In case you have not been paying attention, Social Security has become quite the red meat issue these days. A few Republican politicians have made public RECORDED statements about eliminating or curtailing Social Security, Medicare, and Medicaid benefits, then deny making those comments, and Democrats then accuse the entire Republican Party of wanting to eliminate the programs. Don’t you just get tired of the games being played with such important policy issues?

A little background. The Social Security Act, passed by Congress and signed into law by President Roosevelt in 1935, was intended to provide financial benefits at age 65 for workers who paid into the system after a lifetime of work, and benefits would depend on each worker’s own level of contribution. Whether this was a good or bad idea depends on one’s ideological leanings; liberals generally believe it is a great idea and conservatives believed (and many still believe) it is government overreach because it forces us to contribute whether we like it or not. I’ll leave those arguments aside.

Numerous amendments have been added since the first Social Security law was passed in 1935. Significant changes include extending benefits to farm workers and self-employed professionals as well as employees in Puerto Rico and the Virgin Islands, a 1960 change added benefits for disabled workers and their dependents, a 1965 law added medical insurance (Medicare) for those 65 and older, and a 1972 law guaranteed an annual cost of living increase based on inflation rates.

Other changes included an increase in the payroll tax and decreasing some benefits. In 1987 President Reagan approved increasing the retirement age to 67 and taxing Social Security benefits (dang it!)

HANG ON….I’M GETTING TO THE GOOD PART!

I want to focus on the “problems” with Social Security, a topic near and dear to my heart since I recently collected my first check!

The reserves in the Social Security fund will be gone by 2034 so that only 77% of benefits will come from Social Security tax receipts (FICA deductions from pay checks and employer contributions). If the program is retained, the remaining 23% will have to be covered by income taxes and other federal taxes. If Social Security was designed to be self-sufficient and independent of the greater federal budget, why is it in financial trouble?

One obvious reason is the aging population; as those of us in the Baby Boomer generation get older and retire there are fewer workers to contribute to the fund because Americans are producing fewer children. Also, we are living longer.

The other reason is that, by law, the Social Security trust fund cannot be invested in the stock market. In 1935 when the plan was implemented the S&P 500 was at 170 but as of Friday, February 17, 2023 it was 4,079, so there is significant lost financial opportunity there. Consequently, the trust fund primarily relies on tax payments coming from current workers. See the above concern regarding the dwindling number of contributors.

I want to mention one other issue unrelated to sustainability. Employees contribute 6.2% of their income to the trust fund and their employers contribute an additional 6.2%. However, there is some evidence that employers actually pass their cost along to employees by offering lower salaries and benefits, so workers in effect pay the entire amount. And anyone who is self-employed automatically pays the entire 12.4%.

There are ways to fix Social Security’s deficit, but I’d almost bet you a month’s Social Security check Congress will not do so. Heck, I’d probably bet a year’s worth of benefits!

Options include:

• Retain the existing system for those of us above a certain age (maybe 50 or 55) and then allow younger individuals to determine how Uncle Sam invests their contributions. Jane might want hers invested in an index fund, Bob might want to invest in gold, and Joe might want to buy Beanie Babies. The younger folks would be responsible for the risk to their own retirement accounts.

• Retain the current system but allow the trust fund managers to invest a portion of it in stock market funds rather than relying almost solely on contributions from workers and employers.

• Social Security is currently assessed only on the first $160,200 earned. That limit could be increased or eliminated so that taxes supporting the fund are collected on higher incomes.

• Raise the retirement age again. We are living longer so maybe we should expect to work longer.

• Reduce the amount paid out to wealthier retirees who rely less on Social Security benefits.

• Increase FICA taxes deducted from paychecks or raise taxes in some other way.

At least a dozen other options have been proposed over time. Bernie Sanders recently proposed a plan that, according to government actuaries, would keep Social Security afloat and allow for cost-of-living increases for at least 75 years, but it would require adding a 12.4% tax on investment income for those individuals earning above $250k per year, so I think we may assume the plan is dead in the water.

Is Social Security in danger of elimination or reduction? Probably not. At least not for a while. A small number of Republicans have publicly said that they support eliminating it or reducing benefits, but doing so would likely be devastating for that party. In a 2022 poll 82% of Americans said they want Congress to INCREASE benefits for all recipients, and 73% wanted to increase taxes on the wealthy (by removing the income cap) so that they pay the same proportion of their income as everyone else.

The problem is that, as stated above, the trust fund runs dry in about a dozen years. Congress being Congress, I think it’s reasonable to assume no major necessary changes will be made in time to make it sustainable. At that point new taxes will be required (or more debt accumulated) since a significant portion of benefits will have to be paid out of the general budget, OR benefits will have to be significantly reduced. Congress is not known for addressing significant problems in a timely manner.

Just remember that if your household’s finances were run like Congress runs Social Security and other programs, you would probably be either broke or in prison. Unless, that is, you ALSO have a printing press spitting out money and a willingness to accumulate tremendous debt to pass on to your kids.

Have a great week!

David