The Social Security system imposes a heavy wage tax on most American workers, provides cash benefits and medical-expense reimbursements for most Americans at least sixty-two years of age, and is the source of unemployment compensation and some welfare payments to low-income families. As stakeholders in the system, businesses share the costs of public retirement pension and health insurance programs with the government and their employees.
Before the Great Depression, so few companies had private
The Social Security Act required employers to pay excise taxes as a percentage of employees’ wages, with equal contributions paid by the employees themselves. The initial rate was 2 percent, half paid by workers and half paid by employers. Employers of eight or more employees also paid excise taxes of 1 percent in 1936 to be placed in an Unemployment Trust Fund. Workers paying the tax became eligible to receive pensions on their retirement at the age of sixty-five. Pension benefits were regarded as a right that workers earned by paying into the system. No means tests were imposed on pensioners.
The participation of business in the Social Security system and its influence on the provisions of the Social Security Act of 1935 have always been controversial. Three areas of business influence, albeit indirect and partial, on the law are notable.
First, business members of the Advisory Council to the
Eventually, however, employers became stakeholders in the Social Security Act. They subsidized it over the years and designed their own retirement programs around it. Business sought to stabilize welfare-state spending and prevent new incursions (such as national health care) rather than roll back established programs.
Business supported amendments to the Social Security Act in 1939 that added payments to spouses and minor children of retired workers and survivors’ benefits paid to families in cases of premature deaths of workers. During the 1940’s, business supported payroll tax freezes that kept old-age pensions small. It also supported granting old-age pensions to all elderly with work histories to prevent expansion of the means-tested old-age assistance programs.
By the 1950’s, Social Security with its emphasis on Old-age and Survivors Insurance (OASI; disability was added in 1956, making it
Rising tax rates during the 1930’s and 1940’s spurred employers to create private pension plans–the second tier of the Social Security system–as tax shelters. Wage-and-price controls encouraged employers to provide benefits in lieu of additional wages. The
In 1964, the first private pension early retirement provisions appeared in the automotive industry, allowing workers to retire with reduced benefits at the age of sixty if they had at least ten years of service and at the age of fifty-five if they had at least thirty years of service. The key was “supplemental” benefits, an additional benefit paid until workers were eligible for OASDI at the age of sixty-two. During the 1973-1974 and 1981-1982 recessions, employers added “sweeteners” to the usual early retirement benefits. These
Enactment of the
ERISA accelerated a shift away from traditional defined benefit plans to defined contribution plans. In defined benefit pension plans, employers make pretax contributions into a pension fund for all participants. Workers are automatically enrolled, face no direct investment risk, and automatically receive payments based on wages and years of service for the rest of their lives after retirement. The
A 1936 poster urges Americans to apply for Social Security cards.
Of benefit plans started before 1941, 10.4 percent were defined contribution, rising to 77.8 percent by 1987. By 1995, nearly 90 percent of all plans (623,912 of 693,404) were defined contribution plans and the number of participants in those plans was nearly double that of those in defined benefits plans (42.7 million vs. 23.5 million). The growth of 401(k) plans was so substantial after 1984 that by the turn of the twenty-first century, they accounted for 44 percent of defined contribution plans and for about three-fourths of active participants, contributions, and assets in those plans.
Throughout the 1990’s, defined contribution plans moved toward cash benefit plans, the first created by Bank of America in 1985, and to a lesser extent to pension equity plans. These hybrid plans were like traditional defined benefit plans in that the employer contributed funds into a general fund for all employees, owned the assets, made the investment choices, and bore the investment risk. Benefits were also guaranteed within PBGC limitations. Like defined contribution plans, however, cash benefit and pension annuity accruals depended on annual pay credits and annual interest credits, with employees bearing the market risk. Cash benefit plan benefits were a function of annual pay over the employee’s entire career with the employer; annuity plan benefits were based on a percentage of final average earnings for each year of service under the plan. In 2005, approximately 25 percent of all workers covered by defined benefit plans had a cash balance plan, up from 4 percent in 1996-1997, and they had about 28.8 percent of all defined benefit assets.
As defined contribution plans became more popular, the idea of partially
Between 2004 and 2006, seventeen large financially healthy companies “froze” their defined benefits plans, closing them either to new employees (for example, Alcoa and Nissan N.A. in 2006, Lockheed Martin Corp. in 2005, and Motorola in 2004), new and some existing employees (for example, Verizon Communications and Sprint Nextel in 2005), or new employees and all existing employees (for example, Coca-Cola Bottling Company Consolidated and IBM Corporation in 2006, Sears Holdings Corporation in 2005, and Circuit City Stores in 2004). More than 400,000 persons were affected by the freezes and well in excess of one million workers had 401(k) defined contribution plans instead of defined benefit plans. This shift enabled employers to reduce required contributions from 7 to 8 percent of payrolls to the 3 percent employer match. Employers were also driven to reduce total compensation burdens by rising health care costs, which had increased from 2.4 percent of total compensation in 1970 to 8.4 percent in 2006, the lion’s share of which was due not to Medicare contributions but to the cost of group health care, 2 percent in 1970 and 7.2 percent in 2006. Finally, the shift to defined contributions reduced employer risks (economic, demographic, or legislative) associated with funding requirements sufficient to cover future employee benefits.
Berkowitz, Edward, and Kim McQuaid. Creating the Welfare State: The Political Economy of Twentieth-Century Reform. New York: Praeger, 1980. Argues for an enhanced role of business in passage of the Social Security Act. Colin, Gordon. “Why No National Health Insurance in the U.S.? The Limits of Social Provision in War and Peace, 1941-1948.” Journal of Policy History 9 (July, 1997): 277-310. Shows how business and economic interests limited further expansion of the Social Security Act of 1935 by preventing passage of national health insurance. Derthick, Martha. Policymaking for Social Security. Washington, D.C.: Brookings Institution, 1979. Detailed account of factors conducive to expansion of the Social Security Act. Gale, William G., John B. Shoven, and Mark J. Warshawsky, eds. The Evolving Pension System: Trends, Effects, and Proposals for Reform. Washington, D.C.: Brookings Institution, 2005. Examines trends of private retirement pensions. Gordon, Colin. “New Deal, Old Deck: Business and the Origins of Social Security, 1920-1935.” Politics & Society 19 (June, 1991): 165-207. Argues for a modest indirect role of business in the origins of Social Security. Hacker, Jacob J., and Paul Pierson. “Business Power and Social Policy: Employers and the Formation of the American Welfare State.” Politics & Society 30 (June, 2002): 277-325. Argues for a more restricted role of business in passage of the Social Security Act. Schieber, Sylvester J., and John B. Shoven. The Real Deal: The History and Future of Social Security. New Haven, Conn.: Yale University Press, 1999. Shows how business acts as stakeholders in the Social Security system. Swenson, Peter A. Capitalists Against Markets: The Making of Labor Markets and Welfare States in the United States and Sweden. New York: Oxford University Press, 2002. Highlights employer support for development of the welfare state.
Ford Motor Company
Personal income tax
Medicare and Medicaid
New Deal programs
Pension and retirement plans
Recession of 1937-1938