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A Brief History of Social Security

A brief history of Social Security

Originally published at Forbes

Recipients of Social Security benefits today are not just retirees – they’re disabled workers, spouses and young children of deceased or disabled workers, and the spouses and survivors of retirees. This was not always the case.

The original Social Security Act of 1935 created retirement benefits for only the retired worker, who became eligible at age 65. In 1939, Congress passed amendments to extend benefits to spouses and minor children of retired and deceased workers. Disability insurance arrived in 1954, and the disability program expanded in subsequent years to include the families of disabled workers. In 1972, Congress passed legislation to create annual cost-of-living adjustments for benefit levels. Prior to that time, benefit increases were subject to the whims of Congress and happened only intermittently.

The 1975 Social Security Trustee’s report estimated that the Old-Age, Survivors, and Disability Insurance (OASDI) Trust Funds would be depleted by 1979. Administrators generally want the Trust Fund to be on track to cover net outflows for at least 75 years, so this was a serious problem.

In 1977, Congress enacted amendments to deal with the impending financial problems. The amendments increased the payroll tax, increased the amount of income eligible for the payroll tax, and reduced benefits slightly. This fixed the problem until the economic slowdown of the early 1980s, which meant the Trust Fund again faced serious short-term funding problems.

Alan Greenspan (who would later gain greater fame as a long-serving chair of the Federal Reserve Board) headed a commission to examine the problem in 1983. The Greenspan Commission called for – and Congress subsequently passed into law – a gradual increase in full retirement age from 65 to 67, increases in Social Security tax rates, and the addition of new taxes for the benefits of the wealthiest individuals. The goal was not only to solve the immediate financial problems, but also to create a surplus over the next few decades in anticipation of the inevitable drain from the coming baby boomer retirement. This law is still in place today. Currently, the combined employee/employer tax rate for OASDI is 12.4%, and the full retirement age is slowly ascending toward 67 for those born in 1960 and later. The full retirement age is currently 66 for those reaching this age by 2020.

It should come as no surprise that funding shortages will happen again at some point. Social Security in the United States is meant to be pay-as-you-go, meaning each generation of current workers pays for the benefits of the current retirees.

Three trends will make this task increasingly difficult despite the present surpluses. First, the baby boomer cohort is of unprecedented size and is currently reaching traditional retirement ages. Second, life spans are becoming longer, meaning retiring baby boomers will have longer retirements. Third, fertility rates are decreasing. During the height of the baby boom, women were having between 3.5 and 4 children on average during their lifetimes. The 2015 Trustee’s Report expects the long-run fertility rate in the United States to be just 2.

These trends mean fewer workers available to support more retirees. Throughout its history, the ratio of covered workers contributing to Social Security relative to the number of retirement and survivor beneficiaries has been on a gradual decline. In 2000, there were four workers per retired beneficiary. This had fallen to 3.5 by 2014. The 2015 Trustee’s Report predicts 2.6 contributors per retiree by 2030. With recipients of disability benefits added in, they expect that number to drop to 2.2. As the ratio of workers to beneficiaries becomes more and more misaligned, new contributions will be unable to deliver the promised benefits.

This poses a clear problem. As the Greenspan Commission intended, the Trust Fund accumulates more each year than it spends in order to build a buffer. However, the size of the Trust Fund for retirement and survivors benefits peaked in 2011 and is now in decline. The Trust Fund for disability benefits is expected to run out in 2016.Combined outflow from both funds exceeded inflow in 2010, and the Social Security Trust Fund is currently expected to be depleted by 2034.

Subsequent years will be met with drastic cuts in benefits, increases in taxes, or borrowing from the rest of the government’s budget. Yet near retirees should not expect Social Security to disappear, as a variety of reforms could be implemented to get the system back on track.

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