Reagan’s reforms
President Reagan signed a comprehensive (and somewhat controversial) set of Social Security reforms into law on April 20, 1983. At the time, Reagan said:
This bill demonstrates for all time our nation’s ironclad commitment to Social Security. It assures the elderly that America will always keep the promises made in troubled times a half a century ago. It assures those who are still working that they, too, have a pact with the future. From this day forward, they have our pledge that they will get their fair share of benefits when they retire.
The reforms greatly expanded and protected mandatory eligibility during a critical time, as lawmakers were under intense pressure to answer a deficit in the trust fund that would have disrupted the normal flow of payouts. But what were the costs? The payroll tax rate was increased — placing a larger burden on low-income taxpayers. The retirement age was raised, and “windfall” benefits were to be taxed. The resulting expansion of eligibility brought in more money and left Social Security with a growing surplus, but it also added more people to the eventual benefit rolls — and this may prove difficult to sustain in the future.
The early 1980s was the perfect time to expand the pool of Social Security taxpayers, as baby boomers were entering their peak earning years en masse. The wealth of the nation, which increasingly flowed into stocks, grew enormously, as millions of people watched the Dow Jones Industrial Average (DJINDICES:DJI) increase by nearly 700% for the following two decades.
The Social Security trust fund grew right along with the stock market, expanding from a value of $25 billion to more than $1 trillion by the start of the 21st century. This growth dwarfed all previous expansion of the trust fund’s holdings, as the trust fund had seen its nominal value increase by only 3,100% from the program’s creation in 1937 to its expansion in 1982, compared with a 3,900% expansion during the boomer bull market. At present, Social Security’s trust fund will reach a maximum surplus of $3.7 billion in 2022, after which it will remain solvent and able to pay out full benefits until 2036.
What new reforms might be necessary to push Social Security forward into its second century? Can the program survive without another population and wealth expansion like that produced by the boomer generation?
The article This Day in History: The Deepwater Horizon Disaster and Reagan’s Social Security Rescue originally appeared on Fool.com and is written by Alex Planes.
Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more insight into markets, history, and technology.The Motley Fool recommends Google and Halliburton and owns shares of Google, Oracle, and Transocean.
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