Social Security has become an essential part of financial planning for Americans in its 80-year history, providing vital monthly checks to retirees when they no longer have earned income. Those on Social Security rely heavily on the program, and for many beneficiaries, the money they get from Social Security represents most or all of their retirement income.
For decades, everyone knew that there was an impending financial crisis for the Social Security program. Demographic changes have resulted in an avalanche of new retirees in recent years, with fewer workers to replace them in the workforce. The latest report on Social Security’s financial health has the trust funds supporting the program that is running out of money in the mid-2030s, and that date could come sooner if the coronavirus-related economic slowdown persists.
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Even with all this waiting time, lawmakers have essentially done nothing to address Social Security’s financial problems. The sad truth is that they are unlikely to do so. However, that doesn’t have to be bad news for current and future Social Security beneficiaries, because what is most likely to happen will still ensure that they get all the benefits that are coming their way. Rather than turning to history for advice on compromise, Washington is more likely to turn to a simpler but more dangerous solution.
How a great commitment saved Social Security
More than 35 years ago, Social Security faced its first major financial test. The inflationary period in the late 1970s and early 1980s had put pressure on the federal government budget, and with increasing numbers of people receiving benefits, Social Security needed major changes. There was considerable controversy over how to reform, and as is often the case in Washington, the debate was controversial and progress was slow.
However, in 1983, Congress and the White House approved Social Security amendments that had a radical impact on their financial future. They included the following provisions:
- Gradually raise the full retirement age from 65 to 67.
- Taxing a portion of Social Security benefits for those with income above certain thresholds.
- Acceleration of payroll tax increases.
- Implementation of unexpected elimination provisions to stop the double immersion of those receiving public pensions.
- Increase the delayed retirement credit for deferring Social Security from 3% per year to 8%.
- Favorable changes in the income test for those who reach full retirement age in a given year.
- Social Security coverage for nonprofit employees and federal civilian employees hired after 1983.
President Ronald Reagan described how the compromise worked when he signed the bill:
[This bill is] A clear and dramatic demonstration that our system can still work when good men and women come together to make it work. Just a few months ago, there was a legitimate alarm that Social Security would soon run out of money. On both sides of the political aisle, there were dark suspicions that opponents of the other party were more interested in playing politics than solving the problem. … None of us here today would pretend this bill is perfect. Each of us had to commit in one way or another. But the essence of bipartisanship is giving up a little to get a lot.
How times have changed
Fast forward 37 years, and things are very different. Bipartisanship is almost a thing of the past, with lawmakers increasingly polarized on key issues, including Social Security. On one side of the spectrum, those seeking to cut Social Security spending have looked at measures such as further increasing the full retirement age and linking cost-of-living increases to price indices that rise more slowly than the current benchmark. . On the other hand, some legislators want to dramatically increase spending on Social Security, proposing substantial taxes intended to provide funds for additional spending. The chasm between the two seems too wide to find a consensus.
How Washington has handled past crises provides some clues to how Social Security problems are likely to be resolved. During the financial crisis, lawmakers approved trillions of dollars in bailout money to keep the financial system afloat. Earlier this year, lawmakers approved trillions of dollars in stimulus spending to keep the economy going.
When Social Security trust funds run out of money, the federal government is likely to do the same. Instead of forcing people to see a 20% to 25% cut in benefits, they will simply open the coffers and agree to spend the additional several hundred billion dollars each year to close the gap. It is the easiest way to tackle the problem without having to tackle the difficult problems that lie behind it.
Don’t change your plans
The political reality may be what saves your Social Security benefits, but that doesn’t mean you should trust only the program. If you are still working, set aside money to help you stay in retirement. That way, anything legislators do to Social Security will have at least some ability to be financially self-sufficient.
Social Security problems are difficult to solve, so it is not surprising to see lawmakers in Washington move unsuccessfully trying to find a solution. Some people are optimistic about the future, but I think the federal government will most likely end up bailing out Social Security and letting future generations pay the bill.
