By Ben Ritz and Shai Akabas
The summer of 2015 saw the 80th anniversary of the signing of the Social Security Act of 1935, which created a federally operated system of old-age benefits—the first nationwide social insurance program in the United States. Over the last eight decades, it has been transformed and expanded. Survivors insurance and benefits for spouses and children were added to Social Security in 1939, and the Social Security Disability Insurance program was created in 1956.
Today, the largest component of Social Security is the Old-Age and Survivors Insurance (OASI) program, which provides a basic monthly income beginning as early as age 62 to those who worked in covered jobs for at least ten years, as well as current, former, and surviving spouses and minor children of those entitled to old-age benefits on the basis of their own work record. The OASI program also provides benefits for surviving dependents of covered workers who are deceased before age 62.
According to the Social Security Trustees, 48 million retired workers, their dependents, and their survivors collected $706.8 billion in OASI benefits from Social Security in 2014. This income is a crucial lifeline for many older Americans: roughly half of married beneficiaries and three-quarters of single beneficiaries rely on the program for a majority of their income.
In the same year, the other component of Social Security, the Disability Insurance program (DI), paid another $141.6 billion in benefits to 10.9 million disabled workers and their dependents. Essentially, Social Security disperses among society the cost of providing basic old-age and disability insurance to nearly all working Americans.
What is behind the financing challenges facing the program?
Social Security’s financing challenges are due to both changing demographics and the “pay-as-you-go” design of the system. Today’s workers are mostly financing the benefits of the previous generation rather than their own benefits—and the ratio of workers to beneficiaries is shrinking: it has already dropped from 4:1 in 1965 to 3:1 today, and it is projected to drop to just over 2:1 in 2030 as the baby boomers continue to retire. The shrinking of this ratio is exacerbated by increases in average life expectancy. Since 1945, life expectancy at age 65 has increased by over six years for both men and women. As more people spend a greater proportion of their lives in retirement, the lifetime cost of Social Security benefits increases, leading to more rapid depletion of the OASI Trust Fund.
Rising wage inequality in the United States has also contributed to the shortfall facing Social Security. Wages above the taxable maximum have increased at a faster rate than average wages, meaning a larger share of Americans’ earnings are thus above the cap and not being taxed. While nearly 90 percent of earned income was below the taxable maximum in the early 1980s, today that number is 82.5 percent. As the percentage of national income subject to the Social Security taxes dwindles, funding for the program erodes.
Some of Social Security’s provisions may be outdated
Beyond solvency issues, some Social Security provisions have become outdated over the years. The 1972 legislation set a special minimum benefit for low earners who have long careers, but this has become irrelevant for new claimants because the special minimum benefit was indexed to prices, whereas benefits under the standard Social Security formula are indexed to wages. As wages have grown faster than prices over the years, standard benefits have risen in real terms while the special minimum benefit has not, and the special minimum benefit is now worth less than the standard benefit calculation for new claimants. Furthermore, under either calculation, the benefits that long-career minimum wage earners receive are insufficient to keep them above the poverty line.
Spousal benefits were also developed with an earlier generation in mind. In most cases, the spouse of a covered worker who reaches eligibility age is guaranteed a monthly OASI benefit that is at least half of their spouse’s (the covered worker’s). This is true both for those who have not earned any Social Security benefits on the basis of their own earnings and for those whose old-age benefit based upon their own earnings record would be smaller than half of their spouse’s benefit (for whom the spousal benefit tops up their worker benefit). With more two-earner couples in the workforce than ever before, many of those who receive spousal benefits exceeding any old-age benefit on the basis of their own earnings are those fortunate enough to be married to a high-earning individual.
An additional issue, resulting from increased longevity, is that benefits are becoming inadequate for workers who retire early and/or live long lives. Almost 40 percent of American workers who turned 62 in 2013 claimed benefits that year, meaning that they claimed at their earliest eligibility age. Those with lower lifetime earnings are more likely to claim Social Security benefits as soon as they are available, often due to a lack of personal savings, higher likelihood of unemployment, or the nature of the occupations in which many are employed. Under the current system, however, the earlier a beneficiary decides to receive payments, the greater the reduction in their monthly benefits. The impact of this reduction compounds as beneficiaries live longer in retirement, increasing the risk that they outlive their savings and cannot get by on reduced Social Security benefits alone. While claiming at age 62 may be the only option for some Americans who can no longer work, the early-claiming opportunity also simply appears attractive to others and puts both groups at risk of inadequate income later in old age.
The longer Social Security reform is put off, the less time there will be to phase changes in and give future retirees time to adjust. As we celebrate all that Social Security has done over the last 80 years to improve retirement security in America and assist some of the most vulnerable in society, we should consider how to ensure that it continues to do so for the next 80 years to come.
Brian Collins contributed to this article.
Read more at bipartisanpolicy.org/social-security-80