are not retirees.

The SSI program, meanwhile, provides needed income support to over 6 million recipients, 31 percent of whom are aged individuals; 56 percent disabled adults; and 13 percent disabled children.

Social Security Reform in the Bush Administration

In his Inaugural Address in 2001, President George W. Bush announced his intention to reform Social Security and Medicare. Throughout the early months of his first term, the President made Social Security reform a major recurring theme in many speeches and addresses. In his first speech to a joint-session of Congress in February 2001, the President said he would appoint a Presidential Commission to recommend ways to address Social Security reform.

The President stated the Commission would operate under three broad principles:

• It must preserve the benefits of all current retirees and those nearing retirement.
• It must return Social Security to sound financial footing.
• It must offer personal savings accounts to younger workers who want them.

On May 2, 2001, the President announced the appointment of his Social Security Commission, the "President's Commission to Strengthen Social Security." The Commission issued its final report in December 2001.

On March 2, 2004, the President signed into law the "Social Security Protection Act of 2004," which amends the Social Security Act and the Internal Revenue Code of 1986, to include establishing remedies for misuse of benefit funds by representatives of beneficiaries and increasing protections against program fraud.

The President has said he will work with Congress to determine the best elements of the proposals put forward, according to these principles:

• Do not change benefits for today’s retirees or near-retirees.
• Permanently strengthen Social Security for our children and grandchildren, without raising payroll taxes.
• Move toward voluntary personal accounts for younger workers. The administration believes that personal accounts provide ownership, choice, and the opportunity for workers to build a nest egg for their retirement to pass on to their spouse or their children.
• Offer choices. Those not choosing a personal account would continue to draw their benefits as they always have from the Federal Social Security program. Those choosing a personal account should have increased personal ownership and control of their nest egg within Social Security.

It is well known that President Bush supports privatization of a portion of Social Security benefits. In particular, he would like to give younger workers the option of creating personal investment accounts by using some of their Social Security contributions to invest in those accounts. Advocates for this position say that personal accounts give workers the ownership, choice and opportunity to build a retirement nest egg that can be passed on to their spouse or children.

They also believe that current benefits will not be affected since personal accounts would be available to younger workers while keeping benefits intact for retirees and workers nearing retirement. The Administration also proposes changes in the benefits formula, an approach recommended by the 2001 Commission to Strengthen Social Security.

Critics claim that putting more burden on American workers to build their own retirement funds will not work and site participation in employer-sponsored 401(k) plans as evidence (nearly one-third of eligible workers do not participate in a 401(k)). They believe that current and future retirees will pay the burden of reduced benefits so that younger works will have the option of private accounts. Moreover, some critics question whether there is really a Social Security crisis looming; rather, they assert that the crisis is manufactured for political purposes.

Social Security and the CPA Profession

The AICPA believes the long-term viability of the Social Security system must be addressed. Other societal, economic, and workforce changes over the last decade also call into question the role, design, and objectives of the program over the next century.

In September 1998, the AICPA reported findings of a study on Social Security reform in Understanding Social Security: The Issue and Alternatives. The study was designed to help all interested Americans understand how Social Security reforms could affect the economy as well as the finances of their parents, themselves, and their children.

A revision of this report, developed by a group of leading CPAs, tax specialists and economic analysts, was released on March 7, 2005. The study’s goal is twofold: to provide unbiased facts and analysis of issues, such as privatization and the impact of tax increases, and to foster informed discussion.

The other state CPA societies are also addressing the issue of Social Security reform. In August 2004, the Texas Society of CPAs’ Executive Board adopted a resolution and issued a white paper, “Securing America’s Future Economy” (SAFE) (.PDF). The documents called on the CPA profession and individual CPAs to encourage elected officials to implement reforms to ensure the continued fiscal health of Social Security and Medicare and prevent passing a massive financial burden to future generations. Read the Texas resolution and white paper.

In addition, in November 2004, a number of state CPA societies met to discuss working cooperatively on the Social Security issue. Some states have adopted resolutions supporting Social Security reform, including Arizona, Arkansas, Massachusetts, Michigan, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, Pennsylvania, South Carolina and South Dakota. The leadership in other state societies is discussing the issue.