Part 1: history and future
The Social Security Act was signed into law on August 14, 1935, creating a social insurance program to pay retired workers age 65 and older a stable income after retirement. Enacted in the midst of the Great Depression in response to crushing poverty and a shift from agrarian self-sufficiency to post-industrial urbanization, the original Act sought to provide Americans with protection against the “hazards and vicissitudes of life”. Since its inception, millions of Americans have received benefits from the program, yet despite strong public support, the program has faced a series of funding challenges that continues to threaten its existence.
Although the original Act did not fully address the four key economic insecurities identified in the Committee on Economic Security (CES) report that was commissioned by President Franklin D. Roosevelt and served as the Act’s legislative foundation, namely unemployment insurance, public relief, medical care, and old-age security, it established old-age benefits and cash pensions for the elderly poor, and created a cooperative system between federal and state governments to administer unemployment benefits. A series of amendments enhanced the program’s reach, including the 1956 Amendment that added disability benefits, and the landmark 1965 Amendment that created the Medicare program.
The original Act established the Social Security Board, which later become the Social Security Administration, and created the first Social Security Trust Fund that was used to collect the payroll taxes (known as FICA) that are used to fund benefits. Since then, and because of a long-term demographic ratio of roughly 2.9 workers to 1 retiree, the Trust Fund (since expanded to include a separate disability trust fund and two Medicare trusts) has received more income than it has paid out in benefits. That, however, is beginning to change as an increasing number of baby boomers reach retirement age. At current trends, the number of people aged over 65 per 100 of working age adults is projected to increase from 25 to 40 by 2050. Not only a U.S. problem, this so-called “old-age dependency ratio” has ticked upward in most developed countries, threatening the financial stability of public pensions and social insurance programs like Social Security and Medicare.
The most recent Social Security and Medicare trustees report estimates that the original Social Security (OASDI) trust will remain solvent through 2034, the disability trust through 2052, and the Medicare hospital insurance trust only through 2026. Although the programs will continue to receive ongoing funding through Social Security and Medicare payroll taxes, as well as an additional Medicare tax assessed on high-income taxpayers, the declining ratio of current workers to beneficiaries will result in a funding deficit. Still, even if the funds are depleted entirely, it is estimated that Social Security could continue to pay approximately 75% of benefits, and Medicare almost 90%. A long-term fix is, however, urgently needed, as demographic trends suggest a marked increase in the long-term costs of both programs. The price tag for Social Security is expected to rise from 5% of Gross Domestic Product (GDP) to 6% in 20 years, with Medicare costs projected to almost double from the current 3.7% to 6.5% of GDP over the same period.
Prior funding challenges have occurred, most memorably in the early 1980s when President Reagan appointed the Greenspan Commission to study the financing issues and make policy recommendations. The result was the Social Security Amendments of 1983, which, among other things, made Social Security benefits taxable for the first time and phased in an increase in the retirement age from 65 to 67. Today’s policymakers have suggested any number of fixes, including an increase in the retirement age, changing Social Security’s cost of living index formula, increasing or removing the payroll tax cap for Social Security FICA tax and/or increasing the tax rate, reducing or eliminating benefits for the wealthy, and introducing a means-testing formula for benefits.
Although the program enjoys strong support and is not perceived to be overly generous by international standards, its long-term funding challenges will continue to occupy the attention of policymakers for years to come. As the recent 2018 Social Security Trustee report reminds us, lawmakers have many policy options that would reduce or eliminate long-term funding shortfalls, but do not have the luxury of time to enact them.
John Male CFP®, RICP®
The Gassman Financial Group
G&G Planning Concepts, Inc.
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