The future of Social Security continues to be a frequently asked question for the presidential candidates. What will happen in 2035 when the program simultaneously marks its 100-year anniversary and its projected funding cliff? What are the candidates’ visions for Social Security?
The Social Security Act was signed into law by President Franklin Delano Roosevelt on August 14,1935. The program’s implementation was the result of a confluence of factors which created a perceived societal need for an economic security program including the industrialization and urbanization of America, the elimination of the extended family and a marked increase in life expectancy. Furthermore, the stock market crash of October 24, 1929, where the stock market lost 40% of its value followed by the Great Depression, where the GNP declined from $105 billion in 1929 to $55 billion in 1932, 10,000 banks failed and unemployment exceeded 25%, created a resounding cry for reassurance that citizens would have economic security in their old age. The Social Security Act which was described as including protection against “the hazards and vicissitudes of life” included the Title II-Federal Old-Age Benefits program, which is the program we typically refer to as “social security”. Under this program, benefits are paid to the primary worker upon retirement at age 65. The benefits which would be based on payroll tax contributions which the primary worker made during his working life would start with taxes collected in 1937 and the monthly benefits would start pay out in 1942. The bill also included Title I-Grants to States for Old-Age Assistance. Roosevelt viewed Title I as a temporary program which would eventually sunset to be supplanted by the contributory program once its pool of participants was sufficient. The original Social Security Act also included provisions for aid to dependent children and unemployment insurance.
Social Security underwent some major reforms in the 1960’s and 1970s’s. President Lyndon Johnson signed into law on July 30, 1965 the Medicare bill which provided health coverage to almost all American aged 65 or older. In the 1970’s under President Nixon the SSA launched the Supplemental Security Income (SSI) federal program which provides support to disabled individuals. 1972 also brought a bill which created automated Cost of Living Increases (COLAs) in the earnings subject to Social Security taxes and an automatic adjustment in the wage base used to calculate the benefits. By the mid-70’s, it was apparent that the social security program’s participant base and projected payouts were growing rapidly and that short and long term funding shortfalls were on the horizon. To address this situation, the SSA enacted the 1977 Social Security Amendments which raised the payroll tax from 6.45% to the current 7.65%, increased the wage base, reduced benefits slightly and “decoupled” the wage adjustment from the COLA adjustment. These fixes balanced the program for the next 50 years. However, the prospect of a short-term financing crisis was still looming in the 1980’s when President Ronald Reagan established the Greenspan Commission to study the financing problems and make recommendations for legislative remedies. The end result was the 1983 Amendment which signed into law the taxation of Social Security benefits and an increase in the retirement age to 67 by 2027.
Social Security is currently one of the most popular federal programs. According to the Social Security Administration’s 2015 Trustee Report, at the end of 2014, 59 million Americans were receiving either retirement, disability or survivor’s benefits for a total cost of $848.5 billion and 166 million people paying payroll taxes into the system. Social Security continues to face the specter of a funding shortfall. According to the Congressional Budget Office, since 2010 Social Security’s cash expenses have exceeded its cash receipts. The perception that Social Security is hitting a funding cliff is considered common knowledge. According to a 2014 Pew Research Center survey,” 50% of Gen Xers and 51% of Millennials said they believed they would receive no Social Security benefits at all by the time they’re ready to retire.” In addition, the Pew Survey also revealed that 67% of those surveyed stated that Social Security benefits should not be reduced.
Social Security obviously cannot continue indefinitely without some level of expense, benefit or participant number reduction. According to the Social Security Trustees Report, Social Security will be funded through 2034. The Disability insurance component which represents 18 percent of Social Security funding is projected to be depleted by as earlier as 2017. Barbara Whelehan, Assistant Managing Editor at Bank Rate, said that the most recent Social Security Board of Trustees Report shows that to keep Social Security solvent, revenues have to rise immediately by 2.62% from the current level (which is 12.4 %.) “Or benefits for all current and future beneficiaries would have to be cut by 16.4%,” she adds. “Or, if benefit cuts were to be applied only to those claiming going forward, the haircut would be 19.6%.”
The future of Social Security has been prominent in the 2016 presidential primary race with all of the candidates weighing in on how they would address the program’s looming funding cliff. While all of the current candidates have communicated that reforms to Social Security must take place soon, they all agree that there should be no change to the benefits for those currently retired or approaching retirement.
Democratic Front-Runner former Secretary of State Hillary Clinton has stated that, “I won’t cut Social Security…I’ll defend it, and I’ll expand it.” Clinton’ s platform is focused on expanding benefits for “those who need it most or who are treated unfairly by the current system including women who are widows and those who left the paid work force for significant periods of time to take care of young children, aging parents or other family members. Citing that the poverty rate for widowed women 65 or older is 90% higher than that of other seniors, Clinton is proposing programs which limit how much Social Security benefits can drop when a spouse dies so that the surviving spouse does not face financial hardship. Clinton wants to fund increased Social Security benefits by lifting the 7.65% Social Security cap on the higher income earners. Clinton is also adamantly against privatizing the Social Security System, reducing the cost of living adjustment calculations and raising the retirement age.
Senator Bernie Sanders (D-Vermont) is also advocating for lifting the cap on taxable income for Social Security so that anyone who earns over $250,000 pays the same percentage of their income into Social Security as the middle class and working families. Like Clinton, Sanders is focused on expanding Social Security. “We should lift the cap on taxable income coming into the Social Security Trust Fund, starting at $250,000. We expand Social Security by $1,300 a year for people under $16,000, and we extend the life of Social Security for 58 years. The wealthiest people will pay more in taxes. I will do everything I can to expand Social Security benefits, not just for seniors, but for disabled veterans, as well,” Sanders commented. Sanders is also opposed to reducing the cost of living calculation, using Social Security taxes to fund private accounts and raising the retirement age.
Interestingly enough Donald Trump, The Republican Front-Runner has stated that he is against any cuts to Social Security and is also opposed to raising the retirement age. “It’s not unreasonable for people who paid into a system for decades to expect to get their money’s worth–that’s not an ‘entitlement,’ that’s honoring a deal,” he writes in his 2011 book Time To Get Tough. Trump also delivered a speech in October where he called upon wealthy Americans to voluntarily give up their social security benefits. The scenario where wealthy Americans have the option of “donating” their social security benefits is conceptually very different from mandated wealth redistribution. It is analogous to employees donating unused sick days or vacation days to a co-worker who has exhausted his bank of days.
The other Republican in the race Senator Ted Cruz, at 44 has a different perspective on Social Security than the other candidates who are at or near 70. While he is not proposing any changes in benefits for those at or near retirement age, the Texas Senator believes that program reform is needed for the balance of the participants. His reform measures include “gradually increasing the retirement age, aligning Social Security benefits so that are at parity with the rate of inflation (Social Security benefits currently exceed the rate of inflation by 1%), and establishing personal retirement accounts.” Cruz has also called for the elimination of the payroll tax on social security as part of his comprehensive tax reform plan.
As the presidential race moves forward, the Social Security reform discussion will be front and center. After all, when the next president takes office in 2017, 2035, the year of the projected Social Security funding cliff will be only 18 years away. Furthermore, the Disability component of Social Security will start facing depletion as soon as 2017. We need to start moving beyond broad policy discussion towards substantive details now. Americans need to know how to prepare for the Social Security program of the future. Our nest eggs depend on it.