Sunday, April 29, 2012

Straight Talk on Social Security

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



- bankrupting our nation or future generations.


Here's what Social Security is:


- a critical source of income support for millions of



- 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



social security graph Social Security Trustees' Report, 2012


You can email me at 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: