Straight Talk on Social Security
By: Jared Bernstein
Rolling Stone
April 27, 2012
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.
social security graph http://tinyurl.com/7b6adym Social Security Trustees' Report, 2012
You can email me at info@jaredbernsteinblog.com. 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.
No comments:
Post a Comment