Insolvency means that the revenue collected by Social Security is insufficient to pay scheduled benefits. In such cases, the system draws revenue from the Trust Fund to pay scheduled amounts. In 1983, that reserve was nearly empty meaning that the system would have had to cut benefits back to the level of payroll taxes collected.
The politicians went to work enacting a reform based on the work of The Greenspan Commission which was formed in 1981. It was chaired by Alan Greenspan, the man who would overtime bring us the housing crash. The recommendations consisted of raising taxes and cutting benefits. The politicians applauded the hard-fought compromise, and told the country that the system was fixed into the 2060s.
Reality is very different. Since 1983, the system has lost projected solvency 50% faster than what was forecast. The system now has nearly 26 trillion dollars of unfunded liabilities1. That figure means that the system has roughly $10 of promises for every dollar of asset. The interest burden of the legacy costs is more than the system collects in all forms of revenue.
Understanding this failure is essential for anyone who hopes to save the system. The failure is actually very simple to understand. The country pushed the legacy costs of Social Security disproportionally on to non-voters with the assumption that they would cover the increasing costs. Non-voters received substantially larger benefit cuts and substantially larger cost increases. Now these people can vote, and there is no way to bind them to the terms of the 1983 agreement.
Over time, these people who had no vote in 1983 have grown into a massive voting block. In fact, 2010 was the first year in which a majority of voting aged-Americans could expect to have benefits reduced as the Trust Fund runs dry.
This voting block results from two factors. The estimates from 1983 were overly optimistic. Also people who were non-voters have gotten older. The person who was 17 in 1983 is now 49.
Summary Of The Greenspan Commission
The people who were non-voters at the time of the 1983 changes could expect to pay the higher rates of taxes than any generation and were subjected to larger cuts in benefits.
“Advances scheduled increases in Social Security tax rates. Social Security tax rates (which include the Hospital Insurance tax rates) for employers and employees will increase to 7.0 percent in 1984, 7.05 percent in 1985, 7.15 percent in 1986-87, 7.51 percent in 1988-89 and 7.65 percent in 1990 and thereafter.”
Today Social Security’s portion of payroll taxes is 10.6% of the 15.3%2. If you started work in 1990, you expected to face 49 years of peak rates. If you were 40 in 1983, you could expect to face 26 years of peak rates. If you were 45 in 1983, you could expect to face 20 years of peak rates.
Adjustments to retirement age:
“Raises the age of eligibility for unreduced retirement benefits in two stages to 67 by the year 2027. Workers born in 1938 will be the first group affected by the gradual increase. Benefits will still be available at age 62, but with greater reduction.”
In 1984, the retirement age of someone who was 45 was unaffected. Someone born in 1938, faced a modest increase in retirement age. Someone born in 1960 and later got the full increase of two more years of work. So the majority of the savings comes at the expense of non-voters in 1983.
Introduction of means-testing :
“Beginning in 1984, includes up to one-half of Social Security benefits as taxable income for taxpayers whose adjusted gross income, combined with half their benefits and any tax-exempt interest they may have exceeds $25,000 for a single taxpayer and $32,000 for married taxpayers filing jointly. Benefits received by married taxpayers filing separately are taxable without regard to other income. Appropriates amounts equal to estimated tax liability to the Social Security trust funds.”
“Changes the earnings test for beneficiaries age 65 and over so that $1 in benefits will be withheld for each $3 of earnings above the annual exempt amount, beginning in 1990”
In 1984, this rule did not affect many people, less that 5% of those receiving benefits. The problem is that these limits have not been changed for inflation. These rules also have a greater impact on people who saved for retirement with IRAs or 401Ks. Today it affects up to 1/3rd of retired Americans.
The Lesson Of 1983
1, 2015 Social Security Trustees Report
2. The payroll tax holiday reduces OAS rates from 10.6 to 8.6% on a personal basis. It raises an offseting amount from the general taxpayer. So FICA really mains at 15.3% of wages.
