Prior to Social Security, Americans inevitably found themselves unemployed, unable to continue to work as they aged. In those circumstances, they routinely moved in with their adult children. Those who had no children or whose children were unable or unwilling to support them typically wound up in the poorhouse.
When Social Security became law, every state but New Mexico had poorhouses (sometimes called almshouses or poor farms). The vast majority of the residents were elderly. Most of the “inmates,” as they were often labeled, entered the poorhouse late in life, having been independent wage earners until that point. A Massachusetts Commission reporting in 1910 found, for example, that only one percent of the residents had entered the almshouse before the age of 40; 92 percent entered after age 60.
Social Security made independent retirement a reality. Prior to its enactment,the verb “retire” did not mean what it means today. It was generally used to refer to withdrawing temporarily, as, for example, to retire to the bedroom at the end of the evening. The first known usage of the noun “retiree” was in 1935, the year Social Security was debated in Congress and enacted into law. It was only in the 1940s, once Social Security started to pay monthly benefits, that the word “retiree” became commonly used.
Social Security is the Foundation of the Nation’s Retirement Income System
The nation’s patchwork system of retirement income is largely an historical accident. Shortly after Social Security was enacted and expanded to include benefits for dependents, the nation entered World War II. During the war, Social Security benefits were not increased and consequently eroded in value.
During the Depression and war years, the federal government substantially increased income taxes, and, in response, business owners created pension plans as “tax-avoidance mechanisms,” as they were called at the time. Moreover,the government imposed wage and price controls during World War II. The controls, however, applied only to current compensation, not to private pension arrangements or other forms of deferred compensation. Consequently, employers offered private pensions as a way of competing for labor made scarce by the demands of the war.
Following the war, Congress, now controlled by Republicans, failed to increase Social Security benefits. At the same time,unions began to bargain aggressively for pensions. As a result of all these factors, Social Security benefits eroded during the 1940s, while employer-sponsored pension plans grew substantially.
It was during this period that the metaphor of a three-legged stool to describe the nation’s patchwork retirement income system was first used. It was coined in 1949 by Reinhard Hohaus, a prominent actuary who worked for the Metropolitan Life Insurance Company.
The metaphor was a useful image for Metropolitan Life and others
promoting private pensions, but it was never accurate, because the legs
were never equal. Even for workers fortunate to have employer-provided
pensions and personal savings to supplement their Social Security,their
Social Security benefits have generally been the most important and
secure source of retirement income. A more apt image of the nation’s
retirement system, therefore, is the pyramid below:
Next: Why Social Security works so well – and one way it doesn’t
Excerpted from testimony given by Nancy Altman, President of Social Security Works, at the February 6, 2019 hearing of the U.S. House Ways and Means Committee on improving retirement security for America’s workers.