Home / Business / Sad but true: The real solution to the impending financial crisis of social security

Sad but true: The real solution to the impending financial crisis of social security

Social security has become an integral part of financial planning in the 80-year history of Americans. It offers retirees important monthly checks when they run out of work. Social security recipients rely heavily on the program, and for many recipients, the money they receive from social security accounts for most or all of their retirement income.

Everyone has known for decades that a financial crisis is looming for the social security program. Demographic change has led to a flood of new retirees in recent years, with fewer workers being replaced. The latest report on financial health of social security includes the trust funds that support the program, which ran out of money in the mid-2030s. This date could come earlier if the economic slowdown associated with the corona virus continues.

Front of the US Capitol building with the US flag clearly visible.

Image source: Getty Images.

Despite all this lead time, the legislature has done essentially nothing to address the financial problems of social security. The sad truth is that they are unlikely to ever do so. However, this doesn’t have to be bad news for current and future social security recipients, because what is most likely to happen will still ensure that they get the full benefits they have for them. Instead of turning to history for tips on how to compromise, Washington tends to use a simpler but more dangerous solution.

How a great compromise saved social security

Social security was facing its first major financial test more than 35 years ago. The inflation period in the late 1970s and early 1980s had put a strain on the federal government’s budget, and as more and more people received benefits, social security had to undergo fundamental changes. There was considerable controversy about how reforms should be implemented, and as so often in Washington, the debate was controversial and progress was slow.

In 1983, however, Congress and the White House passed social security changes that had a far-reaching impact on their financial future. They contained the following provisions:

  • Gradually increase the full retirement age from 65 to 67 years.
  • Taxation of part of social security benefits for people with income above certain thresholds.
  • Acceleration of wage tax increases.
  • Implement wind gusts to prevent those who receive public pensions from double diving.
  • Increased the late retirement credit for postponing social security from 3% per year to 8%.
  • Favorable changes in the income test for people who reach full retirement age in a given year.
  • Social security coverage for nonprofit and civilian government employees hired after 1983.

President Ronald Reagan described how the compromise worked when he signed the law:

[This bill is] A clear and dramatic demonstration that our system can still work if men and women of goodwill unite to make it work. A few months ago there was a justified alarm that social security would soon run out of money. There were dark suspicions on both sides of the political process that opponents of the other party were more interested in playing politics than solving the problem. … None of us here today would pretend that this calculation was perfect. Each of us had to compromise in one way or another. But the essence of impartiality is to give up a little to get a lot.

How times have changed

Fast forward 37 years, and things are very different. Bipartisanship is almost a thing of the past, and legislators are increasingly polarized on key issues such as social security. On one side of the spectrum, those looking to reduce social security spending have examined measures such as further increasing full retirement age and linking cost of living increases to price indices that are growing more slowly than the current benchmark. On the other hand, some lawmakers want to drastically increase social security spending and propose significant taxes to fund additional spending. The gap between the two seems too big to ever find consensus.

The way Washington has dealt with past crises provides some clues as to how social security problems are likely to be resolved. During the financial crisis, lawmakers approved trillions of dollars in bailouts to keep the financial system alive. Earlier this year, lawmakers approved trillion-dollar stimulus spending to keep the economy going.

If the social security trust funds run out of money, the federal government is likely to do the same. Instead of forcing people to cut their benefits by 20% to 25%, they just open the box office and approve the additional spending of several hundred billion dollars a year to fill the gap. This is the easiest way to deal with the problem without having to tackle the difficult problems that underlie it.

Don’t change your plans

Political reality may save your social security benefits, but that doesn’t mean you should rely solely on the program. If you are still working, set aside money to feed yourself in retirement. Regardless of what the legislature does with social security, at least you have the option of being financially independent.

Social security problems are difficult to solve, so it is not surprising that Washington legislators are unsuccessful in trying to find a solution. Some people are optimistic about the future, but I think it is very likely that the Federal Government will ultimately only save social security and leave the bill to future generations.

Source link