Authored by Mike Petrino, Sr. Portfolio Manager
On January 31, 1940, Ida May Fuller a Vermont school teacher became the first person to collect a monthly retirement check from the Social Security program. She made a total of $24.75 in contributions over a three-year period. Her first monthly check was for $22.54. Ida May lived to be 100 years old and collected a total of $22,888.92 in benefits. And so, it began.
The average recipient of Social Security benefits has collected more in benefits than he has contributed to the program over the course of his working career. The difference between the benefits collected by retirees and their contributions has been funded by active workers until recently. The contributions of active workers exceeded the payments to retirees on an annual basis on average since the inception of Social Security in 1935 through 2021. The excess of contributions over benefits has been placed in a Trust Fund established in 1939 and invested in debt instruments issued by the Federal Government as specified by statute.
The Social Security Act required trustees for the program to report the status of the financial conditions of the program to the public once per year. The Trustees Report for 2023 contains this message.
“The Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs each year. This document summarizes the findings of the 2023 reports. As in prior years, we found that the Social Security and Medicare programs both continue to face significant financing issues.”
In 2021 the benefits paid retirees exceeded the contributions from active workers, plus interest earned on the Trust Fund, and taxes on SS benefits for the first time. The deficit was then covered by taking funds from the Trust Fund. In 2022 total income from all sources was $1,056.7 billion and total expenses were $1,097.5 billion. The deficit was covered by spending $40.7 billion Trust Fund assets. At the end of 2022, the Fund’s assets were $2,711.9 billion down from $2,752.6 billion at the end of 2021.
The Trustees determined the assets of the Trust Fund would be depleted by 2033, and continuing program income would be sufficient to pay 77 percent of scheduled benefits. The 2033 date is one year earlier than the estimate in 2022.
The deteriorating financial condition of the program has been evident for decades. In 1983 the retirement age for full benefits was scheduled to rise gradually from 65 years to 67 years. The Trustees estimated this change amounted to a thirteen percent reduction in benefits. The increase in the retirement age was an attempt to reduce the impact of increased costs driven by a rise in life expectancy since the inception of the Social Security program. In 1935 life expectancy at birth was just under sixty years, by 2022 life expectancy rose to 77.5 years. As plan participants live longer their benefits increase.
While life expectancy was increasing, the ratio of active lives to retired lives was decreasing. In 1940 the ratio of active workers to retirees was 40 to 1, by 2022 the ratio had fallen to 3 to 1. Trustees project by 2050 the ratio will fall further to 2 to 1. As this ratio declines, the ratio of contributions to expenses falls as well, and the ability to secure scheduled benefits declines.
There are other factors contributing to the deteriorating financial condition of Social Security, but one factor that is often mentioned as a cause of the financial shortfall most definitely is not. The general belief that the trust Fund was “raided” is mistaken. When President Johnson moved Social Security from “off budget” to “on budget” there was no change in the financial procedures of the program. No funds were diverted. The procedures established in 1935 remained in place as the program moved from on and off budget four times since its inception.
There are well known changes available for establishing a financially viable Social Security program, but they bring with them either a reduction in benefits or an increase in tax rates. One of the most often discussed changes entails raising the age requirement for full benefits. At the time Social Security was established, the average life expectancy for Americans at birth was roughly five years less than the age required to earn full benefits. Currently life expectancy is more than twelve years greater than the age required for full benefits.
Additional changes that would increase the viability of the program include an outright reduction in benefits, an increase in the Social Security tax rate, an increase in the income cap when applying the tax rate or privatizing the program. All pf these changes would likely generate strong opposition from participants and their elected representatives.
At some point, math will dominate political considerations. If the current schedule of benefits and the financing mechanism for providing them remain in place, there is no feasible solution for establishing the viability of the program. Major changes in the Social Security program will be thrust upon participants.