Theme 2: Taxes in U.S. HistoryLesson 4: The Social Security Act of 1935

Millions of Americans were unemployed during the Great Depression. President Roosevelt's New Deal created some new jobs, but many elderly people could not work and were living in poverty. The President asked Frances Perkins, the first female cabinet member, to develop an "old-age" insurance program. The resulting Social Security Act of 1935 was designed to provide elderly retired workers with pensions.

At first, payments into Social Security were considered "contributions," not taxes. The program appeared to be self-funded--as workers contributed, they received credits toward retirement benefits. However, too many people needed help, so the program was expanded to include the families and survivors of retired and disabled workers, the unemployed, and federal workers.

Today, Social Security provides a regular income to retired and disabled workers and the unemployed. Social Security is funded by a compulsory payroll tax called the Federal Insurance Contributions Act (FICA) tax. The payroll tax is withheld from each paycheck. Withholding means that an employer deducts, or holds back, a set amount of money and sends it to the government. Workers pay the tax as they earn their incomes. This system is known as "pay-as-you-go" or "pay-as-you-earn." Workers' payroll taxes support those who are currently receiving Social Security benefits.