Social Security and Retirement Planning – Part One – a brief history. By Christina Mae Olson, CFP®
This is the first in a series of articles about Social Security. I believe that we will always have some sort of social security welfare program to rely on. I believe this, in part, because of our history. We have always had some sort of state and/or federal plan in place to help fund the retirement needs of our elderly citizens.
Our country has a long history embracing the belief that government should play a role in taking care of its aging and disabled citizens. One early piece of colonial legislation – The Poor Laws (modeled after the English Poor Law of 1601) – required taxation of all citizens to support the destitute. The recipients of the relief were called the “worthy poor.” The unworthy poor received nothing. The law mandated that local communities would be responsible for the welfare of poor people.
Thomas Paine, radical politician and fervent feminist (!) wrote many pieces about social justice. His last pamphlet, Agrarian Justice (1795), called for the establishment of a public system of economic security for the “new nation”. His proposal would establish the first inheritance/estate tax. Funds from this 10% tax would pay a one-time payment to every 21 year old in the country to get them started in life. Additionally, every person over age 50 would get an annual stipend equivalent to about $25. Most people did not live past age 50 in 1795.
In 1862, the federal government passed the Civil War Pension bill. This provided for lifetime disability pay to civil war veterans. The Civil War Pension program developed over the years and eventually paid retirement income to civil war veterans and even to surviving spouses of deceased veterans. The last surviving spouse collected her final payment from the Civil War Pension plan in 1999. In 1893, the US government paid out $165 million in benefit payments to Civil War Pension beneficiaries. This was the largest line item for the government comprising 37% of the federal budget! The Civil War Pension provided the framework for the future Social Security program. (Note: Confederate soldiers and their families were barred from ever receiving any payment from the Civil War Pension program.)
In 1882, piano and organ manufacturer – the Alfred Dolge Company, was the first company to start a deferred compensation plan. Dolge held back 1% of employees’ pay and credited their accounts with 6% interest annually. By 1900, there were only 5 companies in the United States that offered pension benefits to their retiring employees.
During the third economic depression (the Great Depression of the 1930’s) – state welfare pensions came into existence. 30 states had some sort of pension legislation in place before the Social Security Act in 1935. These benefited fewer than 3% of the elderly population – with the average benefit of 65 cents per day.
There were a few significant private movements that attempted to provide for pension income for the elderly. Louisiana Governor Huey Long, elected to the US Senate in 1930, created the Share Our Wealth program. Share Our Wealth called upon the federal government to guarantee every family in the nation an annual income of $5,000. He also proposed limiting private fortunes to $50 million, legacies to $5 million, and annual incomes to $1 million. Everyone over age 60 would receive an old-age pension. His ideas never made it into law but Share Our Wealth clubs were formed all over the county. By 1935 the movement claimed 27,000 local clubs with 7.7 million members. In California, The Townsend Plan was the brainchild of a 66 year old doctor, Francis Townsend. He was unemployed with no savings. The basic idea of the Townsend Plan was that the government would provide a pension of $200 per month to every citizen age 60 and older. The pensions would be funded by a 2% national sales tax. Townsend published his plan in a local Long Beach newspaper in early 1933 and within about two years there were 7,000 Townsend Clubs around the country with more than 2.2 million members actively working to make the Townsend Plan the nation's old-age pension system. Upton Sinclair, known for his exposé on meat packing industry called The Jungle, was a political anarchist, socialist, and famous muckraker. In 1933, Sinclair, along with a group of supporters in California, created EPIC (End Poverty in California). EPIC was a 12 point plan that included taxing the rich to pay $50/monthly pension to every Californian over age 60. It was so popular that the state Democratic Party persuaded Sinclair to become a democrat so he could run for governor. He lost the three-way race earning 37% of the vote.
Other proposals such as The Ham and Eggs Plan, The Bigelow Plan and The General Welfare Federation Act were all precursors to the final Social Security Act of 1935. Globally, there were 34 other nations that had federal social welfare pension programs in place. The US certainly was ripe for developing its own unified plan.
Next month, I’ll discuss how Social Security and Medicare came into existence.
Chris Olson is a Certified Financial Planner™ practitioner with a fee-only private practice. You can reach her at 608-525-9818 or CMOney@centurytel.net.