Social Security: Principles, Facts, and Fixes

August 16th, 2011 at 1:03 am

[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.]

Principles:

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.

Facts:

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.

Fixes

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.

 

Conclusion

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.”

 

 

 

 

 

 

 

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17 comments in reply to "Social Security: Principles, Facts, and Fixes"

  1. Sister Artemis says:

    Love the circle of life reference, no matter how sentimental. That is REALLY what it is all about. Social Security is really just an extension of that age-old human drive to continually ensure the security of our elders, and the generations that are still to come.


  2. Taryn H. says:

    I don’t know how anyone would want a society that doesn’t take care of its elderly. That’s barbarism. That’s a sign of a society that has no sense that we’re fellow citizens – that we’re responsible to one another – that we’re bound in a common cause. It’s unpatriotic.

    I cannot understand people who just want to take for themselves, live in gated communities, send their children to private school and pay for the police and prisons necessary to lock up the ever-growing segment of society that lives in poverty. I cannot understand how Milton Freedom could ever ever equate free-market capitalism and freedom – to me unfettered free-market capitalism produces the least free, least democratic societies. It produces severe economic inequality, high crime, brutal police force, large segments of the population imprisoned, fewer and fewer civil rights (in the name of order).

    I cannot believe – after the world economy crashed – that this vision has any currency. Of course, we know why it does – it’s very useful to the very rich. But can they really be that cruel and short-sighted? Warren Buffet isn’t (although I bet his secretary makes what secretary’s make). But most of them are – I keep being reminded of Keynes warning everyone after WWI that they were going to crash the world economy (and moreover, it was cruel). Keynes did not win that fight. In terms of ideas I think we’re at Versailles – we’re nowhere near Breton Woods.


  3. D. C. Sessions says:

    Another indexing approach (we should use this for everything): index to median income. It’s politically beneficial in an “we’re all in this together” sense, and it has the added benefit of making the public much more aware of the overall stagnation dragging back on most of the people in the USA.


  4. foosion says:

    Great post!

    One technical question: “historically, maximum taxable income was around 90th percentile but due to increased earnings inequality now around 17% of income escapes the payroll tax.”

    Are you saying that historically 90% of income was subject to SS tax, but now only 83% is?

    I’ve been trying to track down the % of income subject to SS that was projected when the Greenspan Reagan adjustment was made. My understanding is that if the % of national income subject to SS was as projected at that time, there would not be a funding shortfall, but that rising inequality has led to the projected shortfall. Any relevant info would be appreciated.

    thanks


  5. Ron E. says:

    Some other options:

    - increase economic growth and thereby lower unemployment and increase payroll tax revenues by not enacting policies like the recent debt deal
    - increase legal immigration so there are more young people in the country paying the payroll tax


  6. Jim says:

    Interesting that even after noting how the US is an international laggard in providing retirement benefits and pointing out their paltry $14,000 sum, you support ideas that cut benefits.

    Why is it that we so regularly find “liberal” economists who have such an easy time supporting policies that are adverse to the great majority? Why not a wealth tax or vastly higher income taxes? Is it possible to actually attack the power structure in this country yet still be a respected “liberal” economist?

    Jim


    • Chigliakus says:

      “Why is it that we so regularly find ‘liberal’ economists who have such an easy time supporting policies that are adverse to the great majority?”

      I didn’t read it as support, I read it more as Jared including all of the popular suggested “fixes” in the name of intellectual honesty. I personally find it distasteful to ask old folks to eat catfood so some rich guy can throw a couple extra bags of money onto his pile. It’s a shame the rich and much of the middle class no longer acknowledge the benefits conferred upon them by society. Our society has been in decline since the reign of Reagan, and will continue to decline until we slay the ideas championed at the beginning of this era (welfare queens, trickle down economics, the laffer curve, etc.)


  7. alex says:

    we tax labor income to provide for those who are no longer able to labor for themselves. it is only fair that we also tax non-labor income as well.


    • Chigliakus says:

      As the beneficiaries of most of the non-labor-earned income in this nation the oligarchy would never let that happen. Still I wonder how solvent SS would be if we slapped a SS tax on capital gains?


      • Jim says:

        I just re-read it and you’re right. I read it too fast initially. I guess I’m so used to Obama and his compatriots talking of cutting…. And associated Jared w/ the administration he was at.

        I do think it would be pretty damn helpful for Jared to take a more leftish stance – down the lines of massive increases in high income tax rates, etc.

        Jim


  8. Carol says:

    This is a really helpful blog, Jared. It’s one I’ll keep for future reference.

    It seems unlikely that we will be able to increase the cap in the near future. But I’m curious to know why the suggestion is to “gradually” increase it rather than doing what is needed all at once.

    Also, another suggestion that isn’t on your list is one of Dean Baker’s. He says (suggests) that applying the “payroll” tax to all income rather than just salaries would solve the SS completely. What is your opinion of this idea?


  9. sara says:

    The US used to represent opportunity and advancement from hard work (labor!) and tolerance for individual beliefs.
    That is how the US had drawn skilled & unskilled labor and thinkers from around the world over the last 100 years.

    This dream is disappearing fast. Being middle class in this country means you subsidize the poor and the rich and by increasingly taxing labor and job benefits you reduce the incentive to work. The people who pay the most are simultaneously being excluded from the benefits.

    I looked at my situation (below) and the math surprised me.
    I currently work 60-70 hrs a week as a surgeon
    I invested $200,000 8 years as a student and 5 yrs of 80-100 hr weeks on less than minimum wage.

    I pay half my annual income in taxes because I am employed and get a W2. I have no problem paying taxes that help the poor, and provide health care and social security for everyone, and a basic level of quality education including public universities.
    but the bulk of my taxes go to fund wars which basically subsidize the interest of certain industries (such as gas, defense) and directly subsidize others (student loans for profit universities, health insurance companies, pharmaceutical companies, ethanol).

    When I get older, the pension I am working hard for now will be taxed and the reduced return for me from social security will be taxed further– likely eliminated altogether. I have to save extra for retirement since I can’t get social security and also for college because my kids won’t be eligible for aid and subsidized loans have inflated the costs.

    The top people in corporations, and the ownership class, pay much less of their income in taxes. That is also true of people who have cash based business and declare no income.

    If my tax rate increases, (including as jared suggests, taxing the health benefits I get for working) because our government can’t prioritize their spending to my values, other options make more dollar-sense for someone like me.

    1) I will simply cut back on my workload; working at 75% will get me essentially the same take home by dropping my tax burden & reducing child care costs
    2) Take my skill set to a place like Europe or Canada where they retain middle class values . Make less money but then you don’t need it — work less, less malpractice & job stress, child care costs are much less, and I won’t have to save for college.
    3) Work in a place like India or Brazil — capitalist heaven! — what you make, you keep! childcare and college are cheap, salary goes a lot farther so you can actually save for retirement rather than have the government take away as much of what you work for as possible.

    The middle class need to start doing the math. As taxes go up on income and job benefits, if you have a marketable skill set, work less or consider a move to countries that embody what used to be american values.


  10. June Z says:

    Given the health of the Trust Fund for the next decades, even according to the Trustees’ rather pessimistic growth assumptions, there is no reason to make ANY changes now. SS last year still had a surplus. A society cannot prepay for future costs except by investment now. Ron E.[above]is absolutely right. The SS tax is even paid by people too poor to pay income tax, so surpluses now contribute to inequality. I am convinced that if this Congress takes up the issue at all, it will be to make the system less just.


  11. Richard Mathews says:

    A few thoughts on possible fixes.

    Additional revenue does not have to be new/increased taxes. It could be borrowing. For years, the SS Trust Fund has loaned money to the General Fund. There is no reason the loan could not go in the other direction in the future, particularly to get us over a short-term hump due to retired baby boomers.

    On Chained CPI, I think it is important to recognize that there are two problems with COLAs for Social Security, and only one is addressed by Chained CPI. The other is that senior see higher inflation due to more dependence on health care costs that are exploding. Any fix to switch to Chained CPI is unfair unless the other problem is also fixed, but that largely erases the budgetary benefit to making the change.


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