Here’s what Carolyn Colvin would like you to know about Social Security: “This is not a crisis!”
Why should you care what Colvin says? Because she happens to be the acting commissioner of the Social Security Administration.
Social Security was born 80 years ago -- August 14, 1935 -- when President Franklin D. Roosevelt signed the legislation that created the program. Contrary to recent reports of Social Security’s impending demise, Colvin is confident -- and adamant -- that it will still be paying benefits 80 years from now.
In the Beginning
From conception, the idea of a government retirement benefit funded with contributions from both workers and their employers was highly controversial and hotly debated. Some critics argued it was tantamount to socialism. Others pointed out that the benefit criteria excluded millions of American workers -- such as household help, farm laborers and part-time workers -- individuals who were overwhelmingly female and/or African-American. In addition, there was no help for spouses or children if the benefit earner became disabled or died.
America’s Changing Demographics
If you had to pick one constant feature of Social Security over the past 8 decades, it is change. As American society has evolved, Social Security has had to keep up. The changing role of women in the workforce has been a major driver. Back in the 1930s and ‘40s it was inconceivable that a woman could ever be the family breadwinner, much less head a major corporation. Today, 23 of the firms in the S&P 500, have female CEOs -- including General Motors’ Mary Barra, DuPont’s Ellen Kullman, Yahoo’s Marissa Mayer and General Dynamic’s Phebe Novakovic.
In addition, these days the once traditional “Ozzie and Harriet” family arrangement may be the exception rather than the rule, replaced by two-income spouses and even same-sex parents.
Demographics -- and lack of Congressional action -- are the main reason the Disability Insurance trust fund is projected to run out of money next year. “We knew back in 1995 that the DI fund would have a problem in 2016 [due to the fact] that there were more women in the workforce and the age of the Baby Boomers,” says Colvin.
The math is straightforward: 1) Women historically have a higher rate of disability than men. 2) Disability claims are highest among older workers. Thus, as Baby Boomers moved into their 50’s and 60’s, it was clear that there would be an increase in disability filings. 3) Disability benefits are automatically re-classified as “retirement” benefits once someone reaches full retirement age, or FRA. Raising this from 65 to 66 means the disability fund has to pay beneficiaries a year longer than it used to, putting a further drain on its finances.
According to Colvin, “If we temporarily reallocate 0.9% from the retirement fund to the disability fund for 5 years, this will ensure the solvency of both programs through 2034…This gives Congress time to come up with a solution. I am very optimistic this will happen.”
Social Security Responds
Though it certainly didn’t happen overnight, due to social and political pressures, amendments to the 1935 Social Security Act expanded coverage, adding benefits to protect family members (such as widower’s benefits for surviving husbands of working wives), providing assistance to those unable to work and extending the program to all working Americans. Another significant change occurred this summer when the U.S. Supreme Court ruled that legally married same-sex partners are eligible for the same spousal benefits as heterosexual couples.
As the program changed and grew over the years, Social Security’s finances also went through multiple adjustments. The contribution rate has gradually increased. In the ‘70s, Congress approved automatic cost-of-living increases (COLAs) for monthly benefits. Among other things, the Social Security Amendments of 1983 made benefits subject to income tax for the first time, increased the “full” retirement age and accelerated scheduled tax rate increases.
Again, the main impetus has been demographic. Social Security is essentially an inter-generational agreement: contributions made by current workers help fund the payments made to current beneficiaries. The financial challenge the program is facing today is due to the decline in the nation’s birthrate after 1964 and continued increases in life expectancy. The former means that there are fewer individuals entering the workforce to support future retirees; the impact of the latter is that Social Security is paying benefits to recipients for longer than it used to.
As I wrote previously, it would not take much to correct the situation and put Social Security’s finances on a sounder, longterm path. In Colvin’s words, all that is needed is for Congress to approve some “tweaks.” She adds, “We have given them reports.”
She would also like Americans to understand that “Social Security does not contribute to the public debt or deficit.” Today, benefits are being paid from taxes collected from current workers, plus interest earned on the surplus contributions Baby Boomers themselves have been making since 1983. This interest comes from the Treasury bonds the Social Security funds are required to invest in. Unless Congress makes some “tweaks,” by 2034 the bonds -- and the interest they pay -- will be used up. None-the-less, taxes collected from those in the workforce will enable Social Security to cover roughly three-quarters of the benefits it expects to pay out.
I’m 35. Why Should I Care?
When most people think of Social Security they think “retirement.” In fact, what it provides is social insurance. Most of us know at least one person who is receiving a benefit even though they are well under age 62. Perhaps they cannot work due to an accident. “Social Security is the largest assured disability program in the world,” says Colvin.
Or the unexpected death of their partner has left them the sole support of their children. As Colvin explains, “A worker pays into both [the retirement and disability] funds for protection over different phases of their life…disability, loss of a loved one, and ultimately retirement. It’s really a continuum of support.”