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The Social Security Act was signed into law by President Franklin D. Roosevelt on August 14, 1935. The Act, created a social insurance program that was designed to provide workers, age 65 and older, continuing income. Although the Act was passed in 1935, Social Security taxes were not collected until January of 1937. Workers and employers each paid one percent of the first $3,000 in wages and salary.

Ida Mae Fuller was the first recipient of Social Security (cashing check 00-000-001) in 1940 when she turned 65. Ms. Fuller had retired in November of 1939. She had paid into Social Security for a total of three years, before retiring. She had contributed a total of $24.75 in those three years. Her initial monthly benefit check was $22.54. She survived until 1975 when she was one hundred years old.

Needless to say, I don’t think any of us will receive nearly the benefit that Ms. Fuller received. At least, in terms of how much she paid versus how much she collected over her lifetime.

Social Security seems to be a never ending conversation with retirees. Many are worried that the Social Security Administration is going to go broke or that their check is going to disappear.

In order to discuss today’s issues, let’s first look back at how Social Security was started and some of the problems it has faced in the past.

When President Roosevelt signed the Social Security Act, he signed the Act in response to the economic issues facing the country created by the Great Depression. The purpose of Social Security was to provide economic security for aging people. It is often overlooked that Social Security is a payas- you-go program. The Social Security taxes collected from today’s workers pay the benefi ts of today’s retirees. In essence, those working today are the ones that are funding people that are currently collecting Social Security. Just like people that are now collecting Social Security funded Social Security for retirees in their working years.

Each year, the Social Security Administration publishes an annual report. This report is officially called, “The Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.” The report contains historical data as well as projections for the future.

In 1974, the Social Security Board of Trustees report began to project financial problems for both the near term and long term. The problem continued to grow throughout the mid 1970’s.

The near term issues were caused mostly by economic conditions. There was much higher inflation that caused benefits to soar, while lower growth in wages and higher unemployment caused revenues to grow at a slower pace. (Some of that may sound familiar to some of the issues Social Security has faced in recent years.) If changes were not made to the program, reserves would be depleted in just a few years.

The long term issues that faced the program were based primarily on unfavorable demographic trends. Over the next 75 years, there were going to be many more retirees than there were workers.

Despite warning from the 1974 report, Congress did not take action for a few years. A big reason for the delay in taking action was that inflation began to spiral out of control and the thought of raising taxes was very unpleasant, especially for lawmakers.

By 1977, the long-range actuarial situation of the Social Security system was enormously out of balance and, in the shortrange, trust fund reserves were facing exhaustion within just a couple of years.

Congress had to take action at this point and they did by passing the “Social Security Amendments of 1977.” These amendments changed the formula for computing Social Security benefit amounts. The change in law was made effective for individuals reaching age 62 (the age of first eligibility for Social Security retirement benefits) in 1979 or later. This helped stabilize Social Security’s future.

There have been many amendments, similar to the Social Security Amendments of 1977. As economic factors change, so does Social Security.

Let’s fast forward to today to take a look at the 2023 trustees report. The first major takeaway is the projection that the total cost of the program is higher than the total income. Meaning that the Social Security Administration has to dip into its reserves to pay beneficiaries in full. This is the third year in a row that the total cost of the program is greater than the income. (The first year that this occurred was in 2021.)

There are two funds that make up social security. The first being the Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, and the Disability Insurance (DI) Trust Fund pays disability benefits. The funds are separate. As part of the trustees report in 2023, the report combined the funds to give a hypothetical projection. The combined reserves are projected to decrease from $2.83 trillion at the beginning of 2023 to $590 billion at the end of 2032, the last year of the shortrange period. The reason for the decrease is that the trustees are projecting that they will have to continue to dip into the Administration’s reserves to pay full benefits.

Under the intermediate assumptions, the projected hypothetical combined OASI and DI Trust Fund asset reserves become depleted and unable to pay scheduled benefits in full on a timely basis in 2034. At the time of depletion of these combined reserves, continuing income to the combined trust funds would be sufficient to pay 80 percent of scheduled benefi ts. Again, this is when we are combining the two funds. If we separate the funds, the OASI fund payments would be paid at 77 percent, while disability payments would continue to be paid in full.

The big takeaway from the report to me is that, the hypothetical assumptions show that we still have 11 years until 2034, when the report states that Social Security will have depleted its reserves and benefits would have to be reduced. At that point, the program would still be able to pay 80 percent of its scheduled benefits. Although getting 77-80 percent of your benefits is not ideal, it is certainly not the same as Social Security benefits not being paid at all.

The good news is that, although projections show benefi ts would need to be reduced in 2034, that assumes no action being taken by lawmakers between now and then. As you saw with the Amendments of 1977, lawmakers can take action to strengthen the Social Security funds. In fact, in the trustees report this year, the trustees encouraged lawmakers to take action sooner rather than later. The sooner that lawmakers take corrective action, the sooner beneficiaries and workers can adjust to these changes.

There are many proposed options that lawmakers have to consider.

One option would be how to compute the cost of living adjustment each year (COLA adjustment). We have seen very high inflation the past couple of years, which has increased the COLA adjustment that Social Security recipients receive. The Social Security website lists a number of different options on what changes to the COLA would affect the program going forward.

Another option would be changing the full retirement age. This has been done in the past to help strengthen the social security program. No one likes to the option of raising the full retirement age, but it is an option for lawmakers.

A third option would be to invest a portion of the Social Security trust funds in marketable securities (examples would be equities or corporate bonds) rather than in specialissue government bonds. The goal for doing something like this would be for the program to have better returns on their investment. With that, of course, comes more risk.

There are many proposals that include many different options for lawmakers to think about.

Lawmakers could raise taxes to increase cash coming into the program, cut benefits to slow cash leaving, raise retirement age or some combination of all of these. Unfortunately the longer Congress waits, the more likely a more drastic change will have to be made.

From a revenue perspective, Congress could increase the rate of the FICA tax. The FICA tax is the payroll tax that funds both Social Security and Medicare. Currently, the FICA tax is set at 12.4 percent, which is split equally between employers and employees (at 6.2 percent for each).

Another potential change that Congress could enact is that lawmakers could subject more income to the tax. Currently, the current maximum is $160,200. Anything that someone makes over that amount, is not subject to social security taxes.

At the end of the day, the Social Security program is not in as dire of straights as some would make you believe. With that being said, eventually there will need to be changes made for the program to continue to pay full benefits. Those changes could come from one of the proposed changes discussed earlier or a combination of these proposed changes. New proposals may be brought to the table as well. The sooner these changes are made, the more time recipients and workers will have to adjust to the new changes that may be implemented.