Social Security's Last Big Fix Fell Apart 26 Years Early - Here's the One Thing the Next Fix Has to Get Right

The nation's Social Security program is in deep financial trouble.

Unless Congress fixes things, the program's Old-Age and Survivors Insurance (OASI) trust fund is projected to run out of money by the end of 2032, according to the latest Social Security Administration (SSA) trustees' annual report.

If that happens, payroll tax revenue would only fund about 78% of scheduled benefits to retirees, putting the financial fitness of millions of seniors in jeopardy.

Fortunately, a few voices in Congress are suggesting ways to address the problem. However, before reform occurs, it might pay to look at how the last attempt to fix Social Security came up short.

The Social Security reform of 1983

This is not the first time Social Security has faced a gloomy financial future.

In 1983, the trust fund was just a few short months away from being depleted. Congress acted in a bipartisan manner and took several steps to ensure that the Social Security trust fund would not run out of money, including:

• Raising the full retirement age. The full retirement age is when seniors are eligible for their full Social Security benefits. Reform gradually increased this age from 65 to 67.
• Taxing Social Security benefits. The reform made up to 50% of benefits taxable for higher-income retirees. In 1993, this ceiling was increased to up to 85% of benefits.
• Lifting the payroll tax rate. The 1983 reform accelerated already-planned increases in payroll taxes, including raising self-employment taxes significantly.

Why the 1983 reform came up short

In 1983, reformers projected that their fixes would keep Social Security in good financial shape for 75 years, or through 2058. Yet, reality has fallen far short of that projection.

Experts say several factors pushed Social Security back into financial jeopardy sooner than expected. They include the following.

Society is aging, and birth rates are falling

At its core, Social Security's financial woes come down to basic math: Society is aging, and people are living longer while birth rates are falling.

That means there are fewer younger workers paying the payroll taxes that fund Social Security for the growing number of people who collect benefits, and who do so for longer periods now that lifespans have increased.

As recently as 1960, there were roughly five workers supporting every retiree. By 2013, that ratio had sunk to around three workers for every Social Security beneficiary.

Taxes have not increased, and benefits have not been cut

The Brookings Institution notes that even if the 1983 reforms had played out exactly as expected, there would still have been a large hole in Social Security's finances today.

Reformers were aware of this fact, which is why they did not sell their changes as a permanent fix.

The reformers of 1983 knew that at some point, taxes would have to be increased or benefits would have to be cut if Social Security was to remain solvent, according to Alicia H. Munnell, senior advisor of the Center for Retirement Research at Boston College.

But in the decades since reform, Congress has mostly steered clear of either raising taxes or trimming benefits. The major exception occurred in 1993, when a change made a higher percentage of Social Security benefits taxable.

Avoiding a one-time patch

In Munnell's view, the reforms of 1983 actually "did a pretty good job" of addressing Social Security's woes. But the reforms were never intended to fix Social Security forever.

Some Social Security observers would like to see a permanent fix applied to the program this time around.

Whether such a lasting, one-time repair is even possible in an ever-changing world is subject to debate. But some suggestions for creating a permanent fix include:

• Acting early to spread costs across more generations and allowing gradual phase-ins
• Building a bigger financial cushion for the program that could help the program withstand any economic shocks
• Raising or eliminating the payroll tax cap. This cap currently stands at $184,500, meaning income above that level is not subject to Social Security payroll taxes.
• Adjusting the full retirement age higher than today's age, which is 67 for most Americans
• Means-testing benefits so wealthier retirees receive less

Drawbacks to a permanent fix

All of the suggestions for creating a "permanent" fix come with drawbacks for seniors across the income spectrum.

For example, means-testing benefits pulls the rug out from under wealthier retirees who have been promised a specific level of benefits in exchange for the payroll taxes they have contributed over decades.

On the other hand, raising the full retirement age beyond age 67 could make life more difficult for lower-income retirees who have been counting on getting their full share of benefits at that age.

There are plenty of additional pros and cons attached to these suggestions, and they underscore the difficulty of creating lasting change that is expected to endure for decades despite all the uncertainties of life.

Bottom line

There is no way to escape the reality that Social Security is in desperate need of financial reform. The stakes are high for millions of retirees, but Congress has yet to act to fix the problem

It's worth noting that in 1983, Social Security was just a few months away from insolvency when Congress quickly rushed to the rescue. Today's retirees are betting on Congress coming through once again.

In the meantime, future and current retirees would be wise to continue to build real wealth so they are less reliant on the Social Security program.

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