Social Security was established 90 years ago, signed into law by President Franklin Roosevelt in August 1935.
According to Roosevelt, the goal of the program was to “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.”
Except the program is on a trajectory to insolvency. By late 2032, without Congressional action, benefits will be cut by 24 percent across the board.
In other words, it was never designed as a retirement program. In fact, the life expectancy in 1935 was 59 for males and 62 for females. Social Security was originally devised to insure against poverty – just in case – a person defied the odds and lived to 65.
Roughly 68 million people currently receive a monthly check from Social Security, with the average being $2006.69.
SS is a defined benefit scheme, meaning benefits continue for life – regardless of the amount one pays in. Benefits are mostly funded by present contributions. It’s a big revolving door of $1.5 trillion a year. Unlike a traditional 401(k) plan, there is no account assigned to each worker and retiree.
Ida Mae Fuller, a schoolteacher and legal secretary from Vermont, was the first SS recipient. She worked three years after the program launched. She paid $24.74 into Social Security. She retired in 1940, lived to be 100 and drew $22,888.92 in Social Security benefits over those 35 years.
I know it’s popularly believed that Congress “stole” money from Social Security. Simply not true.
Pursuant to federal law, Social Security only has one investment option, and that’s what are called Special Issue Bonds (S-Bonds) issued by the U.S. Treasury. All surplus cash collected by SS is used to purchase S-Bonds. Consistent with Treasury bills, notes, and bonds, the Treasury (taxpayers) pays interest to SS. That’s literally the only investment vehicle the program has available. That interest actually helps fund benefits.
The core driver of SS’s plight is that the ratio of workers paying in to recipients has declined sharply. In 1960, there were 5.1 workers per beneficiary; that ratio has dropped to 2.8 today. In 1940, it was 42:1.
The Republicans really haven’t offered any concrete proposals to stabilize Social Security, but Democrats have. Led by legislation authored by Sen. Bernie Sanders, the Democrat plan is to “Scrap the Cap,” making all wages subject to Social Security payroll taxes while limiting benefits at their present level. It amounts to an egregious income distribution scheme, where higher earners would essentially fund a major portion of the benefits paid to everyone else. Terrible plan.
Another unpopular fix would be to increase employer and employee contribution rates by 2 1/2 percentage points of subject wages.
Finally, the recently enacted OBBBA reduces taxes on Social Security benefits. Those taxes actually go directly to the SS Trust Fund – not the General Fund. That loss of revenue actually accelerates the point at which the program becomes in solvent.
Politicians need to be honest and devise a plan. Unfortunately, all of the options inflict some form of pain on somebody. And that usually means losing your seat in Congress.
7 years…
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