[Here are my notes from a talk I gave today on Social Security on its 76th birthday (which was yesterday)—annotated a bit—thanks to my CBPP colleagues Kathy Ruffing and Paul Van de Water for help.]
Retirement security must be a goal of a civilized society in an advanced economy. And in fact, this is the case in every advanced economy.
A guaranteed pension is essential to meeting that goal; private plans that depend on stock market returns can surely complement a basic guarantee, but they are simply not compatible with the goal of retirement security.
Private employers are providing ever fewer defined benefit plans
In fact, of the three legs of the retirement stool—private pensions, savings, and Soc Sec, the latter is most the solid but must be made more so…we should close the solvency gap to insure this venerable 76 national treasure.
Average benefits are not overly generous, around $1.2K/month or $14K/yr.
But those benefits very important to people, and this is key to thinking about how we’d want to close the solvency gap.
For more than half (55 percent) of elderly beneficiaries, Social Security provides the majority of their cash income. For one-quarter (26 percent), it provides nearly all (more than 90 percent) of their income.
Dependence on Social Security increases with age…among those aged 80 or older, Social Security provides the majority of family income for 64 percent of beneficiaries and nearly all of the income for 33 percent of beneficiaries.
Absent their Soc Sec income, the poverty rate among elderly would be 45%–including Soc Sec benefits, it’s 10%.
When you hear folks talking about how entitlement spending is unsustainable, make sure they’re not including Soc Sec. It is true that entitlement spending expected 10-16% of GDP over next 25 yrs., but about 1 ppt of that 6 ppt increase is Soc Sec.
Can’t afford it?? Long term shortfall—75 years—amounts to 0.8% of GDP—that’s the revenue from the expiration of the highend Bush tax cuts! I think many Americans would take that tradeoff in a minute.
How is it that every other advanced economy can afford it but we can’t? And in fact, we’re international laggard, 30 out of 42 countries in terms of the replacement rates of median income. OECD average is 60%, we’re at 40%. And btw, our demographics, while surely graying, and actually more favorable than theirs.
But isn’t it Soc Sec going broke? Terrible misinformation campaign. Full benefits can be paid through 2036, at which point trust fund is exhausted…but of course, payments still coming into system…at that point, Soc Sec can pay 75% of scheduled benefits. Most people think that number is zero!!
But we shouldn’t let that happen…can and should take steps to close the shortfall.
The 75 year solvency gap is, as I mentioned, 0.8% of GDP, or 2.22% of taxable payroll. To close the gap, there are only two choices, not unlike the budget debate: increase revenues flowing into the problem or lower benefits. And given the important of benefits to most retirees’ income (and that of other served by Soc Sec, including the disabled and children of deceased beneficiaries), we want to minimize benefit cuts in achieving solvency.
The follow are the most popular ideas, with a few comments.
- gradually hike the maximum amount of earnings on which workers and their employers pay Social Security taxes (currently $106,800) until it covers 90 percent of all earnings (closes about 0.70 of taxable payroll gap (tpg)); Good idea— historically, maximum taxable income was around 90th percentile but due to increased earnings inequality now around 17% of income escapes the payroll tax.
- use the so-called “chained” Consumer Price Index for future cost-of-living adjustments in Social Security and other programs, as well as for indexing income-tax brackets (this is a benefit cute; since this price index grows more slowly than the current one in use by Soc Sec, if means the price adjustment for benefits grows more slowly; closes about 0.50 tpg);
- Interesting idea from Domenici/Rivlen debt commission—gradually apply the payroll tax to employer provided health care benefits. The growth of employer-sponsored fringe benefits 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 (closes 0.9 of tpg).
- Increase retirement age to reflect rising life expectancy (again, this is a benefit cut); sounds good to a lot of people, but remember, increased longevity is a function of income, and men of lesser means are not living much longer than they did a generation ago, so raising the Social Security eligibility age is no slam dunk from their perspective (we don’t have such data for women). 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 (closes about 0.45 tpg).
- Reduce benefits for high earners by tweaking the formula in a way that lowers their lifetime benefits (closes about 0.50 tpg, though you can close a lot more if you cut further, of course). Note that this is a much better option than means-testing (reducing benefits based on income in retirement as opposed to earnings of the lifetime). In order to lower tpg through means testing enough to matter, you’d need to cut too far into the income scale, hurting middle-class retirees who depend on Soc Sec.
A sure applause line among politicians is “America is the greatest country in the world.” That’s as it should be—patriotism runs strong…
But what do we really mean by this—what makes us a great country?
It is no exaggeration to say it’s ideas like Soc Sec—ideas that tie us together—ideas that by their nature, provide security and respect to those who raised us, who spent their lives helping to build our future.
As I wrote 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.”