Border wall funding, a government shutdown or a government showdown, trade relations and tariffs between the US and China, the Fed continuing to raise rates with a teetering stock market, congressional hearings with the former FBI Director and the former Attorney General, and the upcoming changing of the guard in the House, all during this holiday season consume our thoughts and the 24-hour news cycle right now… but I want to contemplate something else entirely; something that is happening quietly and off the radar of prime time news but something that is nevertheless one of the most important issues in the history of America. I am referring to the what I label as the coming disenfranchisement of our Social Security system, at least as we know it.
A quick history refresher reminds us that FDR signed the Social Security Act into law in August of 1935, establishing the ideal of a promise that poverty wouldn’t come to Americans in their old age. Unlike Europe, America set-up this ‘insurance’ program with private contributions from the taxation of individual wages and employers’ payrolls. Non-taxable initially, this changed in 1983 after President Reagan and Congress followed the recommendations outlined in a report by the National Commission on Social Security Reform, known as the Greenspan Commission, that, like other pension arrangements, the benefits should be taxable – at least to the extent of the employer contributions which had not previously been taxed. Employer contributions were never taxed before because employers claim the contribution as a deduction from their taxable income. The report concluded that, above certain low-income thresholds, the benefits should be 50% taxable. Fast forward ten years and the 50% tax was now considered unequitable when compared to the taxation of private pensions since, according to government analysis, only between 15% and 17% of the lifetime benefits received were contributed by the employee directly, with the rest of the benefits resulting from employer contributions and interest earned over time. Thus in 1993, taxation of benefits increased again up to a maximum of 85%, above a low-income threshold, where the tax remains today.
Importantly, the initial change in the taxation of benefits in 1983 came on the heels of a substantial funding crisis where the fund was expected to be out of money by August of that year. It will help to remember this as I write about where this program is headed… Of course, as with any tax in America, once it is in place, it is rarely repealed and will only grow bigger over time. This brings us up to the present day and my prognostications of the coming disenfranchisement of this program. Disenfranchisement, quite a stark word, is defined as the state of being deprived of a right or privilege. As a lawyer, I should know better than to use this word in relation to Social Security, since the US Supreme Court ruled in the 1960 case Flemming v. Nestor that the receipt of payments from the program was not a ‘right’ even where a participant had paid into the system for years:
TO ENGRAFT UPON THE SOCIAL SECURITY SYSTEM A CONCEPT OF “ACCRUED PROPERTY RIGHTS” WOULD DEPRIVE IT OF THE FLEXIBILITY AND BOLDNESS IN ADJUSTMENT TO EVER-CHANGING CONDITIONS WHICH IT DEMANDS. … IT WAS DOUBTLESS OUT OF AN AWARENESS OF THE NEED FOR SUCH
FLEXIBILITY THAT CONGRESS INCLUDED IN THE ORIGINAL ACT, AND HAS SINCE RETAINED, A CLAUSE EXPRESSLY RESERVING TO IT “THE RIGHT TO ALTER, AMEND, OR REPEAL ANY PROVISION” OF THE ACT. SEC. 1104, 49 STAT. 648,
42 U.S.C. SEC. 1304. THAT PROVISION MAKES EXPRESS WHAT IS IMPLICIT IN THE INSTITUTIONAL NEEDS OF THE PROGRAM. … WE MUST CONCLUDE THAT A PERSON COVERED BY THE ACT HAS NOT SUCH A RIGHT IN BENEFIT PAYMENTS…
Even so, the reality is that most Americans count on and expect that ‘their’ Social Security, in its present form, will be there for them. But it will not – at least that is what the math unfortunately tells us.
Make no mistake, Social Security is a pay-as-you-go system. Even though there is a reported $3 Trillion in the ‘trust fund’, this simply reflects accounting entries of the net surpluses the fund has been credited with, plus interest earned, since inception. There is no actual money in the fund, just the special-issue Treasury bonds, which are in fact government IOUs. The real surpluses have been used by the federal government as a funding source of many things.
But no more – the days of surplus payments are over now and for the coming 75 years. For the first time since 1982, more benefits will be paid than revenues collected. This is no surprise to the government, as they have projected and forecasted these figures based on our demographics in the annual Trustee Report since 1941. And this report has conveyed that we will not hit a 2-to-1 payor-to-payee (taxed workers per one recipient) ratio on Social Security until 2030 – the special year the last Baby Boomer retires. Even the 2018 report continues to show us at 2.8 workers per beneficiary… but this is not reporting reality.
The 2018 OASDI Trustees’ Report shows 173.5 million ‘covered workers’ – defined as a worker who worked at some point during 2017 where OASDI taxes were due. This is NOT a true count of real payors into the system. For the same year 2017, the Federal Reserve Bank of St. Louis reports only 150.5 million full and part time total workers. But because we cannot count part time workers as one full worker by definition, we use the reported FTE, full time equivalent (full timers plus the aggregation of part time workers into an equivalent full-time count) number, which was just around 126 million in December 2017. That same month, Social Security hit a record high 61.4 million people receiving benefits. Today, 62.6 million receive a monthly benefit with 129.4 million FTEs. Doing the simple math reveals the sad truth, we are essentially at 2 full time equivalent workers per beneficiary since 2017 – some 13 years ahead of the last Boomer retiring.
But as difficult as that is to swallow, that is not the issue I focus on. What consumes me is the much larger problem of what is coming. When you break down the birth rates between 1946 – 1964, you see that births peaked in 1957, followed closely through 1964. This means that about 70% of the Boomers have not even begun to retire yet and beginning in 2022 – the bulk of the generation will retire in a five to seven-year succession, one year after the next. In other words, we are at 2-to-1, costing us more than we are taking in, and 70% of this great generation has yet to even be a recipient in the system.
Keep in mind that every time a Boomer retires, they are a double negative to the federal budget as they go from being a positive contributor through payroll taxes to no contribution with their retirement (the 1st negative impact) and then they move onto the system as a recipient (the 2nd negative budget impact). The lower birth rates of Gen X and Millennials, comparatively, not including surplus immigration, does not help.
Before he was Speaker of the House, Paul Ryan saw the writing on the wall and asked the CBO to analyze these future problems back in 2008. The resulting report was unequivocal. If the benefits paid via Social Security, Medicare, and Medicaid remained (at 2008 levels) with the retirement of the Baby Boomers, benefits will have to be cut, taxes will have to go up, or more likely both.
If you are one of those in the camp of ‘no politician will ever be elected that will cut our Social Security benefits’, as I so frequently hear in my work across the country, let me introduce you to another harsh reality. The timing of the mass retirement of our Boomer generation is colliding with the reality of our federal debt reaching an unsustainable critical mass. At $22 Trillion and climbing, we will not be able to debt finance these benefits for a sustained time period. Once we hit $30 Trillion in total debt, as forecasted in less than 8 years with the projected $1 Trillion annual deficits, interest servicing alone will cost us more per year than we spend on Medicare and the military combined – a simple impossibility for the United States. Thus, it is clear that the ‘proverbial can’ cannot be kicked down the road any longer. The road is ending, and the cliff lies dead ahead just like the iceberg did off the Titanic. We cannot borrow our way out. It is a mathematical certainty that benefits will be cut (I believe on some kind of aggressive means tested basis) and taxes will go up (likely dramatically according to the math).
And hence the word… the coming ‘disenfranchisement’ of Social Security – Americans being deprived of the privilege of the full benefit payments upon which they were counting. It is no wonder that Congress has expressly reserved the right to alter, amend, or repeal any provision of the Act and the US Supreme Court has established that it is not a right… We must wake up and prepare accordingly.
About Rebecca Walser
Rebecca Walser is a licensed tax attorney and certified financial planner and author of the book Wealth Unbroken, who specializes in the strategic planning of maximizing lifetime wealth while minimizing tax through her practice, Walser Wealth Management (www.walserwealth.com). She earned her juris doctor degree from the University of Florida and her Master of Law degree in taxation from New York University. She is a frequent national media contributor.