Is Social Security safe? This question has been heralded in publication after publication, with frequent cries of panic. However, this issue, like all issues we face, must simply be assessed objectively and considered intelligently to determine how it can be corrected.
To begin, we should know the structure of the program so we can consider how to manage it. The whole program is handled by the Social Security Administration and consists of two funds: one for retirees (the OASI Trust Fund, the Retirement Fund), and one for the disabled (the DI Fund, the Disability Fund).
The financial status of each is different, with different solutions to fix their respective problems.
First, the retirement fund is based on a pay-as-you-go system, financed by statutory private contributions, not taxes. Current workers pay Social Security contributions that are matched by employers. The concern related to that pay-as-you-go retirement structure is that the baby boomer generation — born between 1946 and 1964 — will create a crisis because a monumental wave of people will begin collecting Social Security.
By the year 2031, when the youngest boomers reach age 67, there will be 75 million people over the age of 65, nearly double the 39 million who were that age in 2008. This will alarmingly change the ratio of retirees collecting benefits compared with workers paying into the system.
We have known this was coming, and, in fact, it was planned for in 1983, when Alan Greenspan headed the National Commission on Social Security Reform. At that time the trust funds almost ran out of money.
The commission did an excellent job of finding fixes to deal with the future boomer wave. One of the biggest changes was accelerating scheduled increases in Social Security tax rates in order to build up the trust fund. In 1983, the tax rate was 5.4 percent for employees and another 5.4 percent for employers. The commission proposed hiking it to 5.7 percent beginning in 1984, then 6 percent in 1988, and 6.2 percent in 1990.
The Greenspan Commission’s fix worked just as intended, and the nation now has billions more in the Social Security trust funds. The 2020 annual report on the funds showed these basic facts: iI 2019, the Retirement Fund held $2.897 trillion at the end of the year. Total expenditures for 2019 were $1.059 trillion, and total income was $1.062 trillion. So, far, so good, but it was close.
Now, there is more. The Disability Fund, if not addressed, will be depleted in the next 25 years, while the refurbished Retirement Fund will not run out until 20 years later.
The depletion dates are different for two reasons. First, the actuarial computations are different, and secondly, the failure issue in the Retirement Fund was addressed in the 1983 reforms, but the Disability Fund was not. Now, however, we must consider both. Here are the doable fixes.
First: Increase the payroll contribution rates. To remain fully solvent over the next 75 years, payroll contributions would have to go to 15.54 percent. At the moment the rate is 12.4 percent.
Second: Increase the ceiling on which Social Security taxes are paid. It was $137,700 for 2020, but the cap is adjusted for inflation each year and rose to $142,800 in 2021. Eliminating the payroll cap while leaving in place current rules for capping benefit calculations would eliminate 84 percent of the projected 75-year shortfall.
Third: Change the way the annual cost-of-living adjustments are calculated. For 2019, it was 2.8 percent. A 1.6 percent hike followed for 2020 and 1.3 percent for 2021. Realistically, we should base it upon the Consumer Price Index so that it will adjust automatically, without the recurring angst of partisan legislation.
Fourth: Raise the full retirement age. In 2020 the retirement age for baby boomers was 66, and for those who were born in 1960 or after, it was 67. Given our increased longevity, it should be increased to 69. Maybe 70.
Lastly: Allow a good portion of Social Security funds to be invested in the stock market. As a society, we must declare that our inventiveness and productivity will, over the long run, be worthwhile.
For a good part of the next generation, Social Security is not near bankruptcy. We do face future shortfalls, which should be addressed soon, to share the burden more equitably across the players in the system.
And most importantly, we must have the will to bear manageable burdens so that we can restore confidence in the nation’s major retirement program. The levels of Social Security benefits are not rich in anyone’s objective analysis. But to be responsible to our time in history, the sooner we act to make Social Security solvent, the better it will be for our children.
Don Tortorice is a former attorney and professor at the Law School of the College of William and Mary.