The Real Story Behind Social Security and What Lies Ahead for America’s Safety Net
Your mother may depend on it. So might a disabled friend and survivor of a terrible accident. Politicians who want to take money from it or change benefit terms call it an “entitlement.” Yes, it’s Social Security, and it’s been part of the fabric of American life since 1935. As of 2016, 61 million people depended on it in one way or another.
However, in 2015, a majority (51%) of Americans under retirement age told Gallup pollsters they did not expect to receive benefits when they turned 65. Nearly the same percentage of retirees (49%) said they expected cuts to existing benefits later in life.
At the start of 2018, Social Security administrators said people have good reason to fear cuts. By 2034 — just a hop, skip, and a jump into the future — the program’s funding will officially become “depleted.” That’s bad news for the soon-to-be-retired and terrible news for Generation X and millennials.
Low birth rates, automation, and the massive Baby Boomer population all dim Social Security’s prospects for the future. Here’s a quick look at the origins of America’s social insurance and why it’s likely doomed in the coming decades.
1. Civil War vets and a lesson from the Great Depression
By 1862, when Civil War casualties began to mount, American leaders realized they needed to care for the disabled as well as families of deceased soldiers. Shortly after, the Civil War Pension began. Widows and orphans could collect exactly what the lost soldiers would have, and by the 1890s the pension was the U.S. government’s largest expenditure. Nearly 100 years later, Civil War widows still collected checks.
But it was not until the majority of elderly Americans could not support themselves that real change took place. That shift came during the Great Depression, and by 1934 the situation had grown dire. That year, President Franklin Delano Roosevelt declared he would begin a Social Security program. The following year, following a slew of government reports and town halls, FDR signed the Social Security Act into law.
Next: Social Security didn’t do everything people hoped, but it was a start.
2. Protection against the ‘hazards of life’
At the law’s signing, Roosevelt was optimistic and proud of Social Security. “We can never insure 100% of the population against 100% of the hazards and vicissitudes of life,” he said. “But we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”
Most importantly, Social Security shored up state welfare programs for the elderly and established the system of contributions. With everyone paying a share into the program, it became a reward for years of work upon reaching old age. The law also established unemployment insurance, aid for dependents, and grants to states for medical care.
Next: Medicare and disability enter the picture.
3. Enter Medicare and disability protections.
In 1954, disability insurance began under President Eisenhower. By 1965, President Johnson signed the Medicare bill into law. Supplemental Security Income (SSI) for the blind and neediest elderly Americans arrived in the 1970s. In 1972, an amendment put anyone receiving disability for more than two years into the Medicare program.
That same year, seeing how Social Security benefits lost value due to inflation, automatic cost-of-living adjustments (COLA) arrived. These reforms included a flaw that provided for soaring benefits and needed an adjustment to protect against funding shortfalls. A higher payroll tax (to 7.65%) became part of the fix. In President Reagan’s first term, the government began taxing benefits.
Next: Tax-free Social Security benefits end under Reagan, and risks to the program’s future become clear.
4. The Reagan tax to our upcoming shortfalls
“In this present crisis, government is not the solution to our problem; government is the problem,” Reagan said at his inauguration in 1981. Two years later, everyone on Social Security agreed with him, as the government began taxing benefits for the first time in history. (The changes, recommended by Alan Greenspan, had bipartisan support.)
Since 1983, you can see a pattern of steady benefits for those currently receiving Social Security and lesser benefits for generations that follow. According to the columnist (and billionaire) Ken Fisher, older Americans face the biggest risks in benefit cuts. Anyone aged 35-45 should plan on a 25% cut in benefits by retirement age, Fisher said. Younger generations should “never” expect Social Security to take care of them.
Next: The GOP tax plan and future Social Security cuts
5. How the GOP tax plan plays into the problem
The GOP tax plan will add approximately $1.5 trillion to the deficit in the coming years. Given the soaring health care costs expected to come with the package, older Americans have several concerns to address as they approach retirement age. Even though nearly 25% of Social Security will not be there by 2034, the situation could get worse if Congress decides to borrow from this program to pay for Medicare. Social Security is one of the few places to find money.
Next: Medicare costs will take an average of 50% of Social Security income by 2030.
6. COLA will not cover health care.
According to a study by Kaiser Family Foundation, out-of-pocket health care costs for senior will rises nearly 25% between 2018 and 2030. Currently, the average Social Security recipient pays 41% of income per capita on these costs. By 2030, the amount will hit 50%. As older beneficiaries age and incur higher health costs, their lower earnings do not cover the balance.
Increases in Medicare Part B premiums also came in 2018. Therefore, the simultaneous, ballyhooed 2% cost-of-living increase in benefits leaves some seniors with a negative balance. Clearly, these programs are inextricably linked, and the forecast does not look good from Medicare’s standpoint.
Next: Automation and other pay-in challenges
7. Robots don’t pay into Social Security.
As Americans lose jobs to offshoring and automation, there are direct implications for Social Security. This situation diminishes the overall pool, as does the declining birthrate. Since today’s workers pay for current Social Security beneficiaries, uncertainty about the labor force could really complicate the situation by 2030.
Next: The shift to basic income?
8. Social Security as a model for basic income
Just as the Civil War Pension became a model for the modern safety net, Social Security could become the model for a universal basic income. Governments around the world are considering this as a solution to increasing automation and future work shortages. The only problem with this idea mirrors Social Security’s upcoming challenges: How do you pay for it?
We’ve got one guess: The corporations that just got a 40% reduction in tax rate should not expect to keep it forever. Especially the ones that already replaced employees with computers.
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