The story begins more than a century ago in Imperial Germany. In 1889 Chancellor Otto von Bismarck got a law passed setting up an old-age insurance program that required German workers to contribute a portion of their wages to a fund that would pay them in their retirement. Why? In a time of frightening worker unrest and socialist ferment, Bismarck bluntly admitted that he wanted “to bribe the working classes … to regard the State as a social institution … interested in their welfare.” In other words, he feared he had to start doing more for the workers or they might rise up against him.

Before long other European nations followed. The U.S., with its powerful spirit of self-reliance and independence, did not. Yet old age was getting harder for Americans. By the end of the 19th century the nation had gone from mainly agricultural to industrial, from rural to urban, and from extended families in which generations stayed together to what we now call the nuclear family, of parents and children alone. Americans who worked in factories or offices could easily find themselves out of a job in economic hard times, and when they retired they couldn’t fall back on their families as their parents had. Also, people were living longer. That all added up to more and more people facing long old ages without any resources.

A timeline of Social Security

Click on the arrows or dates to scroll through key moments in this interactive timeline.

There were modest pensions for veterans and a few company pension plans, especially among railroads. After the Stock Market Crash of 1929 a few states tried to set up old-age pension systems, but didn’t have the power to effectively implement them. Most older Americans had nothing to fall back on. By 1934, it is estimated, more than half of the elderly in the U.S. were unable to support themselves.

Popular movements arose to challenge this dire situation and agitate for impossible solutions. Huey P. Long, then governor of Louisiana, started the Share Our Wealth Society, which called on the government to guarantee every family in the nation an income of at least $2,000 a year (about $33,000 today), plus a pension for everyone over 60 and confiscation of every personal fortune above $8 million. By 1935 Share Our Wealth had 7.7 million members. Francis E. Townsend, a broke 66-year-old retired doctor, launched a proposal in 1933 to pay every American over 60 $200 a month ($2,400 today) on the condition they spend the money within a month. The payments would be funded by a two percent national sales tax. He soon had millions of followers who organized Townsend Clubs across the country to promote his plan.

President Franklin D. Roosevelt said at one point, “The Congress can’t stand the pressure of the Townsend Plan unless we have a real old-age insurance system, nor can I face the country.” So, on June 8, 1934, he sent Congress a message urging it to enact “social insurance … to provide security against several of the great disturbing factors in life—especially those which relate to unemployment and old age.” He added that “lessons of experience are available from states, from industries, and from many nations of the civilized world.” He set up a committee of five cabinet-level officials headed by Labor Secretary Frances Perkins to come up with a plan.

The committee soon had a large staff and an array of subcommittees. The five officials divided their job into three parts, with one big group tackling unemployment insurance, one big group working on health insurance, and a much smaller group focusing on old-age security. The unemployment team bogged down in disputes, and the health care reformers were kept from doing much by opposition from the American Medical Association, which didn’t want doctors restrained by national regulation. The old-age group, however, came together on a plan where workers and their employers would each contribute, paycheck by paycheck, to a fund that would provide the workers a pension after they retired. It was a relatively moderate, conservative answer to the radical ideas of people like Long and Townsend.

At first the proposed Social Security law was attacked by liberals as doing too little and by conservatives as approaching socialism; but opposition faded, and President Roosevelt signed the Social Security Act of 1935 on August 14 of that year. The law included unemployment insurance, aid to dependent children, and other elements, but its biggest feature was the old-age part we now think of as Social Security. Taxes for it were first collected in 1937, and for three years the trust fund was built up before the first monthly Social Security check was written in 1940, giving Ida May Fuller, a retired legal secretary in Ludlow, Vermont, $22.54.

The idea was not to provide a pension where people would always get back the amount they put in; rather it was to collect a pool of insurance money from people and return it to them if and when they needed it. Thus what you receive depends on when you stop working, and a disabled worker can start collecting early and end up getting more than that worker paid in. Originally the law required you not to work at all after 65 to get Social Security no matter how much you had paid in. This requirement was intended to remove older people from the labor pool, creating more jobs for the young. The law also excluded farm and transient workers, domestic servants, and anyone working for someone with fewer than 10 employees. Those people may have needed Social Security the most, but legislators believed the tax would be too hard to collect from them.

The system has been modified and expanded many times since its creation. In 1940 benefits were added for a survivor of a retiree who died. In 1950 cost of living raises were introduced. Disability coverage was added in 1954. Also, Medicare and Medicaid, begun in the 1960s, are both officially part of the Social Security System. In the 1970s fixes started being made to keep the system from losing money; in 1977 the tax rate was slightly increased and benefits were slightly reduced, and in 1983 the retirement age was raised (to eventually reach 67 for full benefits) while the payout for early retirees and people still working was reduced.

Because the nation is going through an enormous demographic change with aging baby boomers, none of those adjustments has made the system permanently sound. There are now more Americans over 65 than ever before to take money out of the system and not enough younger workers paying in to keep up. Social Security’s financing is in need of repair. Nonetheless, the system is hardly on the brink of collapse, as some claim.

Around 56 million Americans, a sixth of the population, received Social Security benefits in 2011. The system is paying them a total of $727 billion. After years of taking in more than it paid out and building up a surplus, the system has just begun to dip into that surplus—the “trust fund” of government bonds, now at a peak of $2.6 trillion. No one can say exactly how fast the trust fund will diminish, but the Social Security Administration and the non-partisan Congressional Budget Office (CBO) both estimate that if nothing is done it will last until around 2036. But even in that extreme case, Social Security will be able to pay out as much as it takes in. It just won’t be able to pay recipients 100 percent of what they get now; instead, they’ll get something like 76 percent.

How can the loss of money be stopped? There are four possible ways: raise the retirement age; reduce benefits or cost of living increases; raise the top income level for paying Social Security taxes; or raise the Social Security tax rate. If the tax rate were raised from its present 12.4 percent, half paid by employees and half by employers, to 14 percent, that would do it, according to the CBO. More likely is a mix of a smaller tax rise, a modest increase in the retirement age, and a rise in the cap on taxed salary.

In other words, Social Security has very real long-term funding problems, but it is not in a crisis that can’t be fixed. And as for those who say that its trust fund doesn’t really even exist because the government has spent all the money in it, in a sense that’s true—but it’s not a very meaningful sense. The trust fund’s money is all in government bonds, which pay an average of 2.76 percent. Any bond is, in effect, a loan of money to the bond’s issuer and only has value if the bond issuer can repay the loan. The bonds that compose the Social Security trust fund are backed by the full faith and credit of the U.S., and it is almost universally agreed that the U.S. government is more dependable than any other issuer of bonds—or any other investment—on Earth. So the Social Security trust fund may not be 100 percent safe, but any other conceivable investment is probably less safe. That’s one reason why attempts to “privatize” Social Security—replacing the trust fund with individuals’ investments in stocks and other securities, such as President George W. Bush proposed in 2005—haven’t gone very far. After the recent stock market crash, privatization appeals to fewer people than ever.

And here’s a glimmer of good news in that long, uncertain future: Eventually, the flood of baby boomers will end, and older people won’t so greatly outbalance younger ones as they do in this unique period of history. So even if the next generation can’t retire quite as comfortably as Americans could in the unprecedentedly prosperous years since World War II, maybe the generation after that will be more comfortable again—as long as we don’t give up on a Social Security system that has worked wonders for millions of Americans for most of a century. There’s a reason it has been “the third rail of American politics” ever since House speaker Tip O’Neill first called it that in the 1980s: Everyone worries about it, but virtually no one wants to lose it.

Social Security The Saturday Evening Post

To read the full original article, see below.

From Our Archives: Uncle Sam’s Big Pay-Off The Saturday Evening Post

Kelly White has done a lot in his 70 years, from operating a bulldozer to running his own construction company. He’s worked in military intelligence, owned an apple orchard, and invested in the stock market. By almost anyone’s standard, he’s earned the right to slow down.

But the times, they are a changin’. Like many of his peers who have hit retirement age, White is working as hard as ever, “probably harder than I did in my 30s,” he says. These days you’ll find him crunching numbers and serving customers at the HoneyBaked Ham store in Silverdale, Washington, where he and his wife, Sue, put in close to 50 hours per week —apiece.

The Whites tried retirement and didn’t take to it. “We just got bored. We also lost a fair amount of money in the stock market spiral.” So they launched a new career as owners of a popular food franchise.

Ironically, the downturn to which White referred was the dot-com collapse of 2000 and 2001. That seems like small potatoes compared to the 2008 market collapse, which has made work a virtual necessity for many people 65 and older. Other key factors—Congress’s decision to raise retirement age, the escalating cost of health care, and an aging populace—have contributed to the new economic reality: Retirement age just isn’t what it used to be.

Retirement security “is being eroded from a number of sides,” according to a joint study by the Economic Policy Institute and the Center for American Progress. “The decimation of retirement savings due to a sharp stock market decline, historically low interest rates, and in some cases, corporate fraud, has reduced household savings. In addition to these factors, retirement income security has also been undermined by rising health care costs.” The U.S. Department of Labor confirmed the trend in a recent report. “With the baby-boom generation about to start joining the ranks of those age 65 and over, the graying of the American work force is only just beginning,” it said.

Roughly 6.1 million people age 65 or older are in the work force today, compared to 3.8 million 10 years ago. No other age group has seen such huge jumps in employment in recent decades. Between 1977 and 2007, employment of workers 65 and over increased 101 percent, compared to a 59 percent increase for total employment, according to the Bureau of Labor Statistics. The number of employed men 65 and over rose 78 percent; employment of women 65 and older increased by 147 percent. Although they’re still less than 1 percent of the total labor force, the number of working folks 75 and older jumped a whopping 172 percent.

In the latest AARP survey on the subject, 70 percent of “mature workers,” those between 50 and 70, said they’ll keep working through their 60s and 70s. Sixty-four percent of those working now cited financial need as the reason. Another 11 percent mentioned financial security and the desire “to save more for retirement.” Keeping health care benefits was another commonly stated reason.

Even with Social Security and pension benefits, many older people simply haven’t saved enough to retire. And some who thought they had enough watched the worth of their 401Ks and other nest eggs plummet by 30, 40, or even 50 percent this past fall.

“A lot of the value of my assets is declining precipitously,” says Tina Beer, 67, of Sarasota, Florida, who retired at 65 after 35 years in higher education, most recently serving as dean of liberal arts at the Ringling College of Art and Design.

A year ago, Beer went back to work. This time she chose a part-time and virtually stress-free position that allows her to be outdoors much of the time, which makes it fun. As a pet sitter and dog walker for Fetch! Pet Care, she can earn from a few hundred to almost $1,000 per month. The extra income helps Beer and her 73-year-old husband afford travel, entertainment, and the extras they couldn’t otherwise enjoy. Plus the job is flexible: If she and her husband want to go sailing for a couple weeks, she just notifies her employer, and he finds someone else to take her jobs.

Although Beer could have started her own pet sitting business, she affiliated with a franchise so she wouldn’t have to worry about filling out paperwork, finding clients, collecting money, or other details of owning a business. Beer’s only concern is not to earn too much. Social Security benefits become taxable once the total of adjusted gross income, tax-exempt interest income, and one-half of Social Security benefits exceeds $25,000 for individuals or $32,000 for couples.

Unfortunately, folks wanting to retire early or work past retirement age have to keep track of such things to avoid running afoul of Social Security and pension rules that can end up costing them.

Historically, 65 has been considered normal retirement age because it’s when people can claim full Social Security benefits. In 1983, Congress voted to gradually raise the full retirement age beginning with people born in 1938 or later. For anyone born after 1959, full retirement age is 67. Congress based its decision on the improved health of older people and increases in average life expectancy.

People can still start receiving Social Security benefits at 62, but there are reasons not to. If you’re under full retirement age when you start drawing benefits, you’ll lose $1 in benefits for every $2 you earn above the annual limit. For 2009 that limit is $14,160.

If anything, the trend now is to delay claiming benefits as long as possible, which is currently age 70. People who keep working will be rewarded in the form of a delayed retirement credit: A person born in 1943 or later gets an 8 percent higher check for postponing retirement until they are 70. Also, Social Security benefits are based on your top 35 earning years, so those who work past the normal retirement age and continue to make good money can ensure a bigger monthly check.

There are some obstacles, however, for those who want to stay in their current jobs, especially if their employers are among the minority still offering defined benefit pension plans. Under the terms of many of these plans, companies cannot make both salary and pension payments to the same worker at the same time. In addition, some pension plans base their payouts on an employee’s salary during the last year of full-time employment. A worker who stays with his current employer but downsizes his job and accepts reduced salary could actually lose money if the distribution is based on the lower salary amount.

Fortune 500 companies such as Boeing, Eli Lilly, and P&G have found ways around such predicaments. They still use senior, retired workers, but they find and retain them in nontraditional ways, explains Linda Muskin of Clarus Communications. For example, some firms contract with YourEncore (yourencore.com), which has a database of more than 4,000 retired engineers and scientists interested in working on projects in which they can make a meaningful contribution, have a flexible schedule, and get paid for their expertise.

Companies and retirees are less likely to butt heads with Employee Retirement Income Security Act (ERISA) laws governing postretirement compensation when they work through a third party, Muskin said. The Employee Retirement Income Security Act of 1974 is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry. Although the purpose of the law is to provide protection for individuals in these plans, some of its rules actually discourage postretirement employment.

Sen. Herb Kohl, (D-Wis.), who chairs the Senate Special Committee on Aging, has introduced legislation to eliminate these kinds of barriers for older Americans who want to stay in the work force longer and to encourage employers to recruit and retain older workers. The Incentives for Older Workers Act (S. 2933) addresses both the pension and Social Security dilemmas. It would prohibit pension plans from penalizing individuals for continuing to work on a reduced schedule, and it would revise the Social Security benefit reduction to $1 for every $3 earned before full retirement age. The bill also would allow individuals to earn delayed retirement credits for Social Security purposes for an additional two years until age 72, instead of the current limit of 70.

Bottom line: Retiring at 65 is no longer a realistic American dream for workers or corporate America. Public policy needs to change to reflect that fact.

If you’re 65 and fairly healthy, chances are good you’ll live another 20 to 25 years. To retire at the level recommended by financial planners, you’d need about 75 percent of what you were earning when fully employed, multiplied by the number of years you’re expected to live. As an example, someone making $100,000 would want to have at least $1.5 million in the bank. Such savers are the exception, not the rule.

Fortunately for seniors, the need to work longer coincides with a looming labor shortage forecast for many sectors of the economy as baby boomers age out of the work force. Economists say the spike in unemployment that occurred in 2008 is temporary. According to the Special Committee on Aging, the U.S. labor pool will face a shortage of up to 35 million workers by 2030. Fields already reporting shortages include health care, technology, social services, education, public utilities, and engineering.

A multitude of nonprofit and commercial ventures have sprung up to connect seniors with employment and service opportunities. SeniorJobBank (seniorjobbank.org ) is an online service aimed at the over-50 community where job seekers can search job listings and employers can post openings. The AARP Foundation offers two programs to help qualifying seniors find meaningful, well-paying jobs. The Senior Community Service Employment Program targets those 55 and older who are unemployed and need to work to survive. Seniors are placed at “host agencies” such as food banks and hospitals, where they work 20 hours a week and receive at least minimum wage. The jobs are considered temporary while the seniors hone their skills and the program helps locate permanent part-time or full-time work. Another AARP program, WorkSearch, provides career placement advice and the training seniors need to remain in or re-enter the work force.

For those who want to continue to feel useful but don’t necessarily need the money, a campaign called The Experience Wave (experiencewave.org ) is working to change federal tax law to permit older people to treat the time they spend volunteering for nonprofit groups as tax deductible. There’s an irony, of course, to this latest trend of seniors working past 65. One of the great achievements of the 20th century was making retirement a viable option for so many. The allure of travel, spending time with grandchildren, and enjoying a well-deserved rest had become the Holy Grail of the aging process. Here we are now, just a few years into the 21st century, and the goal is to make it easier for seniors to remain or return to work.

The best of both worlds, of course, would be one in which the laws were flexible enough that seniors could jump in and out of the labor force as it suits their needs, and employers could recruit older workers without anyone assuming additional financial risk.

Henry Ford once said, “Nobody can think straight who does not work. Idleness warps the mind.” It’s a sentiment with which Tina Beer and Kelly White and many of their peers fully agree. Over one-third of White’s fellow HoneyBaked Ham franchisees are “retired” workers.

“What I like about my job,” Beer says, “is it’s outdoors most of the time and, to me, that’s play. I get to play with adorable dogs and cats and supplement my income.”

“Unless you’re really active, you do begin a process of mental deterioration as you age,” White says. “Working keeps us young.” And that’s the silver lining to the new economic reality.

Retirement Age: 65 and Rising The Saturday Evening Post