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This Will Either Make You Hopeful… Or Extremely Irritated
Germany’s “Iron Chancellor” Otto von Bismark didn’t pass the world’s first modern Social Security system out of the kindness of his heart.
The year was 1889, and Bismark was fighting hard against the rising tide of socialism; the second volume of Karl Marx’s Das Kapital had been published just a few years earlier in 1885, prompting growing calls for strikes, protests, and wealth redistribution.
For Bismark, his social security program was intended to appease socialists while preserving the conservative political order that he had spent decades building. And on May 24, 1889, his new “Old Age and Disability Insurance Law” was passed by the Reichstag and signed by Kaiser Wilhelm II.
Workers under Bismark’s program became eligible for benefits at age 70, and its costs were paid equally by employees, businesses, and the state.
It also had its intended effect: support for Germany’s unified socialist party fell dramatically after the law was passed, and it became the leading blueprint for similar programs around the world.
Franklin Roosevelt pushed for a Social Security program in the United States for similar reasons; socialist movements were growing quickly in America, especially under the economic devastation of the Great Depression.
Politicians like Louisiana Senator Huey Long were calling for full-blown wealth redistribution, promising every family a $5,000 estate (large sum in the 1930s) and guaranteed income.
Then there was Francis Townsend in California, who proposed a national sales tax to provide a $200 monthly pension to every American over the age of 60– with the requirement that the money had to be spent within 30 days to stimulate the economy.
These ideas spread like wildfire, and soon there was major support in Congress for some sort of national pension.
Roosevelt modeled his program on Otto von Bismark’s– but lowered the age of eligibility to 65 instead of 70.
The first financial analysis of Social Security came in 1941, when the Board of Trustees published a report stating that the program would remain solvent and well-funded indefinitely, i.e. pretty much forever.
At the time, there was far more tax revenue being paid into Social Security than there were benefit payments being paid from the system. So Social Security essentially ran a massive surplus each year… and the accumulated surplus was invested in a giant trust fund.
But eventually cracks started to form.
In 1983, the Social Security trustees issued a more sanguine assessment; this time they claimed that the program would still remain solvent for their 75-year horizon (i.e. through 2057), but that costs of paying benefits to Social Security recipients would exceed tax revenue by 2018… at which point they would have to start drawing down the trust fund.
Pfff. It was 1983. No one in Washington cared about what might or might not happen 35 years later. So, barring cosmetic adjustments, politicians ignored the problem.
The Trustees sounded the alarm bells again in the 1990s when they projected that Social Security’s trust funds would run out of money by the year 2042. And, as time has continued to pass, that projected depletion date has become closer and closer.
Starting in the 2010s, Social Security projected that its trust funds would be fully depleted by 2035– roughly 20-25 years into the future.
And according to their latest assessment, the projected depletion date is now 2033. That’s just eight years away.
So, what does this actually mean?
Well, Social Security is already running an annual deficit, i.e. the program pays out MORE in monthly benefits than it collects in tax revenue. So, each year they have to dip into the trust fund to make ends meet.
But in eight years, the trust fund balance will be zero… so they won’t have any savings to offset Social Security’s annual deficit anymore. And that annual Social Security deficit is projected to be more than $500 billion by 2033.
There will essentially be two options at that point; either
(1) the federal government will pick up the tab, essentially adding $500 billion per year to the US budget deficit; or
(2) Social Security beneficiaries will have to take an immediate cut to their benefits. The initial cut would be around 20-25% and become worse over time.
Option 2 is unthinkable given the political consequences. But option 1 would only lead to more economic problems… and a lot of inflation. The US government needs to be reducing its budget deficit, not expanding it.
The good news is that there are ways to fix Social Security; the program itself has recommended plenty of solutions.
For example, given that life expectancy at age 65 is now so much longer than it was in 1935, one recommendation is to gradually phase-in a higher retirement age to 69.
Simultaneously, a small payroll tax increase of 1%, combined with increasing the maximum taxable salary, would render the program solvent for at least 75 more years.
And these just scratch the surface– there are plenty of other options.
The bad news is that the longer Congress waits, the more painful the solutions will become. If they wait until 2030 to pass any reform, there will have to be much more severe tax hikes and much more abrupt changes to the retirement age.
So, dealing with the problem now will make life less difficult in eight years’ time.
Unfortunately, few are willing to do anything about it.
On rare occasions some politician proposes necessary reforms. In fact, the last one came last week from Rep. Gwen Moore of Wisconsin, who introduced the Social Security Enhancement and Protection Act.
But these bills never go anywhere and ‘die in committee’.
Bottom line, the problem is 100% fixable– just like the rest of America’s economic challenges. The national debt is fixable. Fraud, waste, and abuse is fixable. Inflation is fixable. Everything is fixable.
There just doesn’t seem to be the will to do what is necessary… so these problems will continue to fester until they become a crisis.
