April 20 is the 40th anniversary of the 1983 Social Security Amendments, which President Ronald Reagan signed after the bipartisan Greenspan Commission made its recommendations for reform. Congress and the president created the commission to find solutions to the financial crisis that Social Security faced at the time — the Old Age and Survivors Insurance Trust Fund it draws from was projected to run out of money later that very year.
Fast-forward 40 years and 1983’s 25-year-olds are today’s 65-year-olds — and the country is having the same conversation about the same crisis all over again.
“Reforming Social Security is a subject that’s been making the rounds for some time now,” said Dan Petkevich, founder and CEO of Fair Square Medicare, which helps older adults navigate healthcare and financial challenges. “The general public has an aversion to it that the government needs to address through a much-needed overhaul.”
The Program Depends on a Shrinking Tax Base
The Social Security Administration (SSA) disputes a commonly held misconception that says the program will run out of money because people are living longer. According to the SSA, an aging population isn’t the problem. The problem is that the birth rate dropped from three children per woman to two.
But a more troublesome myth is that people often think the taxes they pay into the system during their working lifetimes pay for their future benefits.
They do not.
“Social Security is a pay-as-you-go system, which means that today’s workers are paying for today’s retirees,” said Catherine Collinson, CEO and president of Transamerica Institute and Transamerica Center for Retirement Studies. “In anticipation of situations when there may be more money being paid out to retirees than coming in from workers, there is a special reserve of excess funds called the Social Security trust funds, which can help fill those gaps.”
Taxes Plus Trust Reserves Will Soon Be Taxes Alone
Since two babies now grow into taxpaying adults where there used to be three, those trusts will be able to pay only 75% of scheduled benefits in about a dozen years, according to the SSA. Then, the reserves will be depleted and tax revenue alone will have to foot the whole bill. Note that these numbers are pre-pandemic.
Only Congressional action can change that trajectory, and according to the SSA, “Over 80+ years, Congress has always acted timely.”
While the current situation isn’t yet as immediate as that of 1983, the subject is a hotter political topic than ever before — and COVID-19 only increased the urgency for another major overhaul.
The Pandemic Accelerated an Already Tight Timeline
The country had known that benefits would drop by 25% in roughly 2035 for years before the COVID-19 crisis moved the finish line closer with mass layoffs and depleted tax revenues.
“The shock of the pandemic in the last two years has pushed Social Security one year earlier to insolvency,” Petkevich said.
In a recent report, the SSA updated its pre-2020 information. The Old Age, Survivors and Disability Insurance (OASDI) trust is now projected to run dry in 2034 instead of 2035. The Old Age and Survivors Insurance (OASI) trust will be depleted in 2033 instead of 2034. The Disability Insurance (DI) trust depletion date jumped forward eight years to 2057.
Lawmakers Are Discussing Reform Because Voters Are Demanding It
Proposals to reform Social Security are always a political landmine because they involve one of the largest and most reliable voting blocs — and that voting bloc is rightly worried.
“About 40% of older Americans rely exclusively on Social Security,” Petkevich said. “Take the benefits away, and what happens? These people would face financial hardships and income losses.”
Research from Collinson’s organization backs up Petkevich’s assessment. Exactly 40% of baby boomers now rely on Social Security primarily and about 1 in 4 among the general population expect to when it’s their turn to retire.
Large majorities worry that the program won’t be there when they reach retirement age, or that it will be greatly diminished.
The Math Is Bleak, the Subject Is Toxic and Everyone Hates All the Options
According to the AP, Social Security reform is an exhausting political hill to climb because all potential solutions involve electoral kryptonite — raising taxes, cutting benefits or both.
The result is that neither party has achieved a consensus, even among themselves, much less one that could survive a divided government. Individual lawmakers have made proposals, nearly all of which have been met with something ranging from dismissal to outright hostility.
But an overhaul is necessary — and possible.
“Regarding possible reforms to Social Security, there are many levers and interdependencies that could be adjusted,” Collinson said. “For example, increasing payroll taxes, increasing maximum taxable wages for workers, and/or reducing benefits. One often-proposed solution is raising the full retirement age. For individuals born in 1960 or later, the full retirement age to receive Social Security benefits currently stands at age 67. Because raising the full retirement age requires that people maintain good health and have access to employment opportunities so they can continue working into older age, it may be unrealistic.”
Reagan-era lawmakers got away with waiting to act until the year of the program’s potential demise — but that doesn’t mean today’s legislators should do the same.
“In whatever form that reforms to Social Security take shape, it’s important that Congress takes action sooner rather than later so that workers have as much time as possible to adjust their financial planning assumptions and retirement expectations accordingly,” Collinson said.
More From GOBankingRates