Social Security was created in 1935 during Franklin D. Roosevelt’s first term.¹ It was designed to provide income to older Americans who had little to no means of support. The country was mired in an economic downturn and the need for such support was acute.
Since its creation, there have been three basic developments that have led to the financial challenges Social Security faces today.
- The number of workers paying into the system (which supports current benefit payments) has fallen from over 8 workers for every retiree in 1955, to 2.8 workers in 2016. That ratio is expected to fall to 2.2 by 2035.²
- A program that began as a dedicated retirement benefit later morphed into an income support for disabled workers and surviving family members. These added obligations were not always matched with the necessary payroll deduction levels to financially support them.
- Retirees are living longer. As might be expected, the march of medical technology and our understanding of healthy behaviors have led to a longer retirement span, potentially placing a greater strain on resources.
Beginning in 2010, Social Security tax and other non-interest income no longer fully covered the program’s cost. According to the Social Security Trustees 2017 annual report, this pattern is expected to continue for the next 75 years; the report projects that the trust fund may be exhausted by 2034, absent any changes. Should that happen, it is estimated that current deductions may only be able to pay about 75% of promised income benefits.³
Social Security’s financial crisis is real, but the prospect of its failure seems remote. There are a number of ways to stabilize the Social Security system, including, but not limited to:
Increase Payroll Taxes: An increase in payroll taxes, depending on the size, could add years of life to the trust fund.
Raise the Retirement Age: This has already been done in past reforms and would save money by paying benefits to future recipients at a later age.
Tax Benefits of Higher Earners: By taxing Social Security income for retirees in higher tax brackets, the tax revenue could be used to lengthen the life of the trust fund.
Modify Inflation Adjustments: Rather than raise benefits in line with the Consumer Price Index (CPI), policymakers might elect to tie future benefit increases to the “chained CPI,” which assumes that individuals move to cheaper alternatives in the face of rising costs. Using the “chained CPI” may make cost of living adjustments less expensive.
Reform is expected to be difficult since it may involve tough choices—something from which many policymakers often retreat. However, history has shown that political leaders tend to act when the consequences of inaction exceed those that would come from taking action.