Seven Key Facts About Social Security and the Federal Budget
by Dean Baker
Center for Economic and Policy Research (CEPR)
Issue Brief - September 2010
http://www.cepr.net/documents/publications/ss-2010-09.pdf
Over the summer there has been a hot debate about Social
Security and the federal budget, especially in relation to
the National Commission on Fiscal Responsibility and Reform.
It is reasonable to expect that the major players in this
debate will do their homework about the issues under
consideration. In order to help them in this process, here
is a quick list of study questions on Social Security and
the federal budget. Reporters and editors at major news
outlets may also want to review these questions, since it
seems that they could also use some additional background
knowledge on these topics.
The Questions
1) How much higher are real wages projected to be in 2040
than today? In other words, how much richer do we expect the
average worker to be 30 years from now?
2) How did the 2010 Social Security Trustees Report change
the projections for 2040 wages compared with the 2009 report?
3) If we solve the projected shortfall in Social Security
entirely by raising the payroll tax, what percent of the
gain in real wages over the next 30 years would have to go
to pay the tax?
4) What percent of real wage gains over the last 30 years
was absorbed by the increase in Social Security payroll taxes?
5) What percent of the projected long-term budget shortfall
is due to the inefficiencies of the
6) How much wealth should we expect near retirees to have to
support themselves in retirement?
7) What percent of older workers have jobs in which they can
reasonably be expected to work at into their late 60s?
Certainly anyone on the deficit commission should be able to
answer these questions, as should any of the people
reporting on Social Security or deficits in the media. But
for those readers who do not fit these descriptions, here
are the answers.
The Answers
1) According to the 2010 Social Security Trustees Report,
the average real (adjusted for inflation) wage is projected
to be 48.7 percent higher in 2040 than it is today (see
Figure 1). In other words, if our kids work 30 hour weeks on
average, they would take home about 10 percent more than we
do today working 40 hour weeks. Deficit hawks have been
known to quip about how our children and grandchildren will
be living in chicken coops, but they're just kidding, right?
As a practical matter, most workers have not seen much by
the way of wage gains over the last three decades because
such a large portion of wage growth has gone to those at the
top: people like many wealthy policymakers. This upward
redistribution of income of this period, and the possibility
that it could continue, is the reason that most people who
are concerned about the well-being of future generations
focus on the distribution of income. The impact of any
potential increases in Social Security taxes on the typical
worker's income is trivial compared to the impact of a
continued upward redistribution of income.
2) The 2010 Trustees Report had good news on the wage front.
It assumed that health care reform would slow the rate of
growth of employer provided health care benefits. This means
that wages are now projected to grow more rapidly since less
money will be diverted to cover rising health care costs. In
2009 the Trustees projected that the average wages would
only rise by 37.2 percent between 2010 and 2040 (see Figure
2). This means that the changes between the 2009 and 2010
Trustees Reports imply that wages will be nearly 10 percent
higher in 2040 than we previously believed. Everyone saw or
heard the lead item in the
Public Radio: "New Trustees Report Shows Our Children Will
be Much Richer." Okay, maybe they managed to overlook this
part of the story, but those who are making decisions about
the federal budget should know it.
3) Number 3 is somewhat of trick question, since it depends
on exactly the formula we use. The Trustees Report tells us
that if we raise the tax tomorrow by 0.96 percentage points
on both the employee and employer (1.92 percent in total),
then the program will be fully solvent through its 75 year
projection period. If we went this route, then it would mean
that the tax increase would take up 5.9 percent of the
projected wage growth over the next three decades.
But, we may not want to impose a tax increase like this
tomorrow. There is a huge amount of uncertainty about these
projections, and the program faces no imminent shortfall.
Suppose we raised both side of the payroll tax by 0.07
percentage points annually beginning in 2020 and continuing
at least to 2040. Then by 2040, the rate would have risen by
1.47 percentage points on both the worker and employer. This
would take up 12.0 percent of the projected wage growth over
this period, leaving our children on an after-tax basis just
42.8 percent richer than we are. This doesn't quite sound
like the story about our kids living in chicken coops (see Figure 3).
4) The Social Security tax increases of the last 30 years
took 6.8 percent of average wage growth. This is in the same
range as the portion of projected future wage growth that
may have to go to higher Social Security taxes. The big
problem in the story is that people have been living longer
through time. If we want to enjoy a growing portion of our
lives in retirement, then it will cost somewhat more money.
This means that after-tax wages will grow less rapidly than
would otherwise be the case.
It is worth noting that the gains in life expectancy also
have not been distributed evenly. Most of the gains went to
those in the top two quintiles of the income distribution.
5) The
care system on the planet. We pay more than twice as much
per person as people in other wealthy countries with very
little to show for it in terms of health outcomes. If we had
the same per person health care costs as any other country
in the world the long-term budget projections would show
huge surpluses rather than deficit (see Figure 4).
6) Critics of Social Security have held up the image of
affluent elderly getting Social Security checks. They talk
of seniors driving up to their gated communities in their
Lexuses. While this may describe such critics' peers, it is
not an accurate description of the vast majority of seniors,
most of whom rely on Social Security for the majority of their income.
This is likely to be even more true of the baby boom
generation that is at the edge of retirement. Few have
traditional defined benefit pensions. They have seen much of
the wealth they were able to accumulate destroyed by the
collapse of the housing bubble and the subsequent plunge in
the stock market (see Figure 5 and Figure 6).1
7) Many policymakers are able to still work into their late
70s. This leads many deficit hawk types to think all workers
should be expected to work until age 70 or even older.
However, this is not likely to be as easy for most workers
as it is for them. Forty five percent of workers over age 58
work at jobs that are physically demanding or have difficult
work conditions.2
So there you have it: seven key facts about Social Security,
the budget and the well-being of workers and retirees.
Policymakers and members of the media who influence the
debate about these issues should know this information inside out.
[Reference notes]
1 For additional details, see Baker, Dean and David Rosnick.
2009. "The Wealth of the Baby Boomer Cohorts After the
Collapse of the Housing Bubble."
Economic and Policy Research. Available at
http://www.cepr.net/documents/publications/baby-boomer-wealth-2009-02.pdf.
2
Labor Among Older Workers."
Economic and Policy Research. Available at
http://www.cepr.net/documents/publications/older-workers-2010-08.pdf.
Dean Baker is an economist and Co-Director of the Center for Economic and Policy Research in Washington, D.C.
=====
Center for Economic and Policy Research
Phone: (202) 293-5380, Fax: (202) 588-1356
To see the extensive graphs and tables which accompany this report, go to
http://www.cepr.net/documents/publications/ss-2010-09.pdf.
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