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Sad But True: The Real Solution to Social Security's Looming Financial Crisis

By Dan Caplinger – Updated Jun 27, 2020 at 1:16PM

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Forget the proposals. Here's what's really going to happen.

Social Security has become an essential part of financial planning for Americans in its 80-year history, providing vital monthly checks to retirees when they no longer have income from work. Those on Social Security rely heavily on the program, and for many recipients, the money they get from Social Security represents most or all of their income in retirement.

For decades, everyone has known that there was a looming financial crisis for the Social Security program. Changing demographics have resulted in a flood of new retirees in recent years, with fewer workers to replace them in the workforce. The latest report on Social Security's financial health has the trust funds supporting the program running out of money in the mid-2030s, and that date could come sooner if coronavirus-related economic slowdowns persist.

Front of U.S. Capitol Building, with U.S. flag prominently shown.

Image source: Getty Images.

Even with all this lead time, lawmakers have essentially done nothing to address Social Security's financial woes. The sad truth is that they're unlikely ever to do so. Yet that doesn't have to be bad news for current and future Social Security recipients, because what's most likely to happen will still ensure that they get the full benefits they have coming to them. Rather than turning to history for tips on coming up with a compromise, Washington's more likely to resort to a simpler yet more dangerous solution.

How a great compromise saved Social Security

More than 35 years ago, Social Security faced its first major financial test. The inflationary period in the late 1970s and early 1980s had put strain on the federal government's budget, and with a growing number of people receiving benefits, Social Security needed major changes. There was considerable controversy about how to go about making reforms, and as often happens in Washington, debate was contentious and progress was slow.

However, in 1983, Congress and the White House passed amendments to Social Security that had sweeping impacts on its financial future. They included the following provisions:

  • Gradually raising the full retirement age from 65 to 67.
  • Taxing a portion of Social Security benefits for those with incomes above certain thresholds.
  • Accelerating payroll tax increases.
  • Implementing windfall elimination provisions to stop double-dipping by those receiving public pensions.
  • Boosting the delayed retirement credit for deferring Social Security from 3% per year to 8%.
  • Favorable changes to the earnings test for those reaching full retirement age in a given year.
  • Social Security coverage for nonprofit employees and federal civilian employees hired after 1983.

President Ronald Reagan described how the compromise worked when he signed the bill into law:

[This bill is] a clear and dramatic demonstration that our system can still work when men and women of good will join together to make it work. Just a few months ago, there was legitimate alarm that Social Security would soon run out of money. On both sides of the political aisle, there were dark suspicions that opponents from the other party were more interested in playing politics than in solving the problem. ... None of us here today would pretend that this bill is perfect. Each of us had to compromise one way or another. But the essence of bipartisanship is to give up a little in order to get a lot.

How times have changed

Fast forward 37 years, and things are very different. Bipartisanship is nearly a thing of the past, with lawmakers increasingly polarized on key issues including Social Security. On one side of the spectrum, those seeking to reduce Social Security's expenditures have looked at measures like further increasing the full retirement age and linking cost-of-living increases to price indexes that rise more slowly than the current benchmark. On the other, some lawmakers want to increase Social Security spending dramatically, proposing substantial taxes intended to provide funding for added expenditures. The gulf between the two seems too wide ever to find consensus.

The way Washington has handled past crises provides some clues about how Social Security's problems are likely to get solved. During the financial crisis, lawmakers approved trillions of dollars in bailout money to keep the financial system afloat. Earlier this year, lawmakers approved trillions of dollars in stimulus spending to keep the economy going.

When Social Security's trust funds run out of money, the federal government is likely to do the same thing. Rather than forcing people to see a 20% to 25% benefit cut, they'll simply open the coffers and approve spending the additional several hundred billions of dollars each year to close the gap. It's the easiest way to deal with the problem without having to address the tough issues that underlie it.

Don't change your plans

Political reality might be what saves your Social Security benefits, but that doesn't mean you should rely solely on the program. If you're still working, set money aside to help support yourself in retirement. That way, whatever lawmakers do to Social Security, you'll have at least some ability to be financially self-sufficient.

Social Security's problems are tough to solve, so it's not surprising to see lawmakers in Washington flail around unsuccessfully trying to find a fix. Some people are optimistic about the future, but I think it's most likely that the federal government will end up just bailing out Social Security and leaving future generations to foot the bill.

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