Social Security at 80:
Time to Retire? or Revise In 2015, America’s Social Security System turns 80 years old. The original act was a landmark bill, as it was the establishment of America’s safety net. The promise of the act was to ensure that America’s retirees would have some protection from poverty. Since the Social Security Act of 1935 was passed, the social safety net has been expanded to cover additional groups and classes of people. The most important additional programs established being MediCare and MedicAid. After years of running a surplus, Social Security has reached an inflection point. At the current rate of drawdown, the trust fund will run dry, and Social Security will begin to operate as a pay-as-you-go program, potentially only paying 75% of promised benefit levels. This paper will discuss the history of Social Security, demographic and technological trends that affect Social Security, the future implications of these trends for Social Security, and possible solutions.

A Brief History of Social Security Social Security as we know it today evolved from the Social Security Act of 1935. Under the terms of the original law, Social Security benefits only applied to the employee. Today, Social Security pays benefits to the employee, the spouse, and the disabled and contains the provision for what is known as Medicaid and Medicare. When compared to today’s law, the scope of the original version of the Social Security Act was much narrower.
For example, agricultural workers, domestic workers and government employees were excluded under the original act. Since 1935, Congress has expanded the number employees eligible to contribute to and draw from Social Security. Notable expansions of coverage include: 1950 - Social Security was expanded to domestic and farm laborers, 1954 - coverage was expanded to the farm and professional self-employed, 1956 - coverage expanded to U.S. Armed Forces service members.
The Social Security Act of 1935 also established 65 as the age eligible for Social Security benefits. At the time the act was established in 1935, total life expectancy was 63.3 years; for men, life expectancy was 61.6 years and for women, life expectancy was 65.9 years. Current life expectancy for the average American is 77.5 years; for men it is 74.8 years and for women it is now 80.1. years. While life expectancy in the United States has marched upward, there hasn’t been a corresponding upward revision of the retirement age. Current U.S. law allows participants a choice to begin to receive benefits benefits at 62, the full retirement age, at 70, or any age in-between. The dollar amount of benefits does change depending on the age when benefits are taken. In any event, the increase in American life expectancy has resulted in more people taking Social Security benefits than expected when the Act was created.
Perhaps the most important expansion of social welfare insurance occurred when President Lyndon Johnson signed the Social Security Amendment Act of 1965. However, the idea of Medicare and Medicaid was first proposed by President Harry S Truman in 1945. The act established the Medicare and Medicaid programs to deliver health insurance to the elderly and poor, respectively. The 1965 Act created Medicare Part A: Hospital Insure which is focused on inpatient hospital services and and Medicare Part B: Medical Insurance which is focused on more outpatient services. Initially, the Medicare and Medicaid is generally only available to people aged 65 or older, however it is also available to younger individuals who suffer from certain chronic illness such as Lou Gehrig’s disease, end stage renal failure, and other disabilities. As of 2011, approximately 40 million people aged 65 or older are enrolled in Medicare and almost 9 million disabled persons are enrolled in Medicare. Since President Johnson signed the Social Security Amendment Act of 1965, there have been numerous modifications and expansions of the program.
One of the more important expansion of coverage was in 2003, when President George W. Bush signed the Medicare Modernization Act (MMA) in law. This act created Medicare Part D which was the introduction of prescription drug coverage. Since 1965, prescription drugs have become more common but were excluded from the original 1965 act. The law was meant to address the increasing dependency of elderly on prescription drugs to manage chronic illnesses. Unlike the Veteran’s Affairs prescription drug benefit plan, the MMA does not allow the federal government to negotiate drugs prices. This has become a contentious point because the same drug can cost the VA 50% than the same drug under Medicare.

Demographic Issues Affecting Social Security, Medicare and Medicaid The overriding issue facing Social Security, Medicare and Medicaid is the changing of America’s demographic makeup. Shortly after the close of the Second World War, the U.S. saw a dramatic rise in fertility, called the Baby Boom generation. The sharp rise and following fall of U.S. fertility produced what is often called a demographic dividend. The demographic dividend provided by these workers coincided with an era of unparalleled economic growth for the United States and the rest of the world. But the demographic dividend provided by the Baby Boomers is coming to an end. Beginning in 2011, the Baby Boomers began to retire and the aged dependency ratio is set to markedly increase. The Social Security Administration estimate that the U.S. aged dependency ratio will rise to 35% in 2030 from the 2010 level of 22% . As a result Social Security is set to make more benefits payments to more people than it has in its entire history. This is the principal reason that the Social Security Trust fund is being drawn down. As previously, the Baby Boomers paid into Social Security and now are withdrawing from it. As mentioned previously, the Social Security Administration estimates that the trust will be exhausted by 2030, when a large proportion of the U.S. population will be eligible. This will cause a sharp reduction in benefits paid to retirees because Social Security will move to a pay-as-you-go program. Once again, the best current estimate is that Social Security will be able to continue to pay 75% of entitled benefits. At the same time the US labor force was expanding because more and more women were working outside the home. This massive influx of workers into the Social Security system improved its stability and solvency. The women workers entering during the prime of their careers and they would be on contributing and not be receiving retirement benefits for some time. However,the mass influx into social security is set to now retire thus placing more stress on the Social Security fund. The other major demographic trend affecting Social Security, Medicare, and Medicaid is the increase in life expectancy and the rise of chronic illness. Since 1935, health care has significantly improved. People now live longer than ever before, and medical care has greatly increased the survival rate for what were previously fatal diseases or injuries. For example, heart attacks are much more survivable now thanks to better emergency care. As it stand now, chronic illnesses are by far the biggest healthcare issue. Chronic health issues are of particular concern because they disproportionately affect the elderly. Chronic illnesses and increases in life expectancy have had a noted effect of the solvency of Medicaid and Medicare.

Other Trends affecting Social Security, Medicare and Medicaid

The other important trend is the rising cost of medical care in the United States. In 1960, the total U.S. expenditure on health care was $27.4 billion and was equal to 5.2% of U.S. GDP. In per capita terms 1960 U.S health expenditure was $147 in current dollar terms. However, in 2011, total US health expenditure has risen to 2.7 trillion, consumed 17.9% of US GDP and in per capita terms, $8,680. The Center for Medicaid and Medicare services expects U.S. health care expenditure to continue to rise, and projects that health care expenditures will be $4.7 trillion dollars in 2021. The combination of rising costs, increasing number of eligible people, decreasing number of contributors and the rise of chronic illness will push Medicare and Medicaid towards insolvency, if nothing is done.

Possible Solutions for Issues Facing Social Security, Medicare and Medicaid One of the principal issues about Social Security is that it is notoriously difficult to change. It is often referred to as a “third rail” in politics. These social insurance programs engender a sense of dependency that leaves many people conflicted. They don’t enjoy the feeling of dependency but can’t articulate a different vision. As a result, people currently benefitting from the current system do not want The AARP is one of the most influential political lobbying groups in Washington and the elderly are known to have high voter turnout. As a result, politicians are extraordinarily hesitant to change the system. Another issue compounding the difficulty of changing the current Social Security system is that most Americans haven’t fully understood the consequences of retirement. Americans in general do not save nearly enough to retire, although we all plan to retire. Social Security was only meant to prevent destitution, it was never meant to be a retiree’s main source of income. This is is becoming critically important as defined benefit programs, such as pensions are replaced with defined contribution plans such as 401k’s. In effect, companies have transferred longevity and investment risk to their current employees. Observers are right to point out that the majority of employees do not make intelligent or rational decisions when investing for retirement, thus limiting the potential of 401k plans.
There is potential change coming, in the past few weeks President Obama has put forward a government budget that includes a change to Social Security. Under the proposed Obama budget, the Cost of Living Adjustment (COLA) would be modified. Currently COLA is indexed to the consumer price index (CPI), the proposed change would change the index to the chained-CPI. Unlike the CPI, the chained CPI seeks to capture purchasing behavior effects, specifically the tendency to purchase generic or substitute goods. Under chained CPI, the Social Security COLA would rise slower than under a CPI COLA. It is an important milestone, as previously no politician would discuss, ultimately the effect of switching the COLA index to the chained CPI would not do much to prevent the Social Security trust fund from running dry somewhere during the 2030’s.
Immigration reform could potentially help fix Social Security. A current plan for immigration reform proposes a path to citizenship for current illegal immigrants provided they meet several requirements. One of these requirements is that the immigrant would need to pay all back taxes due. This proposal would be very helpful in addressing some of current challenges facing Social Security. One, it would represent a massive inflow into the Social Security fund, which would then be invested and earn additional money for the system. Second, the immigrants would start to contribute. This could have an effect similar to the Baby Boom demographic dividend, as there would be a sudden enlargement of the legal labor force. Yet, any talk of how immigration reform is currently premature as it is still in the proposal stage. However, immigration reform could have a beneficial secondary effect for Social Security. Another possible solution to the issues facing Social Security, Medicare and Medicaid would be to raise the eligibility age or index the retirement age to life expectancy. This solution is attractive because raising the retirement age would slow down the enrollment in these programs. Additionally, people would be required to pay into the system longer and as a result the trust could earn more investment income, which would help push back the date when the Social Security trust fund is exhausted. However, as mentioned previously, raising the retirement age would be extremely difficult. Another potential option would be to raise the Social Security levy. Increasing the individual and employers contributions to Social Security would delay the depletion date of the trust fund as more money would be set aside to cover future Social Security obligations. Unfortunately, this proposal is likely to run into fierce opposition from the business lobby and from the American people. Given the current political climate, it would be almost completely impossible to increase anything that resembles a tax.

Works Cited

2012 Social Security Trustees Report http://www.ssa.gov/oact/tr/2012/tr2012.pdf America’s Safety Net: Taking Welfare and Hating It www.economist.com/blogs/democracyinamerica/2012/02/americas-safety-net/print America’s Safety Net Part Two: Taking Social Security and Feeling like you’ve earned www.economist.com/blogs/democracyinamerica/2012/02/americas-safety-net-part-two/print Deaths: Final Data for 2003, CDC, NCHS Health EStat

Kent, Mary and Mather, Mark. “What Drives US Population Growth?”. Population Reference Bureau, December 2002 Vol. 57 No.4

National Health Expenditures; Aggregate and Per Capita Amounts http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/downloads/tables.pdf

National Health Expenditure Projections 2011-2021 http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/Proj2011PDF.pdf Social Security Act of 1935

Social Security Administration. Social Security Fact Sheet

Shrestha, Laura, CRS report for Congress, “Life Expectancy in the United States”. August 18, 2006

The Trouble with Pensions: Falling Short. www.economist.com/node/11529345/print
Retrieved on April 7, 2013

Toossi, Mitra. “Labor Force Projections to 2020: a more slowly growing workforce” Monthly Labor Review. January 2012

U.S. Census Bureau, Statistical Abstract of the United States: 2012 Table 104

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