A social security program was adopted first in Germany in the 1880s, when Chancellor Otto von Bismarck advocated social legislation not only in order to benefit the workers but also to forestall the program of the socialists and gain the support of the workers for his own party. Legislation setting up compulsory sickness insurance, for which the worker paid two thirds of the cost and the employer one third, was passed in Germany in 1883. Compulsory old-age insurance (see pension), the cost of which the employee, employer, and government shared, was adopted in 1889; unemployment insurance legislation, however, was not passed until 1927.
As economic insecurity among workers in the highly industrialized countries spread, an increasing number of social security programs were enacted. In Great Britain, the National Insurance Act, devised by David Lloyd George, was passed in 1911, and a compulsory unemployment insurance program as well as old-age insurance and sickness insurance programs were established. The unemployment insurance system excluded many workers, notably government employees, nurses, casual workers, and those who earned over £250 per annum. A survivors insurance program was adopted (1925); in 1942, Parliament was presented with a plan, by Sir William Henry Beveridge, for a more expanded social security program, much of which was enacted after World War II.
France adopted in 1905 a program of voluntary unemployment insurance and in 1928 made insurance plans for old age and sickness mandatory. Meanwhile, diverse social security programs were adopted throughout Europe, differing from country to country as to the kinds of insurance instituted, the categories of workers eligible, the proportions paid by employee, employer, and government, the conditions for receipt of benefits, the amounts of the benefits, and finally in the overall effects of the programs. In 1922, the Soviet Union adopted comprehensive social security plans as part of their socialist economy. Chile became (1924) the first Latin American country to adopt a social security program.
The United States did not have social security on a national level until 1935, when the Social Security Act was passed as part of President Franklin Delano Roosevelt's New Deal program. The act established two social insurance programs: a federal-state program of unemployment compensation and a federal program of old-age retirement insurance. It also provided for federal grants to assist the states with programs for the disabled, the aged, child welfare services, public health services, and vocational rehabilitation. The compulsory old-age insurance paid benefits proportionate to prior earnings for persons over 65, with a reserve fund being accumulated through payroll taxes on employers and employees; the rate of the tax was originally set at 1%.
The original Social Security Act of 1935 covered only workers in commercial and industrial occupations, but since then several major amendments have increased the categories of persons eligible for benefits. The amendment of 1939 provided for benefits to the dependents and survivors of workers; an amendment in 1950 broadened the coverage to include full-time farm and domestic workers, many self-employed persons, employees of state and local governments, and employees of nonprofit organizations; later amendments extended coverage to members of the armed forces and to self-employed professionals; and a 1957 amendment provided benefits to insured workers 50 years of age and older who became permanently and totally disabled. The age of eligibility for retirement benefits was lowered from 65 to 62, but with lower benefits for persons retiring before 65.
In 1965, Congress enacted the Medicare program, providing medical benefits for persons over the age of 65, and an accompanying Medicaid program for the indigent regardless of age. A 1972 amendment tied increases in Social Security retirement benefits to increases in the Consumer Price Index. In 1974, Social Security insurance was taken over by the Social Security Administration, and in 1983 an amendment allowed partial taxation of the benefits given to upper-income recipients. In 1999, payroll deductions for Social Security were set at 6.2% of annual wages below $72,600, and payroll deductions for Medicare were 1.45% of annual wages (no upper limit), with employers contributing matching amounts.
Social Security funds are invested in federal securities, mainly long-term bonds. In 1997 a government advisory panel proposed that some of the revenues be invested in stocks and bonds to generate higher returns. The panel was divided over whether the money should be invested by the government or by individuals, as well as the amount that should be shifted from government bonds. Both approaches have their critics. Some regard government investment in stocks as a potential source of intrusive federal influence on U.S. businesses; others feel that allowing individuals to invest their Social Security funds would endanger the minimal postretirement "safety net" for all workers that the program is designed to provide if individuals invest unwisely. President George W. Bush, who campaigned for personal Social Security investment accounts, appointed (2001) a commission that offered several options for allowing individual investments in stocks and bonds as part of the Social Security program and for securing the program's financial health; it estimated that it would take as much as $3 trillion of additional revenue over the next 75 years and reductions in guaranteed benefits to accomplish both goals.
Underlying these proposals is the anticipation that the costs of the program as presently structured will outstrip the revenues raised and invested in the early to mid-21st cent. and that benefits will have to be paid from revenues alone, which are expected to be inadequate. If this occurs, Social Security will place a greater burden on the federal budget, and benefits may need to be reduced, or taxes increased, significantly. Although historical returns from investment in stock and bonds over the past century suggest that placing funds in those securities would forestall the program's financial difficulties, the dramatic fluctations in stock prices during and after the market bubble of the late 1990s has given many pause, particularly where individual investment accounts are concerned.
Administration of retirement, survivors, and disability insurance (OASDI) and supplemental security income (SSI) programs is vested in the Social Security Administration. The administration was part of the U.S. Dept. of Health and Human Services until becoming an independent agency in 1995. The Medicare and Medicaid programs are administered by Centers for Medicare and Medicaid Services of the Dept. of Health and Human Services. Unemployment insurance is administered by each state under the overall supervision of the U.S. Dept. of Labor. Contributions are collected by the Internal Revenue Service, while the preparation of benefit checks and the management of trust funds are the responsibility of the Dept. of the Treasury.
See J. Creedy and R. Disney, Social Insurance in Transition (1985); W. A. Achenbaum, Social Security: Visions and Revisions (1988); J. Quadagno, The Transformation of Old Age Security (1988).