The Social Security Act of 1935 put into place a program meant to provide payments for a retired worker for the rest of that worker’s life (U.S. Department of Treasury). President Roosevelt explained that the program was meant to, “give some measure of protection to the average citizen…against poverty ridden old age”. The program was orchestrated by President Roosevelt to be self-funded, meaning that a person paying into the fund throughout their working life would receive a comparable amount of funds when they retire (Parker, 2010). The first official Social Security card was given to John D. Sweeney, Jr. in 1936 (Parker, 2010). While the benefits given to retirees were not meant to be their sole source of income, Social Security has become most workers’ only retirement plan (U.S. Department of Treasury).
As such, Social Security has become the federal government’s largest social program with many expansions in coverage (U.S. Department of Treasury). About 49 million retired workers today receive Social Security benefits (U.S. Department of Treasury). As the program reaches about 80 years old, Social Security is in crisis (Press, 2015). Social Security will not change for those workers who are currently age 55 or older. This means that the benefits for those workers have been secured (Trumbull, 2005). The crisis is for the next generation of young adults entering the work force. If the problems the program faces are not addressed immediately, the solutions to the crisis will involve much higher taxes, heavy borrowing, severe cuts in benefits, or a combination of all three (Trumbull, 2005). As of now, the average thirty year old worker can expect a decrease in benefits by 27 percent (Trumbull, 2005). The problems the government will be facing for the Social Security program are the amount of contributions paid to the program’s trust funds, the baby boomer generation coming to retirement age, and debt payments to the program by the government.
To understand why the current contributions to Social Security are presenting a problem, a brief explanation on how contributions work is needed. Social Security is broken down into two parts. The first part of Social Security is what is known as old age and survivors’ insurance (OASI) (U.S. Department of Treasury). The government began collecting taxes to fund this part of the program in 1937 (U.S. Department of Treasury). The government began collecting taxes for the second part of the program, disability insurance (DI) in 1957 (U.S. Department of Treasury). These programs are referred to as OASDI or together as “Social Security” (U.S. Department of Treasury). The OASDI is financed by taxes paid by the employee and employer throughout working lives (U.S. Department of Treasury). These taxes are meant to pay out benefits; therefore, ideally Social Security is a self-funded program (U.S. Department of Treasury). That means that Social Security benefits are paid out automatically so long as there are enough funds in the trust (U.S. Department of Treasury). Now, these funds are estimated to be exhausted by 2033 (Fitchner, 2014). The reasons the funds are beginning to fail are due in part to a system that was built around the 1930s American economy (Trumbull, 2005). In the 1930s, the majority of women did not work and most Americans did not survive long enough to begin collecting benefits at the age of 65 (Trumbull, 2005). Social Security worked in the 1930s because there were shorter lifespans; benefits were lower, there were more workers per retiree, and much fewer retirees drawing from the fund (Trumbull, 2005). Then, with each passing year, there became fewer workers paying higher benefits for a growing number of those retired (Trumbull, 2005). When a worker pays in to the fund, it goes into the general fund; there is no account with the worker’s name on it ready to be paid back out by retirement (Trumbull, 2005) The generation before pays for the benefits of the generation retired which becomes a huge problem when there are more retired than those paying into the fund.
A large part of the crisis Social Security is in is due to a changing demographic in American workers (Press, 2015). Now that the Baby Boomer generation is coming to retirement age, the Social Security fund will be heavily exhausted (Parker, 2010). As such a large portion of the population is retiring; there will be relatively fewer workers to support a large retirement population (Press, 2015). About 80 million Baby Boomers are beginning to enter retirement (Parker, 2010). In 1960, there were about five workers for every one retiree receiving Social Security benefits (Press, 2015). In today’s working environment, there are fewer than three workers for every person receiving social security benefits (Press, 2015). It is predicted that in twenty years there will only be two workers for every one person on Social Security (Press, 2015). This means that Generation X will be supporting the Baby Boomers with about 15 million fewer workers than retirees (Parker, 2010). There is yet another problem facing Social Security. The Baby Boomers with their large workforce did create a surplus for the Social Security fund (Parker, 2010). However, that surplus has been loaned to the federal government (Parker, 2010).
When there is a surplus in the Social Security fund, that surplus is loaned to the federal government (Parker, 2010). Many of the funding problems could be solved if the federal government pays back the surplus it was loaned from the Social Security program (Parker, 2010). However, there is doubt if the government will be able to pay back this loan as it is already trillions of dollars in debt (parker, 2010). If the U.S. government defaults on the loan, then the Social Security fund will deplete sooner than the projected year of exhaustion (Parker, 2010). The program can still be saved with some adjustments to Social Security policy. Proposed have been to reduce benefits. According to Brandon, if Social Security were reduced by three percent for new beneficiaries, then about eighteen percent of the shortage will be relieved. The next proposed changed would be to raise the retirement age (Brandon, 2010). Currently the age range for collecting social security is 65-67, if the age is pushed back to 68-70 then that would relieve about one-third of the shortage (Brandon, 2010). If the government were to increase worker and employer contributions this will effectively eliminate the deficit (Brandon, 2010). As of now employers and employees pay 6.2 percent of earnings toward Social Security. If this were increased to 7.3 percent then the estimated deficit will be virtually eliminated (Brandon, 2010). If future contributions were increased gradually to total 8.3 percent by 2052 this would also eliminate the shortage (Brandon, 2010). A tax as needed policy could be implemented (Brandon, 2010). This means that policy changes involving increasing taxes when necessary and decreasing when not could solve the problem (Brandon, 2010). Currently, Social Security is capped at a yearly earnings of $106,800 (Brandon, 2010). If workers who earn above that pay raise were also taxed but did not receive benefits then the shortage would be eliminated (Brandon, 2010). Social Security benefits average the most paid thirty-five years of the worker’s life (Brandon, 2010). If the program averaged in more working years, then the average would be decreased and therefore lessen the burden on the program (Brandon, 2010). As of now, Social Security is adjusted each year to account for cost of living. If this account were decreased about one percent each year, then the shortage will be eliminated by about 78 percent (Brandon, 2010). Other changed could be to lower spousal benefits, include more workers, create a legacy tax, and riskily diversify investments (Brandon, 2010). Time is of the essence, the sooner a change is made, the less drastic the change will have to be for the future (Goss, 2010).
In conclusion, Social Security, a program to ease poverty for retirees, faces fund depletion due to a change in the workforce where retirees outnumber contributors. There is hope for the future if policies to correct the imbalances are implemented as soon as possible.
- Brandon, E. (2010, May 10). 12 Ways to Fix Social Security. Retrieved March 6, 2016, from U.S. World Report and News: Money, http://money.usnews.com/money/blogs/planning-to-retire/2010/05/18/12-ways-to-fix-social-security
- Fichtner, J. J. (2014, July 31). Social security is in crisis. Market Watch. Retrieved from http://www.marketwatch.com/story/social-security-is-in-crisis-2014-07-31
- Goss, S. C. (2010). The future financial status of the social security program. Social Security Bulletin,70(3), . Retrieved from https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html
- Parker, T. (2010). Top 3 challenges facing social security. In . Retrieved from http://www.investopedia.com/financial-edge/0111/top-3-challenges-facing-social-security.aspx
- Press, T. A. (2015, August 9). Social security facing major problems as it turns 80. Newsfront. Retrieved from http://www.newsmax.com/Newsfront/social-security-turns-80/2015/08/09/id/669208/
- Trumbull, D. (2005, March 11). The problems facing social security. Retrieved March 6, 2016, from Post-Gazette-Res Publica, http://www.trumbullofboston.org/writing/2005-03-11.htm
- U. S. D. of T. Social Security Reform: The Nature of the Problem. Retrieved March 6, 2016, from Social Security Reform: The Nature of the Problem: Issue Brief No. 1, https://www.treasury.gov/resource-center/economic-policy/ss-medicare/Documents/post.pdf