In early 1983, Congress convened as Social Security was just months away from being unable to pay all the benefits due to retirees. It took bipartisanship and significant compromises from various interest groups, but the new law ultimately pulled Social Security back from the brink. At the time, the best forecast from Social Security's actuaries said the program would last at least another 75 years.
Forty-two years later, Social Security is still evolving from the laws enacted by that 1983 Congress. 2026 will see the last of those changes come to a completion, but today's Congress may have to act to keep changing Social Security to prevent another situation like we nearly saw 42 years ago.
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The big change coming next year
Many of the changes Congress put in place in 1983 went into effect over the following year. However, one big change has been spaced out to ensure it didn't adversely impact existing retirees and workers had plenty of time to adapt to the changes. That's the increase in the full retirement age.
The full retirement age is the age at which you're eligible to receive your primary insurance amount, or full benefits. Claiming before that age results in a reduction in monthly payments relative to your full benefits. Retirees are also able to delay Social Security, earning an increase in their monthly payment up until they reach age 70.
Before the 1983 law, the Social Security full retirement age was 65 years old. Anyone born before 1938 could collect their primary insurance amount at that age. But starting in 2003, 1938 birthdays had to wait two months longer to collect full benefits. The full retirement age continued increasing by two months for each year someone was born after 1938. That transition ended in 2008, as everyone born in 1943 had to wait until 2009 (when they turned 66) to claim full benefits.
We're currently in the midst of a second phase of the transition. Anyone born between 1943 and 1954 had a full retirement age of 66, but that age increases by two months for every year you were born after 1954 until reaching age 67 for those born in 1960 or later. That means 2026 is the last year anyone younger than 67 will be eligible for their primary insurance amount.
Unfortunately, that might not be the end of the push to increase the full retirement age. And the changes may go into effect much more quickly than they did in 1983.
Social Security is facing another shortfall
While Congress isn't cutting it nearly as close as it came to not paying out full benefits in 1983, Social Security's chief actuary estimates we're just seven years away from depleting the Old Age and Survivors Insurance trust fund. At that point, the program is only legally able to pay out as much in benefits as it brings in revenue. That's estimated to be about 77% of benefits due in 2032.
Astute readers will note 2032 is less than 75 years after 1983. Actuaries had expected the program to last at least 75 more years after Congress enacted the new law, but it could face another shortfall less than 50 years later.
There are a couple of reasons why the actuaries got it wrong. The first is the growing wage gap. Social Security taxes only apply up to a certain amount of wages per employee each year. Back in 1983, 90% of wages paid were subject to Social Security tax. However, as the highest earners saw their wages rise faster than lower earners, that percentage has declined. In 2022, only 82% of earnings were subject to Social Security tax.
The bigger issue is the demographic shift that's occurred over the last two generations. Younger people aren't having as many kids. Meanwhile, baby boomers are reaching retirement age. As a result, we've seen an influx in retirees without as much growth in working-age Americans to support them. So, there's a big outflow of benefits starting this decade without as big of an increase in tax revenue.
Numerous proposals have been sent to the Office of the Chief Actuary to assess how they would impact the long-term health of Social Security. Like the 1983 law, Social Security will require multiple changes to put it back on a path to sustaining another 75 years of benefit payments. Unfortunately, it looks like changes will need to come more swiftly, possibly negatively impacting Americans nearing retirement age. Some call for immediate increases in the full retirement age. Others call for immediate increases in the Social Security tax rate and raising the cap on earnings subject to the tax.
Congress waited until Social Security was literally days away from failing to pay full benefits in 1983; nobody wants to repeat cutting it that close. The longer Congress waits, the more swiftly and drastically it'll have to make the changes to Social Security. That could have huge affects on many Americans' retirement plans, and it might not provide enough time for them to do much about it.
