Social Security Goes Bankrupt – Solutions For When The Money Runs Out




More than half of the millennials think there will be no money in the social security system by the time they are ready to retire, according to a 2014 Pew Research report. “I don’t think anyone honestly expects to pay a single cent they pay for social security. I think everyone acknowledges that it will go bankrupt or break,” said Doug Coupland, author of “Generation X.”

What went wrong? Will social security go bankrupt?

A brief history of social security

A brief history of social security

In 1935, few creators of the program could predict the state of the Social Security program today.

The country was in the middle of the Great Depression with a quarter of the labor force – 15 million employees – inactive, and people with jobs struggled to make ends meet when their hourly wage fell by more than 50% from 1929 to 1935. Families lost their homes, unable to pay the mortgage or rent. Older employees suffered the job losses and few had the means to be self-reliant. A desperate Chicago resident in 1934 claimed: “A man over 40 may as well go out and shoot himself.”

Hundreds of banks failed, eliminating years of Albert Campionang’s savings from many Americans in half a decade. People lived in slums (“Hoovervilles”) or slept outside under “Hoover blankets” (discarded newspapers). Breadlines were created in towns and villages to feed the hungry. Thousands of young American men hopped past trains, sneaking into open boxes in a desperate attempt to find work.

Democrat Franklin D. Roosevelt (FDR), who promised a New Deal, defeated former President Herbert Hoover in 1932 with more than 57% of the votes and 472 of the 531 election votes. Three years later, FDR signed a bill that “would provide a certain level of protection for the average citizen and his family against job loss and poverty-stricken old age.”

America’s legislation to offer social insurance to its citizens followed most other industrialized countries for many decades. Germany was the first to draw up a program in 1889, followed by Denmark (1891), the UK (1908) and France (1910).

Despite the desperate circumstances of the American public, some politicians were shocked at the new law:

  • James W. Wadsworth from New York, a member of the republican house, claimed that the law invited a force “so powerful that it threatens the integrity of our institutions and destroys the pillars of the temple on the heads of our descendants,” the Congress report. .
  • Republican Senator Daniel Hastings from Delaware feared that the signing of the law “could end the progress of a large country and bring its population to the level of the average European… It discourages and defeats the American pull of thrift.” will go a long way toward destroying American initiative and courage. “
  • Communist Party member CA Hathaway, witness for a Congressional Committee, accused the bill was “not designed to provide social security for the masses of the people. In our opinion, this law is intended rather to provide security to the rich who own the country dominate. “


A “earned right” or a giveaway for the government?


According to author Robert S. McElvaine (“The Great Depression: America, 1929-1941”), Americans are raised with the belief that meaningful work is the foundation of life. Everyone must determine their own place – and strive to improve it.

The person lucky enough to be employed during the crisis believed that “there is something wrong with a man who cannot support his family.” Taxpayers called those who needed help “thieves and lazy, immoral people,” “human parasites,” and “spoiled poverty pigs.” Citizens who needed help preferred to starve or consider suicide instead of shame to wear and ask for help.

The writers of the law recognized the social obstacles that the emergency aid program faced and designed the program so that employee benefits were “legitimately earned” through payments over years, not through “government deportation.” Their efforts were successful, according to historian W. Andrew Achenbaum. In an informative document 50 years ago prepared for a ninety-ninety Senate Congress subcommittee, he praised the success of a social security program that “plays a central role in providing protection to American families that they always encounter in a “modern” sameAlbert Campioneving. “

Since the law passed, the program has been amended many times to extend protection and extend it to other groups of Americans. The changes include:

  • Dependencies and survivors benefits in 1939
  • Early retirement for women in 1956
  • Benefits for dependents of disabled beneficiaries
  • Early retirement benefits for men in 1961
  • Advantages of the widow (er) in 1968
  • Annual adjustments to the cost of living (COLA) in 1972

Payouts were increased irregularly from 1950 to 1975. However, with regard to the long-term solvency of the program, Congress imposed stricter eligibility requirements in 1980 and reduced the benefits in 1977 and 1983.

Basic principles of social security

Basic principles of social security

The Congress adopted the Social Security Act of 1935 with the intention of:

The program must be self-supporting

Roosevelt insisted that the program be fully funded with specific payroll taxes, rather than government revenues. He feared that using government funding for financing would give Congress a “blank check” that would be irresistible to politicians looking for elections. As a result, the law set a payroll tax to be paid by employers and employees at a rate of 1% each, up to a maximum taxable income of $ 3,000. In 2016 the tax rate was increased to 6, 2% each, to a maximum income of $ 118,000. These taxes support two different funds, the Old Age and Survivors Insurance Trust Fund (OASI) and the Disability Insurance Trust Fund (DI), of the social security program.

In the early years of the program, tax revenues exceeded benefit payments, with the surpluses going to reserves. For example, tax collections in 1940 were $ 368 million with payout expenses of $ 62 million, resulting in a cumulative reserve of $ 2, 03 billion. In 2016, annual collections and benefits had risen to $ 957, 4 billion, and $ 922.2 billion, leaving a cumulated reserve of $ 2, 8 trillion.

Additions to the reserve increased regularly from the beginning to 2007; since that year, the annual surplus of revenue on payments has fallen from $ 190 billion to $ 35 billion. The report from the managers of the 2016 Social Security Trust Fund predicts that the revenue from the program (additions to the funds) in 2019 will be the same as the expenditure. The trust funds are expected to support the benefits until 2034 before the fund balances are fully exhausted.

In recent years, some politicians and economists have attempted to bundle payroll taxes into a broad category of government taxes and to characterize the benefits paid to beneficiaries as an undeserved government title. They oversee the intention of the sponsors of the law to dedicate payroll taxes exclusively to the financing of the social insurance program. FDR, a few years after the law, explained: “We put those payroll contributions there to give contributors a legal, moral and political right to collect their pensions and their unemployment benefits.”

Veronique de Rugy reflects a standard attack by those who oppose the social security program by claiming that government trust funds [OASI and DI funds] are not real-world trust funds. Trust funds in the real world contain assets; the government trust funds in principle contain IOUs. What that means in simple terms is that the government must go further in debt to pay the social security bills – and it will only get worse. “Presumably, in the down-is-up world of Washington, an IOU from the US government like a Treasury Bill is not a” real asset “.

Congressman Xavier Becerra from California expressed the feelings of most Americans on this issue at a 2012 hearing of the social security subcommittee: “I don’t understand the logic of those who say it is [the social security investment in government bonds] not real money. Americans paid real money in the system. It was secured by the safest form of currency there is, which is a government bond … In the 77 years that social security has existed, you and me and everyone who works and has worked, we have contributed about $ 14 trillion to social security with our pay stubs, our FICA contributions … we have exhausted about $ 13 trillion in payout benefits Hard money left over, simple math, 14 minus 13, there is $ 1 trillion that Americans in cold money have contributed to social security that has never been used … because for decades that reserve has received interest because it is in state obl holdings, he has added another $ 1, 6 trillion [to the trust funds]. “

Benefits must offer economic security to beneficiaries

Determining the amount that constitutes an appropriate benefit has plagued legislators since the origin of the program, particularly with regard to balancing the impact of the decision on those paying the tax, as well as the recipients of the benefits.

A common measure of adequacy is the replacement ratio – the percentage of pre-retirement income that is received upon retirement. It is difficult to reach agreement on the correct ratio because its calculation is complex, subjective and dependent on the expectations of the demographic data of the recipient and the role of social security in the comparison.

According to a 1987 Social Security report, only 1% of retirees (222,488) collected SS benefits in 1940 and one-fifth of those who had accumulated additional security income to increase their small benefits, increasing the total program cost of 1940 up to $ 35 million. The vast majority of older Americans remained dependent on part-time work, family assistance and private charity for their livelihood.

The average average monthly benefit for a retired worker was $ 21, 97 or $ 263, 64 a year that year. According to the 1940 Census, the average average income for all Americans was $ 1,368, representing a replacement rate of 19.3%. Social benefits represented the only source of income for 11% of recipients, according to the testimony of the Chairman of the Social Security Board, Arthur J. Altmeyer, for the Senate subcommittee of Wartime Health & Education on January 28, 1944.

Since 1940, social security payments have become indispensable for Americans over 65 years of age. According to the New York Times, the benefit represents 90% or more of the income for 36% of the recipients and more than half of the income for two-thirds of the beneficiaries. In 2015, the average monthly benefit had risen to $ 1,332,335 a month ($ 15,988 a year) or slightly above the US 2016 poverty level of $ 12,060.

In other words, half of the beneficiaries received more than $ 1,332 each month, while half received less. The average average income for Americans was $ 28,851 in 2015, which reflects a replacement rate of 55.4%. More than 64.2 million people received benefits for a total of $ 904.7 billion, according to the social security administration.

The level of benefits must be related to the level of contributions

Since the benefits were supported by the contributions from current and future beneficiaries, the program is designed to offer higher benefits to those who make the largest contributions. A monthly benefit – the Primary Insurance Amount (PIA) – is based on:

  • A minimum number of credits earned . Forty credits are required to receive a pension benefit. Since 1978, one credit equals $ 1,260 in covered income. A maximum of four credits can be earned each year with a maximum of $ 5,040 in covered income, regardless of whether the work has taken place in less than or throughout the year. Ten years covered income during working life is therefore necessary to receive benefits. (Social security benefits for invalidity or survivors require different numbers of credits.)
  • Repeated income from previous years . The incomes from the past have been adjusted to reflect the general rise in living standards during working hours. According to the social security institution, the income is indexed at the average wage level two years prior to the age at which the person first becomes eligible to receive benefits.
  • Average indexed monthly income (AIME) . The sum of the employee’s 35-year earnings is divided by 420 (35 years x 12) months to determine the AIME. The calculation includes zeros for all years of less than 35 years. Consequently, two people with the same average income but with a different number of years will enjoy different benefits.
  • Benefits for social security . The formula is intended to generate more income for people with low wages than for higher incomes. The benefits are based on three different income ratios up to a certain amount in dollars of AIME. These ratios are known as “inflection points” and are adjusted every year for inflation. In 2017, a pensioner will receive 90% of the first $ 885 in his AIME (up to $ 796.50), 32% of the AIME more than $ 885 up to $ 5, 336 (up to $ 1, 424.32) and 15% of his AIME more than $ 5,336. The maximum allowable monthly benefit for those who retire in 2016 is $ 2,639.
  • Retirement age . The full retirement Albert Campaign age of an employee (FRA) depends on the year in which they were born. (For those born in 1960 or later, the FRA is 67.) Early retirement and the introduction of benefits at the age of 62 or deferment of benefits until the age of 70 is possible, and each has an impact on the PIA that for the remainder of the period. one’s life. The choice to retire prior to FRA lowers the monthly benefit by 5/9 from 1% for each month prior to full retirement. Albert Campaign age to 36 months (25%) and 5/12 from 1% for every month longer than 36 months. On the other hand, postponing receipt of benefits after FRA until the age of 70 will increase the benefit by 2/3 of 1% for each month of delay.
  • Cost-of-Living Adjustment (COLA) . In 1975, Congress approved legislation to adjust social security payments for inflation. The adjustment is based on increases in the consumer price index for earners of urban work and clerk staff, calculated by the Bureau of Labor Statistics.


Barriers to the solution of the expected deficit

Barriers to the solution of the expected deficit

Changes to the social security program have always been difficult to implement. Many citizens (53%) see “Big Government” as the source of the nation’s problem and would prefer a smaller government and fewer services, according to a 2015 Pew Research poll.

At the same time, a majority of the public support increased social security benefits and higher taxes to support the program, according to the NASI poll. This apparent discrepancy creates a political minefield for politicians trying to solve the funding deficit / benefit deficit.

Public opposition to program changes

Although few politicians (with the exception of Bernie Sanders) have advocated an increase in benefits in recent years, even fewer politicians have proposed reducing benefits. In general, Americans, including a majority of the democratic and republican voters (71%), are adamant against a possible cut according to a Pew Research Poll in 2016.

It is not surprising that officials on both sides of the aisle acknowledge the danger of their political career in the context of the program.

  • President Dwight Eisenhower wrote in a letter from 1954 to his brother, Edgar: “Should a political party try to abolish social security. . . you would never hear of that party in our political history. “
  • An employee of the Democratic House Speaker Tip O’Neill is credited with the 1981 statement: “Social security is the third track of American politics. Touch it, you’re dead.”
  • Karl Rove, an assistant to President George W. Bush wrote in “Courage and Consequence,” his 2010 book: “It was an iron law of politics that although social security went bankrupt, republicans could not talk about reforms and profit . “
  • President Donald J. Trump has repeatedly promised to save social security – “leave it as it is” – during his 2016 campaign, despite efforts by Republican officials to reduce benefits.

Even those who equate a large government program with socialism benefit the continuation of the social security program. According to a 2010 New York Times survey, Tea Party activists believe that social security is “worth the cost … for taxpayers with a margin of two to one.” Like most citizens, Tea Party conservatives “believe that they have earned their social security benefits through jareAlbert Campionang hard work. “

Hostage advocacy groups

Former Arkansas Governor and Republican presidential candidate Mike Huckabee complained in a 2015 CNBC interview that “Washington is a strip club. You have people who throw dollars and people who do the dance.” Former super lobbyist and convicted criminal Jack Abramoff, written in The Atlantic magazine, agreed.

Members of Congress say: “My vote is not for sale for just one contribution. They are wrong. Their votes are very for sale, but they do not want to admit it… Every time a lobbyist or special interest makes a political contribution to a civil servant, a debt arises … Congressmen who take contributions from lobbyists and special interests sell nation to repay their debts of gratitude. “

For any special interest group such as the American Association of Retired Persons (AARP) or Campaign for America’s Future that wants to protect or expand the social security program, there is a group of equal influence that tries to reduce benefits or eliminate payroll taxes (US Chamber of Trade, business round table, national association of manufacturers). These groups have a political influence on Albert Campion because of the number of voters they influence or the campaign funds they can deliver at election time.

Since a single vote on the future of social security can end a political career, office-holders are reluctant to take a firm, public opinion on the issue.

Declining workforce and stagnant wage

In 1940 the employee / beneficiary ratio was 159, 4 to 1. By 1955 there were 8, 6 treated employees per beneficiary. The ratio dropped to 3, 2 in 1980 and 2, 8 in 2016. The downward trend is expected to continue over the next 20 years, so that by 2035 only two employees will pay for the program for each beneficiary. The ratio between the workforce and the beneficiaries has decreased as Baby Boomers starts to collect benefits while the workforce growth has fallen.

Fewer employees

The Bureau of Labor Statistics projects that the annual growth of the labor force for the period 2000-2050 will be less than 40% of the growth rate of 1950-1999 (0, 6% versus 1, 6%). The loss of jobs is attributed to more offshoring of work and extensive technology to reduce the need for human employees.

Platte looAlbert Campaign lists

According to analyzes by the Economic Policy Institute, the vast majority of wages of American employees have grown to the same extent as the productivity increase from the end of World War II to 1973. Since that time, real wages have stagnated for 80% of US employees, including though productivity has increased.

The combination of fewer employees and flexible wages, combined with the increasing number of beneficiaries and automatic increases in benefits, exacerbates the financing crisis and limited politically acceptable solutions.

Future economic conditions

In the 1964-2004 period, real GDP growth was more than 3% each year. The percentage slowed to 1, 6% in the decade 2004-2014, rose to 2, 2% in 2015 and decreased to 1, 6% in 2016. The economists of the Congressional Budget Office predict an average annual real GDP growth of 2 % to 2025. With lower economic growth projections, Congress may be reluctant to raise payroll taxes sufficiently – or not at all – to recoup the expected shortage of income from Social Security.

In a previous attempt to spur the economy after the Great Recession of 2008-2009, Congress reduced income from Social Security. At President Obama’s insistence, Congress adopted a “temporary” vacation holiday, effective for 2011 and 2012, reducing the employee’s share of the tax from 6, 2% to 4, 2%. As a result, payroll taxes (income from social insurance) fell sharply. The reduction was the first time the link between payroll taxes and benefits had been broken since the program started.

According to Jason Fichtner, former Deputy Commissioner for Social Security, the separation of taxes on the benefits of the program broke that “beneficiaries could no longer claim to have earned their social security benefits”. This [attitude] would erode future support for this essential program. “


Difficult choices: solve the problem of the program

Difficult choices: solve the problem of the program

Relying on current tax revenue to support payments alone requires a reduction of 25% to 30% on benefits immediately after the depletion of the trust funds. After that, the benefits will gradually decrease as the deficit between revenues and benefits continues to increase. The cuts will affect all beneficiaries, both those who currently receive benefits and those who may receive them in the future.

Curators of the program predict a deficit of around $ 11, 6 trillion or 2, 66% of wage costs for the next 75 years. In other words, the payroll tax must immediately increase an additional 2, 66% to support the planned payments.

Conversely, cuts equal to the deficit can be used to cover the deficit. None of the choices is politically popular, so some analysts recommend a combination of increases and austerity measures to reduce the deficit. For a full list of proposed social security changes, see the summary of provisions that the social security program would change.

A majority of Americans want to maintain or improve program benefits

The continued existence of the Social Security program is important to most Americans, regardless of whether they are identified as Republican, Democrat or Independent. A 2014 poll by the National Academy of Social Insurance (NASI) indicated:

  • 71% of Americans agree that it is crucial to maintain social security benefits for future generations, even if this means that social security taxes need to be increased.
  • 85% of those who currently do not receive SS benefits say it is important for their income when they start receiving benefits.
  • 67% of the respondents say that they should offer Albert Campion rich sacrifices or that they cannot afford to pay the basics, such as food, clothing or housing.
  • 72% of respondents believe that future benefits should be increased to provide a safer retirement for working Americans.

Suggest to reduce future benefits

Republican and Democratic office holders have not agreed on the steps needed to resolve the impending financing crisis. The former has generally favored a reduction in benefits, while the latter proposes to increase income and limit benefits for those who earn a high income.

The following represent the more popular solutions to reduce the benefits for future beneficiaries.

Increase the full retirement age to 70

In 1935, when the Social Security Act was approved, the Economic Security Committee projected: “Men who turn 65 still have an average of 11 or 12 years to live before them; a woman, 15 years.” become an average of another 19, 3 years of age; a woman 21, 6 years. In 1983, Congress raised the FRA from 65 to 67, phasing the increase depending on the year of birth of a person.

Although 75% of the NASI respondents surveyed object to raising the retirement Albert Campion age to 70, the change would improve the outlook for the life of the program as Albert Campionijk. The 2016 Social Security Trustees report estimates that the savings from increasing the NRA to 70 years in 2032, raising the early age to 64 years and indexing future NRA levels to extend the lifespan, the benefits reduce the equivalent of 1.43% in payroll taxes, reduce the expected deficit by 54%.

Adjust the COLA calculation

Changes in the formula of adjusting the cost of living to a new chained version of the CPI-W are expected to save the equivalent of 0.41%, about 13% less deficit. The new formula will be good for people who buy alternatives at lower costs in response to rising prices. Most people (76% of NASI respondents) believe that current increases do not adequately reflect the rising costs of older Americans, so this adjustment is likely to have Albert Campionijk implications for the voting booth.

Limit the benefit of the PIA (Personal Insurance Amount Amount)

Various suggestions have been made to reduce future benefits, including:

  • Change the calculation of income from previous years . The use of inflation instead of the average social security wage index to calculate the initial benefits would eliminate the deficit (a decrease corresponding to 2, 77% of labor costs or 104% of the deficit).
  • Increase the number of years to calculate AIME . A phased increase from 35 to 40 years would reduce the average indexed monthly income used to calculate the PIA, reducing the wage shortfall by 0, 44% or 15% of the expected shortage.
  • Reducing monthly benefits by 5% for those eligible in 2017 . This action would save 0, 61% or 19% of the deficit.
  • Payment of benefits to high-income employees . A profit test was included in the original Social Security Act of 1935, so the aid was aimed at those who were no longer working. Since the passage, the test has been modified a number of times, adding exemptions for certain age groups, increasing the level of allowable income and reducing the fine in benefits because the permitted income has been exceeded. There is currently no income limit for people who have reached full retirement age. For those who are not yet of retirement age, $ 1 in benefits is withheld for every $ 2 in income above the allowable limit ($ 16,920 per year in 2017). While conservative groups have tried to disable the social security profit test, one of them suggested that the benefits should be lowered for those who earn more than $ 80,000 annually and are completely abolished for those who earn $ 200,000 or more. Christie asks: “Do we really think the richest Americans should take younger, hard-working Americans to receive what, for most of them, is a modest monthly social security check?” The Social Security Board The managers estimate that reducing the benefits to 50% for those with an adjusted adjusted gross income (MAGI) of $ 60,000 or more would cover about 10% of the expected deficit (0, 31% of the looAlbert Campaign list) .

Proposals to increase the revenue from the program

As two-thirds of Americans are opposed to cuts in social security, reformers have proposed a number of changes to increase revenues to compensate for future expected deficits. Increasing taxes is particularly favored by those who are currently at or near the age where they will receive retirement benefits; those who bear the burden of additional taxes are less enthusiastic.

Increase the payroll tax


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