In the United States, before 1935, very few workers in the United States worked in jobs covered by pensions. Of those with coverage, many never received any benefits because their benefits were not guaranteed.
The original Social Security Act was passed in 1935. It had two components: a Social Security retirement benefit that applied only to workers and a welfare program for the needy elderly called Old Age Assistance. The welfare program was initially more popular because the benefits were bigger. No Social Security benefits were to be paid until 1942, allowing for a period of partial forward funding. The retirement benefit was initially funded by a 2 percent tax on the first $3000 of payroll earnings,1 percent from employers and 1 percent from workers.
The Social Security system has been reformed many times but it has always sustained the basic concept of social insurance. The income (premium) has come from payroll taxes and benefits have been paid according to benefit formulas.
In 1939, Social Security was amended to include coverage to dependents of workers who died. It was also decided to set the payroll tax income aside in a separate trust fund.
Social Security gained full national commitment in 1950 when it was decided to phase out the Old Age Assistance program and make the Social Security benefit more adequate. Benefits were increased by 77 percent and the payroll tax rate was raised to 6.5 percent on a phased-in basis. This move was partly in response to an expansion in private pensions that were being won by unions in collective bargaining agreements. Such pensions were usually designed as a supplement to Social Security benefits. Employers supported the increase because Social Security was considered cheaper than private pensions, because the payroll tax costs were transferred to workers by lowering...