The bill establishing the Social Security Administration was signed 80 years ago today. Social Security benefits have been a lifeline for many senior Americans and the disabled. But the program will not be around another 80 years unless substantial changes are made. So far Congress has refused to make even small adjustments for fear of the wrath of senior voters.
Senior Americans need to be pragmatic. No one has proposed any changes for those already receiving benefits. In fact, the few politicians who talk about it always make that clear multiple times during their remarks. If something is not done to increase funds deposited into the Trust Fund and slow the payouts, money for retirees will run out in 2035. Some current beneficiaries would be left with nothing, so they really should be backing reform plans.
Worse yet, the SS disability fund (established in 1956) will run dry in just over a year. Democrats in Congress want to redirect some of the 85% of the payroll tax which funds retirement benefits to the disability fund. That was also done in 1994. That proposal would have both funds down to nothing in 2034. Republicans have expressed that they would like to use this opportunity to make some changes in disability benefits to eliminate fraud and waste to provide funds for a longer time.
How did the US get in this mess? There’s no one answer, but some trends and actions have contributed in ways not always obvious.
* Four decades of birth control and abortion have reduced the number of younger workers paying into the system. The US has an aging population whose benefits cannot be totally funded at current levels by the payroll taxes of those earning wages.
* During the worst of the recent recession, a payroll tax “holiday” cut 2% from the rate that workers pay into Social Security. In 2011 alone, the Social Security Trust Fund was shorted $112 billion. The government is supposed to pay that back into the Trust Fund from the general tax fund. The payroll tax holiday ended January 1, 2013, although some short-sighted politicians suggested making it permanent.
* Fewer people are employed. The past six or seven years have been especially bad for jobs. And the Affordable Care Act (aka Obamacare) mandates have made things worse. The requirement that any business with over 50 full-time employees must provide health benefits has caused some companies to lay-off workers to stay below the limit. And redefining full-time as 30 hours a week has caused some employers to cut employee hours.
But the employment situation has been trending downward in some areas for decades. As products became cheaper to import from Japan or China than manufacture in the US, factories closed. We have become a service economy. Many service jobs require fewer special skills and pay less. Since the payroll tax is a percentage of total earnings, that’s less money for Social Security.
President Obama’s Clean Power Plan executive order will be another blow to industrial America, at least in the short-term. The plan requires states and utilities to transition from coal-fired power generation to greener alternatives in next 17 years. The US Chamber of Commerce estimates over 200,000 jobs will be lost. New jobs will be created in the solar and wind energy sectors, but I wonder about the longevity of those jobs given the history of green energy companies going bankrupt.
A trendy proposal to fix Social Security is allowing new workers to manage payroll tax money themselves, kind of a government IRA or 401K type plan. I’m all for people having more control over what is their money in the first place. But that plan would harm Social Security because it would decrease the amount flowing into the Trust Fund.
The reform least likely to disrupt the system or retirees is gradually increasing the age when people qualify for Social Security. That age was based on life expectancy years ago. We live longer now, so retirement age should go up as well. I’d also suggest getting rid of various options to retire early with lower monthly benefits. More public service announcements or notices on each paystub should educate workers that Social Security was intended as a safety net, not a retirement plan. Few retirees can live on current benefits alone, and current workers need to be encouraged to save for retirement.
Along with raising the retirement age, there should be a gradual increase in the payroll tax. I don’t know if 0.10% per year for 20 years would be enough to keep the Trust Fund solvent, but the increase would need to be something gradual like that. Hopefully, workers would receive at least a cost-of-living raise each year that would be more than the tax increase, thus limiting the pain.
Social Security will celebrate many more anniversaries if Congress has the courage to update the system to reflect the new worker-retiree ratio and increasing lifespan.