Sad but true: the real solution to the impending financial crisis of social security


Social security has become an essential part of Americans’ financial planning during its 80-year history, providing vital monthly checks to retirees when they have run out of income. Social security recipients are heavily dependent on the program, and for many beneficiaries the money they receive from social security accounts for most or all of their retirement income.

For decades, everyone has known that there is an impending financial crisis for the social security program. Changing demographics have resulted in a flood of new retirees in recent years, with fewer workers to replace them in the labor market. The latest Social Security financial health report has trust funds supporting the cash-strapped program in the mid-2030s, and that date could come sooner if economic downturns linked to coronaviruses persist.

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Even with all this delay, legislators have done almost nothing to remedy the financial problems of social security. The sad truth is that they are unlikely to do so. However, this should not be bad news for current and future social security recipients, because what is most likely to happen will always ensure that they get all the benefits they receive. Rather than turning to history for advice on finding a compromise, Washington is more likely to resort to a simpler but more dangerous solution.

How a big compromise saved social security

Over 35 years ago, Social Security faced its first major financial test. The period of inflation in the late 1970s and early 1980s had strained the federal government’s budget and, with an increasing number of people receiving benefits, social security needed major changes. There has been considerable controversy over how to proceed with the reforms, and as often happens in Washington, the debate was controversial and progress was slow.

However, in 1983, Congress and the White House passed social security amendments that had a major impact on his financial future. They included the following provisions:

  • Gradually raise the full retirement age from 65 to 67.
  • Tax part of the social security benefits for those whose income exceeds certain thresholds.
  • Accelerate increases in payroll taxes.
  • Implement winding down provisions to end double taxation of public pension recipients
  • Increase the deferred retirement credit for having postponed social security from 3% per year to 8%.
  • Favorable changes to the compensation test for those who reach full retirement age in a given year
  • Social security coverage for non-profit 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 gloomy suspicions that opponents of the other party were more interested in playing politics than solving the problem. … None of us here today would pretend that this bill is perfect. Each of us has had to compromise in one way or another. But the essence of bipartisanship is to give 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 legislators increasingly polarizing on key issues, including social security. On one side of the spectrum, those looking to cut social security spending have considered measures such as raising the retirement age to full rates and linking increases in the cost of living to indices prices which are increasing more slowly than the current reference. On the other hand, some lawmakers want to dramatically increase social security spending, offering substantial taxes to finance the extra spending. The gap between the two seems too wide to reach a consensus.

Washington’s handling of past crises provides some clues to how social security problems are likely to be resolved. During the financial crisis, lawmakers approved billions of dollars in bailouts to keep the financial system afloat. Earlier this year, lawmakers approved billions 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. Rather than forcing people to see a 20-25% cut in benefits, they will simply open the coffers and agree to spend several hundred trillion dollars more annually to close the gap. This is the easiest way to solve the problem without having to solve the difficult problems that underlie it.

Don’t change your plans

Political reality might be what saves your social security benefits, but that doesn’t mean you have to rely solely on the program. If you are still working, set aside money to support yourself in retirement. That way, whatever legislators do to social security, you will at least have some ability to be financially independent.

Social security problems are difficult to solve, so it is not surprising to see Washington lawmakers struggling unsuccessfully to try to find a solution. Some people are optimistic about the future, but I think it’s very likely that the federal government will eventually bail out social security and leave future generations to foot the bill.


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