Personal Wealth Management / Financial Planning
Social Security Is Still Pretty Secure
As the Social Security Administration prepares to dip into the trust fund to cover benefits for the first time since 1982, this seems like a good time for a short trip in the wayback machine.
Welp, here we go: According to the latest Social Security Trustees Report, out today, benefit payments will exceed receipts this year, forcing the program to draw from the trust fund for the first time since 1982. The trustees’ number-crunchers anticipate the trust will be empty by 2034, a year sooner than last year’s report projected, forcing widespread benefits cuts (and presumably the end of American civilization as we know it). Before you sound the alarm, however, we think it is worthwhile to look back at 1982 in detail. The history surrounding Social Security’s “crisis” then, in our view, shows why fears of its demise are likely far-fetched today.
Back in the go-go 1950s and 1960s, lawmakers’ favorite election-year trick was to ramp up Social Security benefits. The last of these, passed in 1972, included an unfortunate mathematical error when Congress introduced cost-of-living adjustments (COLA), which resulted in that decade’s inflation bringing unsustainably generous benefits. Congress patched that problem in 1977, but the damage was already done, and Social Security entered the 1980s in dire straits.[i] With the economy tipping into recession yet again, the 1980 Trustees Report’s projections looked bleak. The “optimistic” scenario, which presumed a short, partial-year recession in late 1980 and quick recovery, showed the Old Age and Survivors Insurance Trust (OASI)—what we commonly call the Social Security Trust Fund—depleting by 1982. The “pessimistic” scenario, which assumed a longer recession, showed OASI depleted by 1981 and never recovering. (Though the economic forecast here came closer to reality, obviously we still have Social Security.) Combining it with the Disability Insurance Trust (DI)—not permissible under then-current laws—was suggested as a way to delay the pain somewhat, but not avoid the depletion the Trustees thought inevitable.
Hence, during the Reagan Administration’s early years, Social Security was a hot-button issue. If you have a New York Times subscription, you might enjoy using the “Times Machine” feature to dig up coverage of the standoff between Reagan and then-House Speaker Tip O’Neill, as well as fear-mongering from the likes of Peter G. Peterson, then the leader of the Social Security panic bandwagon. Though his infamous warning about insolvent Social Security appeared in The New York Review of Books, the Times referenced it, highlighting his warning that preserving Social Security benefits in the long run would require 44% of Americans’ taxable pay to go to the program. Your local paper’s archives may have similar articles.
Reagan officially created his bipartisan Social Security taskforce in December 1981. As often happens in Washington, DC, they spent the next year squabbling and missing deadlines, even as OASI had to begin “borrowing” from the DI and Medicare in order to meet benefit obligations in November 1982. Absent new legislation, the trustees believed those loans were only a short-term patch, forcing delayed or cut benefit payments by July 1983.
But a funny thing happened. The trusts did not run out. Social Security didn’t miss or delay payments that summer. And needless to say, Americans aren’t forking 44% of their taxable income over to the Social Security Administration each year. Rather, the current contribution is 12.4%—half from workers, and half from employers via the payroll tax. That is only a shade higher than it was in 1982.
How did we avoid the Retirementpocalypse? Simple: Faced with a do-or-die scenario, Congress knuckled down and grabbed the third rail. Reagan’s bipartisan commission finally delivered its report and recommendations in January 1983. The House and Senate drafted legislation accordingly, and the Conference Committee that reconciles differing House and Senate bills created a compromise package that both houses passed in late March. One month later, with Reagan’s fresh signature, the Social Security Amendments of 1983 were law.
Like the 1977 COLA patch, 1983’s reforms didn’t slash benefits for existing recipients. Politicians like getting re-elected, after all, and taking money from a very reliable cohort of voters is a good way to get tossed out. Instead, among other things, they inched Social Security taxes a bit higher, gradually raised the eligibility for full benefits to age 67 for workers born in 1938 or later (at the time, these folks were 45 years old), made some benefits taxable for what were then high-income households, and reduced planned benefits for high-income folks from 1990 onward. Those modest tweaks were enough to radically extend the trust fund’s lifespan.
The future, of course, is impossible to predict perfectly—especially where politics is involved. But based on what went down in the early 1980s, a couple loose predictions seem reasonable. One, it wouldn’t surprise if Congress doesn’t bother doing anything about Social Security until the last minute. Not only is it still a third rail, but fixing it now, 16 years before the doomsday clock is set to expire, would rob politicians of a key fundraising and campaign wedge issue. Lawmakers have repeatedly shown they would much rather exploit problems for personal gain than solve them. Two, when they do finally bite the bullet, they can probably kick the can decades into the future with more modest tweaks to the retirement age, taxes and far-future benefits.
In other words, if you are receiving Social Security now—or about to start doing so—you can probably breathe easier. Congress will want to keep your vote. Folks in my generation might have to work a few years longer to get full benefits, but I daresay we can handle it. The current retirement age is an antiquated relic of a time when life expectancies were short and many Americans had backbreaking jobs in factories, agriculture and mining. Folks retired at 65 because they were physically incapable of working longer. Retirement wasn’t a 30-plus year adventure of traveling and spoiling the grand-kids. For many people today, “retiring” means quitting the old day job and taking on a new, more enjoyable form of employment in order to avoid boredom.Actually, when you get down to it, a Social Security crisis is a pretty good problem to have. It means we’re all living longer and enjoying a far higher quality of life in old age. If 60 is the new 40 now, perhaps 80 will be the new 60 in 40 years. You just never know. But I’m personally glad to live in an era when pundits tie themselves in knots over whether the government will be able to help support me from age 67 to 100 or more, rather than a time when it was a foregone conclusion that government cheese would keep me well fed from my retirement at age 65 through my death five years later.
[i] Musical pun intended.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.
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