At 75, Social Security Is Showing Its Age

America's Social Security system celebrates its 75^th anniversary today. Hurray. Thanks to this program, more than 55 million elderly or disabled Americans (and their dependents) receive an average of $1,070 each month. Yet, for all the retirement security that the program provides, its future looks bleaker than ever.

Earlier this month, the trustees for the Social Security Administration reported that the system will not be able to pay full benefits after 2037. Despite the dismal forecast, most politicians steer clear of any serious attempt at reform. It's one of those issues described as the "third rail of politics" since any elected official who dares touch it faces certain political death. What else would you expect from a program with so many millions of beneficiaries, most of whom are old and vote and don't want to see their benefits cut or taxes increased?

Still, Social Security is in need of help. It is now paying out $41 billion more in benefits than it is collecting in taxes. And, although economic recovery will help restore some of the program's revenue, the Social Security Administration's latest report says that deficits will be a permanent feature starting in 2015 and that the trust fund will be exhausted by 2037 --- four years earlier than projected just three years ago.

Private analysts confirm this dark picture. The Committee for a Responsible Federal Budget (CRFB) projects that Social Security faces a $5.4 trillion shortfall in what it has promised to pay and what it actually is able to pay.

What to do about it? Barring any sudden change in mortality or fertility rates, in simple terms benefits have to trim or taxes have to increase.

On the benefit side, options include increasing the retirement age or changing the cost of living adjustment to reflect a more realistic picture than it now does. Monthly benefits could be cut or the number of years used to calculate earnings could be increased. On the tax side, the payroll tax rate could be raised or the amount of wages subject to the tax could be increased. One option that is rarely discussed is to change Social Security from an entitlement program to a means-tested program so that only those with financial need would receive Social Security. Which poison would you choose?

One of Social Security's biggest problems comes from the way the program is funded. The system runs on something known as "pay as you go," meaning that taxes levied on current workers pay for the benefits of current retirees (by contrast, under a fully funded system benefits are paid from accumulated earnings). When created back in 1935, the system worked since there were more than 40 workers paying into the system for every retiree drawing from it. Today, there are just three workers supporting every retiree and before we know it, each worker will have his or her own retiree to support. With 80 million baby boomers retiring in the next 20 years, the numbers don't look so good.

Social Security has had one remarkable success in the name of Ida May Fuller. She worked for three years and paid $24.75 into the program. She received her first check from Social Security --- for $22.54 --- in January, 1940 and from that time until she died at age 100 in 1975, she received $22,888.92 in benefits.

None of us will be so lucky. Those born after about 1960 will likely contribute more to the system than they'll receive in benefits. With this type of return, it's no wonder that some workers feel they might be better off providing for their own retirement rather than trusting the government. Of course, the notion of funding retirement through private investing makes a lot more sense when the stock market provides a higher return than Social Security (historically, the stock market has provided a 7 percent annual return compared with just 2 percent for Social Security).

Social Security reform nearly happened in 1998 when President Bill Clinton and the then Speaker of the House, Republican Newt Gingrich, reached a tentative agreement to put Social Security on a sound financial future by making choices that were unpopular with each of their respective constituencies. As Steven M. Gillon, a professor at the University of Oklahoma and resident historian at the History Channel, writes in The Pact: Bill Clinton, Newt Gingrich and the Rivalry that Defined a Generation, the revelation of Clinton's affair with White House intern Monica Lewinsky derailed those efforts as Clinton needed all the support he could find just to stay in office. (Note: I had heard the same story from a former senior Republican staff member in an interview on an unrelated matter a few years ago.)

But, today is Social Security's 75^th birthday, so perhaps now is not the time for such dismal thoughts. For those who wish to celebrate this milestone, go to the agency's web page or to the calculator to estimate your benefits