This is the first installment in a series of articles addressing the future of Social Security. My goal is to inform readers about the various challenges and proposed solutions surrounding this debate.
Social Security reform is a contentious public policy issue. The nation's public retirement system is being increasingly strained by demographic changes that did not exist when the program was established over 80 years ago. People are living longer and having fewer children, forcing policymakers to choose between raising taxes, reducing benefits or shifting to a more market-based, quasi-public system.
Passed in 1935, the Social Security Act established a system of public retirement benefits. The program also includes general welfare provisions for the disabled, children, public health and unemployment compensation. As the nation’s population has grown, so has the program. The number of beneficiaries has doubled since 1970 and will continue to grow as baby boomers retire in record numbers.
This reality has created pressing concerns about the current pay-as-you-go system. Social Security is funded by taking income from current workers and transferring the money to current retirees. Traditionally, this system has always worked because the number of workers outnumbered the number of beneficiaries. However, this ratio has been steadily falling.
The worker-to-beneficiary ratio (a common measure used to gauge how many people are paying into the system versus taking out of the system) fell from a high of 159.4 in 1940 to 2.8 in 2013, a decline of 98.2 percent.
As the system’s fiscal solvency wanes, Americans are becoming increasingly concerned about the future of the program and the benefits they will receive. According to a Gallup poll conducted in March 2018, 72 percent of Americans are concerned about the future of the program. The same poll shows that 79 percent of Americans expect Social Security to provide at least some of their retirement income.
Moreover, projections by the nonpartisan Congressional Budget Office (CBO) support this growing concern. They project that Social Security trust funds, which are used to pay the difference between current revenues and expenditures, will be exhausted by 2030, forcing a 29 percent reduction in benefits.
However, reducing benefits for public retirement programs can lead to political backlash. This has often been the case at the state level, where unfunded pensions liabilities plague state lawmakers. Last month, Kentucky teachers skipped work to protest a reduction in pension benefits.
On the international stage, the country of Nicaragua recently attempted to reduce its retirement benefits, sparking massive anti-government protests that left dozens dead. Even after the protests prompted the government to reverse its position, citizens called for President Daniel Ortega to resign.
These events at the state and international levels underscore the need for policymakers in the United States to restore fiscal solvency and public trust in our national retirement system.
Now that I have outlined the problem with the future of Social Security, I will turn to examining three commonly-proposed solutions – raising taxes, reducing benefits and moving to a market-based system. My next post will focus on the benefits and challenges of raising taxes.