Straight Talk on Social Security
Here’s what Social Security is not:
• going broke;
• a Ponzi scheme;
• expected to stop paying out benefits in your lifetime;
• bankrupting our nation or future generations.
Here’s what Social Security is:
• a critical source of income support for millions of retirees;
• an elegant and binding intergenerational contract between yesterday’s and today’s workforces;
• a progressive social insurance program that efficiently provides a reliable, affordable, guaranteed pension to those past their working years.
• a national treasure to be fiscally strengthened and carefully preserved for both today’s elderly and for future generations.
Some of these facts may surprise you, but I can and will easily defend each one.
First, the finances. You may have recently heard that the trust fund from which Social Security benefits are paid will be exhausted by 2033, three years earlier than last year’s forecast. That exhaustion can and should be avoided, and the sooner we take steps to do so, the better (I’ll suggest a few below).
But consider three things regarding this prediction. First, as the figure below shows, this exhaustion date is a moving target. Most recently, you can clearly see the impact of the recession in the trust fund’s erosion, because with fewer people working (or working fewer hours at lower wages), the flow of payroll taxes into the trust fund is diminished. But as the economy improves, the end date may be moved back in time, as was the case in the 1990s.
Second, and this is widely misunderstood, as long as we have an economy with a workforce, payroll taxes will fund Social Security. (That’s the intergenerational compact: today’s workers support yesterday’s workers, who are today’s retirees.) The problem is that unless we turn up that flow (or lower the benefits), the taxes coming into the system won’t be enough, post-2033, to pay the full benefits promised to those slated to retire then. The inflow to the fund will, however, be enough to pay 75 percent of those benefits. Too many people think that number is zero, i.e., they think that when the trust fund exhausts, benefit payments go to zero. They do not.
Third, let’s put the Social Security shortfall in perspective. Those who are running around saying a) we should make the Bush tax cuts permanent, and b) we can no longer afford to fully fund Social Security need to deal with this fact: the long-term revenue loss from extending just the highend part of the Bush cuts—the part to the top 2% of households—is about equal to the full trust fund shortfall. It can’t be the case that we can afford tax cuts for the wealthiest yet our fiscal future faces a dire threat from Social Security.
Why is this venerable program so important? For the average beneficiary, Social Security benefits comprise two-thirds of their income. That’s a tough statistic to wrap you head around, especially when you consider that the average monthly benefit is about $1,200 right now (implying that the household income of these beneficiaries is around $22,000). But it’s the truth.
For the old elderly, it’s even more important. Among those aged 80 or older, Social Security provides the majority of family income for almost two-thirds of beneficiaries and nearly all of the income for one-third of beneficiaries. Without their income from Social Security, the poverty rate among elderly would be 45 percent. With those benefits, it’s 10 percent.
So I’m going to assume you’re still with me; you recognize that the program is not about to explode and disappear, and want to know what will it take to replenish the Social Security trust fund so we can bump the 75 percent of expected benefit payments back up to 100 percent where it belongs.
There is a wide menu of steps we could take to fully fund the program over the next 75-year accounting horizon. Here are three:
1. The maximum salary to which the payroll tax is applied is about $110,000 right now. If you’re someone who earns more than that, you don’t pay any payroll taxes above that amount. This maximum used to cover about 90 percent of earnings, but because of the growth of earnings inequality, it now only reaches about 84 percent. Kicking it back up to 90 percent – around $180,000 – would help close about a third of the solvency gap.
2. The price index used to make cost-of-living adjustments to Social Security is thought to overstate the increase in inflation, leading to overpayment of benefits relative to actual price changes. Switching to something called the “chained” Consumer Price Index would close about a quarter of the fund’s gap, but we should be clear that this is a cut in benefits relative to what folks get today and are scheduled to get in later years.
3. The growth of employer-sponsored fringe benefits, especially health care, has fueled cost pressures in the health-care system and eroded the Social Security tax base, as a rising share of workers’ total compensation has come in the form of untaxed benefits rather than taxed wages. We should consider gradually applying the payroll tax to employer provided health care benefits, which are currently not taxed at all. This closes about 45 percent of the gap.
Those three get you pretty much there, in terms of returning the trust fund to full solvency, but there are many more options, including raising the retirement age and reducing the benefits of the wealthy. I’m wary about raising the retirement age, in part because increased longevity is a function of income, so that low-income men are not living much longer than they did a generation ago (since 1977, the life expectancy of male workers retiring at age 65 has risen 6 years in the top half of the income distribution, but only 1.3 years in the bottom half; we don’t have this data for women).
No one’s saying these are easy fixes. Even brave politicians fear suggesting any changes to this extremely popular program (in his most recent budget, President Obama proposes spending cuts to Medicare and Medicaid, but doesn’t touch Social Security). But given the deep misperceptions noted above, and the fact that so many younger Americans are increasingly buying into the nonsense that Social Security won’t be there for them, there could be a receptive audience for the brave soul with the courage to tell it like it is.
If I may be so bold as to suggest a script, here’s the way I wrote about this in my book All Together Now: Common Sense for a Fair Economy,
“Though I grant you we rarely discuss it in these terms, Security creates a strong link between the aged and the working-age population. The idea behind the program is that today’s workers create the capital, the technology, and the wealth that will support tomorrow’s generation. Embedded in its mind-numbing formulas is the notion that those of us who came before, whether they were teachers, accountants, homemakers, mail carriers, barbers, cashiers, or lawyers, have built up the productive capacity of our nation.
“When the children of these workers come of age (along with new immigrants), they will earn their living from this infrastructure while also making their own contributions. As they do so, we will peel off some portion of their earnings to provide pensions for their forebears, just as those forebears did for their own predecessors. If this were a Disney movie, music about the “Circle of Life” would swell up here, but suffice it to say, Social Security is an elegant collaborative solution to a universal challenge.”
Now, could you do me a solid? Please spread this gospel wherever and whenever you can. I know we’re a long ways from Factville right now, but we’ll never find our way back there if we don’t proclaim the fundamental truth about what Social Security is and isn’t.
You can email me at firstname.lastname@example.org. I look forward to your feedback.
Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities. From 2009 to 2011, he was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team.
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