Social Security Crisis: Problems, History, and Solutions

Introduction

While the United States does not provide a universal pension and healthcare system for all its citizens as some countries do, it does have a program designed to ensure that older retired workers have some income on which to live. Called Social Security, it also provides money to people who become so disabled before retirement age that they cannot work, and — depending on the age of the children — to widows and surviving parents of covered workers who die before their children are grown (Toner). One factor in American history that contributed to the establishment of Social Security was the Great Depression of the 1930s, which wiped out many people's savings and left them in severe economic distress.

The Problem Facing Social Security

While the great majority of Americans support Social Security, the program no longer works as smoothly as it was first organized. The problem stems from shifts in population. Right now, there are about 37 million people who are 65 or older. Their Social Security benefits come from the contributions being made into the system by both current workers and the companies employing those workers. At present, there are about five workers paying into the system for every one person withdrawing benefits. However, by the year 2035, approximately 75 million people will be of retirement age. In addition, they are likely to live longer, meaning they will draw from the system for a longer period of time. Between the doubling of retirees and the fact that the number of workers will not increase proportionally, the Social Security system is headed for major fiscal problems (Reynolds).

There is one other significant stress on Social Security's financing: cost-of-living increases in benefits. Because the size of a person's Social Security benefit is based on the wages he or she earned while working, increases are also tied to wages. Each year, benefits are increased based on the growth of wages in the workplace. This increase does not always reflect real increases in income flowing into Social Security, and over time it substantially raises benefit payments (Reynolds). For instance, if a person received $750 per month in their first year on Social Security, by their tenth year that amount will have increased to over $820. Experts assert that 45% of the increase in Social Security benefits results from these automatic adjustments. Because of this, an economic boom would not necessarily help solve Social Security's looming fiscal problem, since rising wages during a boom would also drive benefit increases (Reynolds).

First called the Old Age and Survivors Insurance, or OASI, Social Security was established in 1939. Until 1983, it survived successfully on a pay-as-you-go approach, which works when there are enough people still working to support those who have retired or who receive benefits for other reasons. In addition to the FICA taxes paid by current workers and employers, Social Security holds investments that produce income. Ideally, the system should maintain reserve funds capable of covering pension payments for six to twelve months — a buffer against recessions, when rising unemployment reduces FICA contributions (O'Donnell).

History of Social Security

The combination of FICA taxes backed by investments worked well until the country experienced a significant recession in the early 1980s. The OASI trust fund plummeted from almost $38 billion in 1974 to only $21 billion in 1985. Social Security was spending more than it was taking in. By October of 1982, the fund had dropped to $10 billion — not enough to pay benefits for even one month. In order to meet its obligations, the OASI trust fund had to borrow money from other funds. Essentially, Social Security was bankrupt (O'Donnell).

In response, the OASI Commission changed the program's funding structure. Originally organized on a pay-as-you-go basis, it was switched to an advance-funding system, meaning the Social Security fund would build up reserves over time. This worked well in the 1980s: by December of 1983, the fund balance had recovered to nearly $20 billion. By the beginning of 1999, it had grown to over $680 billion, and commissioners predicted that by 2008 the fund would exceed $2.1 trillion (O'Donnell).

Although those who forecast problems for Social Security point to difficulties several decades away — as the ratio between workers and retirees shrinks — those figures do not account for the possibility of another recession. Economies tend to move in cycles, and recessions do occur. If the United States experiences a significant downturn, it could accelerate Social Security's financial problems just as it did in the early 1980s. Unfortunately, the high projections for the trust fund encourage some people to believe that Social Security is operating well on its own and is unlikely to face further fiscal crises. It sounds like a lot of money — and it would be — if the workforce-to-retiree ratio were not going to shrink so significantly.

Several solutions have been proposed to keep Social Security solvent for the foreseeable future. One of the more unpopular was proposed by Federal Reserve Chairman Alan Greenspan, who suggested that Congress pass laws to cut people's benefits. This is deeply unpopular among those receiving Social Security or approaching retirement age, since they have planned their finances around that income (O'Neil). For politicians, such an approach also carries a serious electoral cost, as it would alienate a large bloc of voters.

Conclusion

Any time money is a topic of serious discussion, emotions tend to run high. Those who support privatization insist that without adding personal investment "ownership" to the plan, future workers will simply shoulder a tremendous burden and ultimately receive lower benefits (Reynolds). This does appear to be a real possibility if nothing is done. Other experts look at the situation differently, arguing that younger workers must set up personal retirement accounts such as IRAs because they cannot be certain Social Security will exist for them when they reach retirement age (Reynolds).