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A Look at the History of Social Security as COLA Bump Nears

Loren Merkle, CFP®, RICP®, Certified Financial Fiduciary

Any day now, retirees should find out what their Social Security raise will be for 2023. Experts are predicting the highest Cost of Living Adjustment (COLA) in 40 years, thanks to inflation. The pay bump is expected to be around 9% or approximately $150 on the average monthly benefit.

Here’s a look at the history of a program that will pay benefits to approximately 64 million Americans in 2022.

Early years
In 1935 President Roosevelt signed the Social Security Bill into law. It was created in reaction to the Great Depression as a way to provide economic security for elderly Americans. Before Social Security, many states had elder-assistance programs, but they were underfunded and poorly run.

Workers funded President Roosevelt’s program. They contributed to the program through payroll tax deductions, developing a model where the current working generation would finance the retired generation’s monthly benefit.

Not everyone could participate. Self-employed professionals and field hands were among those excluded. To become eligible, workers filled out an application at the post office and received a card with a unique, nine-digit identification number. Within eight days of launching the program, more than one million workers had Social Security numbers.

First beneficiary
Ida May Fuller was the first Social Security beneficiary. Fuller filed her retirement claim on November 4th, 1939. She received her Social Security check 00-000-001 in early 1940. The amount was $22.54.

Fuller worked as a teacher and a legal secretary. She contributed to the Social Security program for three years before retiring. During that time, she paid $24.75 into the system, according to the Social Security Administration. During her lifetime, she collected $22,888.92 in Social Security benefits.

Amendments
The original Social Security bill has been amended several times. In 1977, it became clear that Social Security could run out of money. The benefit qualification formula was changed, and the payroll tax was increased slightly, decreasing benefits for retirees.

The program faced another financial crisis in the 80s. President Reagan signed legislation that gradually increased the retirement age to 67, taxed Social Security benefits, and provided Social Security benefits to federal workers.

The Obama Administration temporarily reduced the Social Security tax rate from 6.2% to 4.2% in 2011 and 2012.

COLA
Since 1983, the Social Security COLA has been based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the prior year to the corresponding quarters of the current year. The 2021 COLA increase was 5.9%, the largest since the 11.2% COLA in 1981. The biggest COLA bump was 14.3% in 1980. There has been a 0% COLA three times: 2009, 2010, and 2015.

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