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The Social Security Act was created in 1935 during the Depression as a first effort towards the eventual goal of providing cradle to grave social security to Americans. The drafters of the Act intended to create two types of government programs: (1) public welfare and (2) public insurance. Public welfare programs are paid for by general tax revenues, and the amount of the benefit has no connection to the amount of taxes, if any, the beneficiary has paid. Public insurance programs are paid for by payroll taxes to insure against the risk of loss of earnings from a job. The payroll taxes are put into a government-run trust fund, and the amount of benefit is tied to the amount of money in the trust fund and the average amount of taxed income the beneficiary earned during his lifetime.Here is a quick summary of important public welfare and public insurance programs under the Social Security Act: (Food Stamps is an important public welfare program which is not part of the Social Security Act. Workers' Compensation is an important insurance program which is not part of the Social Security Act.)Title II: Federal Old-Age, Survivors, and Disability Insurance. This is a public insurance program. The original Act only provided for Old-Age Insurance. The Old-Age Insurance Trust Fund was used to provide a pension to people who lost the income from their jobs because they retired. The provisions relating to the payroll tax to provide revenue for the Trust Fund were put in Title VIII. In 1939, a Survivors benefit was added so that the widows of old-age beneficiaries could continue to receive benefits. In 1956, disability benefits were also added for people who had to retire prior to reaching “old age” because they became disabled. This public insurance program, which is now administered by the Social Security Administration, is what people usually refer to as “social security.”Title III: Grants to States for Unemployment Compensation. This is a public insurance program that was part of the original Act. The program is now administered by the Department of Labor. The law taxes employers, and the Federal government assists the states in administering systems of unemployment compensation to provide temporary assistance to people who lose their income from their jobs because they are laid off.Title IV: Grants to States for Aid and Services to Needy Families with Children and for Child-Welfare Services. This is what exists now that we have eliminated “welfare” as we knew it. Originally, Title IV was for Grants to States for Aid to Dependent Children. This was a public welfare program for children whose father did not support them, presumably, because he had died or become disabled. Money was given to the widow to help her support her children. Eventually, the program was expanded to provide Aid to Families with Dependent Children (AFDC). For some reason, people began referring to this program alone as “welfare.”Title VIII. Taxes With Respect to Employment. In the original Act, payroll taxes were used to provide revenue for the Old-Age Insurance Trust Fund. This title in the original Act was repealed and moved to the Internal Revenue Code in 1939. Now, payroll taxes are required to be paid under the Federal Insurance Contributions Act (FICA), which is still codified in the Internal Revenue Code.Title XVI: Supplemental Security Income for the Aged, Blind, or Disabled (SSI). In the original Act, Title I was Grants to States for Old-Age Assistance for the Aged and Title X was Grants to States for Aid to the Blind. Later, Title XIV, Grants to States for the Permanently and Totally Disabled, was added. In the early 1970s, Titles I, X and XIV were eventually combined into this one program. SSI is clearly a public welfare program, but for some reason, people usually do not mean SSI when they use the word “welfare.”Title XVIII: Health Insurance for the Aged and Disabled (Medicare). Created in 1965, this program provides health insurance (but not nursing home care) for the aged and disabled. This is a public insurance program, because benefits are tied to payroll taxes contributed under FICA. People with no work record can get Medicare, but it is through a transfer payment from Medicaid to Medicare.Title XIX: Grants to States for Medical Assistance Programs (Medicaid). Created in 1965, this program provides health insurance and nursing home care for the needy. This is a public welfare program, but it is not usually called “welfare,” because it provides medical assistance, not cash assistance.Title XX: Block Grants to States for Social Services. Created in 1981, this program provides block grants to states to be used flexibly for social services.Title XXI: State Children's Health Insurance Program (CHIP). Created during the Clinton administration, this program provides health insurance for medically indigent people who have too much income or resources to qualify for Medicaid.Currently, FICA imposes a 6.2% and a 1.45% tax on income, and the tax is deducted directly from the payroll. People generally think of the 6.2% tax as the “social security” tax and the 1.45% tax as the “Medicare” tax. (From 2011-2012, the employee's share was temporarily reduced to 4.2% of gross compensation as a fiscal stimulus.) The tax is only imposed on the first $106,800 of income.Under Title II of the Social Security Act, there is a Federal Old-Age and Survivors Insurance Trust Fund and Federal Disability Insurance Trust Fund. Old-Age benefits are paid from the fund. 42 USC § 401(h) The amount of the benefit is a percentage of your average monthly income from age 22 until you retire. The benefit is scaled so that the percentage is lower if your average monthly income is higher.Right from the beginning, there was a debate about what the connection was between the tax imposed by Title VIII of the original Act (now FICA), and the amount of benefit paid by Title II of the Act. The original bill proposed during the Depression by the Committee on Economic Security directed by Edwin E. Witte definitely linked Title II and Title VIII, but there was great concern that the scheme would be found unconstitutional. This was during the time period when the Supreme Court found some of Roosevelt's programs unconstitutional on the ground that they allowed the Federal government to do things that were beyond its enumerated powers in the Constitution. If the two titles were unlinked, it was thought Title VIII had a better chance of being upheld under the Congressional taxing power. Thus, in order to ensure that the law would be found to be constitutional, the House Ways and Means Committee changed the original bill to break the linkage between Title II and Title VIII. “All provisions which related the benefits to the tax paid by the employers and their employees were eliminated, as well as all references to any contractual right to benefits.” Witte, at 147. In the beginning, the Committee on Economic Security had believed that the Title VIII tax would not be enough to fund the Title II benefit past about 1965, and the Committee assumed that Title II would need to be funded from general tax sources. Witte, at 148-149. Roosevelt, however, insisted that the program must be self-supporting, so the plan was changed to increase the tax under Title VIII. Agriculture and domestic service were originally not included. The actuarial calculations were made on the assumption that the benefit would only be paid to those retiring from active employment, but the House Ways and Means Committee took out this requirement, and the bill was passed by the House without any provision requiring that beneficiaries be retired from active employment. The President insisted that retirement from employment be a condition of receipt of benefits, and the Senate bill put that requirement back in and it remained in the final bill that was enacted into law. An amendment was proposed which would have exempted employers who already had industrial pension plans, but that amendment was rejected.Today, the link between FICA taxes paid and benefits under Title II of the Social Security Act is well-established.To be eligible for old-age benefits, you must be at least 62, and you must have paid FICA taxes for 10 years. 42 USC § 414.Old-age insurance benefits are determined as follows:1. Determine “number of elapsed years.” Generally, for people retiring now who were never disabled, this is the number of calendar years after the year in which you turned 21 and before the year in which you turned 62, i.e., 39 years. 42 USC § 415(b)(2)(B)(iii).2. Determine “benefit computation years.” Generally, this is the number of elapsed years minus five, i.e., 35 years. 42 USC § 415(b)(2)(A)(i). Use the 35 years with the highest incomes. 42 USC § 415(b)(2)(B)(i). The income from each year will be multiplied by a wage index to get a figure that shows what you earned in today's dollars. 42 USC § 415(b)(3). Only “credited” income counts, i.e., income on which “social security” FICA taxes were imposed, so there's a maximum amount which can be credited. 42 USC §§ 415(e), 430.3. Determine “average indexed monthly earnings.” Total up all the indexed income in the benefit computation years and divide by the number of months in those years. 42 USC § 415(b)(1).4. Determine the “primary insurance amount.” 90% of the first chunk of average indexed monthly earnings, plus 32% of the next chunk of average indexed monthly earnings, plus 15% of the rest of the average indexed monthly earnings. 42 USC § 415(a)(1).This is the benefit if you retire at the regular retirement age, which is 65 if you turned 62 before 1/1/00, 66 if you turn 62 after 12/31/04, and 67 if you turn 62 after 12/31/21. 42 USC § 416. For example, I'll turn 62 in 2029, so 67 is my regular retirement age. I can get old-age insurance benefits at age 62, but they'll be actuarially adjusted downward.Also, the benefit is adjusted downward if you continue to have significant earned income. Congress has delegated the power to determine the amount of this adjustment to the Social Security Administration. The Social Security Administration could reduce the old-age retirement benefit to zero for people who have earned income in excess of the amount of the benefit they would receive if they did not have earned income. 42 USC § 403(b)(1). This is consistent with the requirement insisted upon by Roosevelt in the original Social Security Act that you had to retire to get the old-age insurance benefit. Today, in order to encourage people to keep working, the Social Security Administration only lowers the benefit by a fraction of earnings, so that it is possible for someone entitled to benefits to increase income by working. Benefits are not reduced on account of a person having unearned (investment) income.That's what social security is. I suppose any insurance plan could be characterized as a "Ponzi sceme," in the sense that the people currently paying premiums are funding other beneficiaries' claims. But unlike Ponzi schemes, most insurance plans are able to honor their obligations to pay claims. Just like a private insurance plan, a public insurance plan will become insolvent if the amount of the claims exceeds the revenue generated by premiums. In the case of social security, the program can remain solvent if FICA taxes are increased and/or benefits are reduced.To me, a big problem in the debate over social security is that people believe they are entitled to receive old-age insurance benefits even if they don't need them. Under current law, of course, they are. I certainly agree that if someone who has worked over the course of a lifetime, and the individual and the individual's employers have paid payroll taxes (either under the former Title VIII of the Social Security Act or under FICA), the person should get old-age insurance benefits if they need them. The situation of no longer having sufficient income to support oneself because one has retired is the risk that old-age insurance was meant to insure against. If, in fact, a person can no longer support themselves because they have retired, the person should be able, in effect, to make a claim for payment under the old-age insurance system. If, however, a person is not destitute upon retirement, the person (luckily) does not need to make a claim.Just like health insurance, car insurance, home owner's insurance or term life insurance, premiums are paid, but it is hoped that a claim will never have to be made. Rich people getting old-age insurance benefits, to me, is like someone telling his homeowner's insurance carrier that he wants to make a claim even though no damage to his house has occurred, simply because he has been paying premiums all his life. To me, a rich person saying he is entitled to old-age insurance benefits because he has paid “social security” FICA taxes during his lifetime is like a healthy person saying that the Medicare program should send him prescription drugs or a kidney transplant even though he is perfectly healthy because he has paid “Medicare” FICA taxes during his lifetime.The nature of insurance is that one is insuring against a risk. In the case of old-age insurance, the risk is that one will be poor when they retire. If the thing one is insuring against does not occur, one should not be able to collect the insurance benefit. For the same reason, I do not think it makes any sense to privatize social security as the Republicans would like to do. Allowing people to use some of their FICA taxes to set up private retirement accounts just takes money away from the Old-age, Survivors, and Disability Insurance Trust Fund which provides money to people who have become destitute because they have lost their income from working.People who are already secure don't need social security. I think we should eliminate Old-Age, Survivors, and Disability Insurance Benefits for people who have a sufficient amount of income and resources to support themselves. I would impose a needs test on the receipt of Old-Age, Survivors, and Disability Insurance Benefits. If we did so, social security could easily remain solvent and would not collapse like a Ponzi scheme.Of course, it is not politically popular to means test social security, so my solution has little chance of being adopted. But there are other ways the program can remain solvent and continue to honor its obligations. The FICA tax could be imposed on incomes above $106,800. The retirement age could be increased. The United States could adopt a more liberal immigration policy to increase the number of younger workers paying into the system.Social security is determined by laws and regulations that are known and can be changed if necessary. People can criticize those rules, but they are not a fraudulent scheme.BibliographyAltmeyer, Arthur J., The Formative Years of Social Security, University of Wisconsin Press, 1966. Dr. Altmeyer was the first chairman of the Social Security Board. The functions of the Social Security Board were transferred to the Federal Security Agency. In 1946, the Social Security Board was abolished, and the Social Security Administration was created. Altmeyer remained the Commissioner for Social Security until Eisenhower became president. In 1953, the Federal Security Agency was abolished and all of its powers were transferred to the Department of Health, Education, and Welfare. Now, the functions of the former Department of Health, Education, and Welfare are carried out by the Department of Health and Human Services.Witte, Edwin E., The Development of the Social Security Act, University of Wisconsin Press, 1962. Professor Witte worked for the Wisconsin State government and was a professor at the University of Wisconsin. Beginning in 1934, Witte began directing the work of drafting a social security act. He was the Executive Director of the Committee on Economic Security, which consisted of five members of Roosevelt's cabinet. The President's stated goal was to provide a “cradle to the grave” social insurance system. The Committee wrote an extensive report. Witte testified before Congress, and basically was responsible for the law the was written.