Friday, September 3, 2010

Seven Key Facts About Social Security and the Federal Budget

Seven Key Facts About Social Security and the Federal Budget


by Dean Baker


Center for Economic and Policy Research (CEPR)


Issue Brief - September 2010


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 U.S. health care system?


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 Washington Post and on National

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 United States has by far the most inefficient health

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." Washington, DC: Center for

Economic and Policy Research. Available at


2 Rho, Hye Jin. 2010. "Patterns in Physically Demanding

Labor Among Older Workers." Washington, DC: Center for

Economic and Policy Research. Available at


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

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To see the extensive graphs and tables which accompany this report, go to


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