Social Security at 80: How's it doing?

Last Friday marked the 80th anniversary of the date President Franklin Roosevelt signed the Social Security Act into law. Clearly, congratulations are in order for reaching this milestone. Now, let's review just how this federal program has been working and assign Social Security a "report card" with grades on five important subjects that really matter.

Reducing poverty among older Americans: A

According to one analysis, Social Security keeps 22 million Americans out of poverty. While most of these people are elderly, one out of three are under the age of 65, including 1 million children. Between 1960 and 1995, the poverty rate of Americans age 65 and older fell from 35 percent to 10 percent, a level close to that of working Americans. By contrast, during the 1930s, just before the Social Security Act became law, roughly half of all seniors were estimated to be poor.

Effectiveness in delivering retirement income: A

Social Security checks help all retired workers, not just those who would otherwise be living in poverty. The program pays you a monthly retirement income, no matter how long you live and no matter what happens in the stock market. For many Americans with no traditional pension plan, Social Security provides their only source of guaranteed lifetime retirement income. Most of today's 401(k) plans -- the retirement plan of choice among employers -- have a significant flaw: They don't help deliver a lifetime retirement income. And Social Security benefits rise with inflation, a feature that's rare among even the few private sector pension plans that remain.

With Social Security, you can't be defrauded and lose all your income, or have your benefits reduced by investing mistakes or fees from financial institutions or advisors. Social Security benefits are the gold standard of retirement income.

Popularity with Americans: B+

Repeated polls show a majority of Americans favor Social Security. For example, one recent CBS News Poll found 73 percent of Americans agree with the notion that overall the benefits from Social Security are worth the cost. A CNN Poll shows 79 percent say the program has been good for the country.

Large majorities of Americans say they don't mind paying Social Security taxes because of the stability and benefits provided to millions of Americans. These reports cut across party lines (91 percent of Democrats, 86 percent of Independents and 74 percent of Republicans).

Nearly nine in 10 Americans (89 percent) say Social Security is more important than ever to ensure that retirees have a dependable income. These survey results also cut across generations (84 percent of Gen X and 93 percent in the Silent Generation) and income levels (89 percent with family incomes under $30,000, 89 percent with incomes between $50,000 and $75,000, and 88 percent with earnings over $100,000).

Confidence that it will be there when you need it: C

According to a recent Gallup poll, 51 percent of nonretirees doubt the system will be able to pay them a benefit when they retire. Two-thirds say Social Security is in crisis or has major problems. A recent poll by Northwestern Mutual found three in 10 say it's likely that the system won't be there when they need it.

No doubt, part of the reason for this lack of confidence is the widespread publicity about Social Security's funding problems, but part is also due to the widespread lack of knowledge about how Social Security is funded (see the next grade). It's important to remember that Social Security has never missed a payment to any citizen yet.

Financial strength: C-

The opening lines of the 2015 annual report from the Social Security Boards of Trustees state quite clearly the looming threat to Social Security's trust funds.

"Social Security's Disability Insurance (DI) Trust Fund now faces an urgent threat of reserve depletion, requiring prompt corrective action by lawmakers if sudden reductions or interruptions in benefit payments are to be avoided. Beyond DI, Social Security as a whole as well as Medicare cannot sustain projected long-run program costs under currently scheduled financing."

The Disability Insurance Trust Fund is projected to be exhausted in late 2016, and the retirement trust fund is projected to be depleted in 2034. Some combination of tax increases and benefit reductions for future beneficiaries is needed to reduce the long-term actuarial deficit and restore confidence in the system.

But it's way too pessimistic to think that you'll never get anything from Social Security or that it won't be there at all for you. This conclusion ignores the massive cash inflow paid by current workers through FICA taxes. In the worst-case scenario, Social Security benefits would need to be cut by only about 25 percent to match the cash flow from FICA in 2034. While that scenario would certainly be bad news, doomsday predictions that you'll get nothing aren't realistic.

And because of Social Security's popularity, no sane politician would allow it to be gutted.

At this significant milestone, it's important to reflect on the features of Social Security that really matter. This will help us focus on where improvement is needed.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.