Since 1985, the Social Security Board of Trustees has been warning elected officials that there won’t be enough revenue collected in the next few decades to cover expenses. Sean Williams of The Motley Fool highlighted several points of concern for Social Security.
Put simply, Social Security’s asset reserves will dry up and a significant cut in benefits will have to be made to keep the current payout system going. In a recent report, the Trustees project depletion of Social Security’s $2.9 trillion in asset reserves by 2035, which could potentially lead to a 23 percent cut in benefits for retired workers. Indeed, with more baby boomers leaving the workforce, more pressure will be placed on the program as Social Security payouts increase.
The Social Security Act was passed in the middle of the Great Depression in 1935. The rationale behind its passage was that a significant portion of the population would not be able to accumulate enough savings into old age. In turn, the government needed to step in to provide somewhat of a retirement baseline for the elderly and individuals not capable of staying in the workforce for prolonged periods of time.
Williams provides some solid context as to why Social Security is on the ropes. When the Social Security Act was signed into law in 1935, the average life expectancy for an American was about 62 years. Today, the average American life expectancy is about 78.6 years, representing a 16-year increase in longevity since the act was passed over 80 years ago.
Longevity is a great thing. Being able to see loved ones into old age is one of the greatest achievements of modern development. However, because of increased life expectancy, our social security system has been forced to adjust. Social Security’s full retirement age — the age when a retired worker is eligible to receive all of their benefits according to their birth year — will have been raised ten times in the past 85 years by 2020.
By 2022, these trends would point to a two-year increase in the retirement age (from age 65 to 67). Essentially, a program that was initially created in the 1930s to provide payments to individuals for possibly a few years to a decade at most is now being used by retirees to collect payments for two decades, or even longer. With medical advancements improving by the year, people are living longer, thus allowing them to collect these benefits for longer periods of time.
Similarly, declining birth rates in America are putting Social Security on the ropes. With fewer workers to support Social Security beneficiaries, the system is bound to eventually go bust. These macro factors will put tremendous pressure on the current system, which will necessitate a strong overhaul.
The more just path forward is to let the people who have paid into the system receive their benefits and then transition into a more private system where younger workers can opt out and have actual savings options in the market.
Social Security is a relic of the New Deal-era when the federal government expanded beyond its intended scope of constitutional governance. This was no spontaneous development. It was the logical result of the previous Progressive Era when central banking and the income tax became fixtures in the American political economy and enabled the government to grow at extraordinary rates.
Some people think that phasing out Social Security will lead to chaos. However, U.S. history has shown that Americans are industrious people capable of building mutual aid societies to provide non-state welfare services for those who would otherwise slip through the cracks. This was how America operated before the New Deal.
Younger generations would be wise to read up on this history. In it, they will find the keys to prepare themselves for a future where they will not be able to collect the same level of Social Security benefits as their parents and grandparents did. The good news is that the voluntary mechanisms of mutual aid arrangements can lay the groundwork for an economic renaissance like never before. It’s just a matter of breaking free from the notion that the state has to be responsible for providing welfare services.