The day the Social Security funding crisis became inevitable

December 20, 1977. If not a date that will live in infamy, it is the date on which a Social Security funding crisis was made inevitable. 

Had Congress acted differently on that day, by adopting the unanimous recommendations of a congressionally appointed expert panel, Social Security’s $22 trillion funding shortfall would not exist, and retirees would not face a 20 percent benefit cut when Social Security’s trust fund runs dry in 2034. 

As Congress considers a bipartisan fiscal commission to recommend reforms, it should bear in mind that the coming Social Security funding crisis is a man-made catastrophe, not a natural disaster. 

Since the Social Security Act was passed in 1935, policymakers have known that changing demographics — specifically, rising numbers of beneficiaries relative to workers paying into the program — would over time cause Social Security to become more costly. 

What wasn’t inevitable was a funding crisis. In fact, from 1950 to 1971, Congress was able to increase benefits nine times. That changed in 1977 when Social Security Amendments responded to a technical error in 1972 legislation which caused retirement benefits to skyrocket and threatened insolvency by 1979. 

The 1977 law sought to slow the rapid growth in benefits for future retirees. At the time, Congress considered two options. The first, recommended by an expert commission headed by Harvard economist William Hsiao, would link the growth of the initial benefits paid to new retirees to the rate of inflation. The second approach, favored by the Carter administration, would index initial benefits to national average wage growth. 

While differing only in seemingly technical ways, the two approaches had dramatically different effects on Social Security’s long-term finances. Simply put, the Hsiao Commission’s recommendation was fully sustainable under then-legislated tax rates. It would allow, as the commission wrote, “future generations to decide what benefit increases are appropriate and what tax rates to finance them are acceptable.” 

In contrast, the alternative approach of “wage-indexing” initial benefits could not be sustained without substantially higher future taxes.  

The Hsiao Commission bluntly criticized that policy, saying that it “gravely doubts the fairness and wisdom of now promising benefits at such a level that we must commit our sons and daughters to a higher tax rate than we ourselves are willing to pay.” Congress, nevertheless, opted for wage indexing.   

In doing so, Congress guaranteed a future Social Security funding crisis. While politicians will happily increase Social Security benefits, they avoid at all costs reducing them, in particular after (falsely) telling Americans that these are benefits they have earned and paid for. In reality, a typical couple retiring in the late 2030s is promised 62 percent more in lifetime benefits than they paid in taxes, according to SSA’s actuaries. 

This explains why, despite being aware since 1984 that Social Security promised far more benefits than it could pay, Congress has never passed legislation to address it. Year after year, elected officials passed the problem onto future legislators, who themselves passed it on, until after four decades a funding crisis approached. 

That pattern continues. President Biden, while floating a partial Social Security fix during the 2020 campaign, has not promoted reform since taking office. Former President Trump, the Republican frontrunner for 2024, vocally opposes any benefit reductions but has no plans to pay for his promises. 

And so, during the next 10 years, Social Security will add nearly $3 trillion to the publicly held national debt. Come 2034, the Trust Fund will be depleted, and Congress will face the task of addressing what we’ve calculated will be a $360 billion funding gap in that year alone, with increasing shortfalls in years to come. All in the interest of paying inflation-adjusted benefits nearly twice as high in 2034 as were paid to retirees in 1970. 

Had our elected officials acted differently on Dec. 20, 1977, and adopted the Hsiao Commission’s policy, Social Security would be financially solvent, and its small surpluses could be applied to lowering the public debt burden rather than adding to it. Although benefits would be about 12 percent lower than they are today, their inflation-adjusted value would still be about 60 percent higher than in 1977, and a looming insolvency would not threaten future benefits. 

Seniors’ incomes would still be at record high levels, due to increases in benefits from private retirement plans and in earnings in retirement. And with Social Security fully funded in perpetuity, Congress could have enacted targeted benefit increases to protect the poorest retirees.  

Instead, Congress locked in benefit growth rates that are unsustainable and yet seemingly impossible to arrest. This history lesson, that Congress should not commit future Americans to tax rates that current Americans are unwilling to pay, should not be lost on policymakers as Social Security reforms are debated.  

Andrew G. Biggs is a senior fellow at the American Enterprise Institute. John F. Cogan is a senior fellow and Daniel Heil is a policy fellow at the Hoover Institution at Stanford University.