Fixing Social Security
Saturday marks the 75th anniversary of Social Security, the largest and most enduring of the social programs enacted during the New Deal. Created as a modest retirement program for workers, it has morphed into a safety net for their families, the elderly and the disabled. It is also the federal government’s single largest program, accounting for a fifth of all spending.
The anniversary of the law’s enactment arrives just after the board overseeing the Social Security Trust Fund warned yet again that the program was on a gradual path to insolvency, with too few workers supporting the retirements of the baby boom generation. There are enough reserves in the trust fund to last a few more decades, but the longer Congress waits to address the problem, the harder it will be to fix.
By the end of last year, about 53 million retirees, disabled workers and their survivors or dependents were drawing Social Security benefits. That’s one of every six Americans, with an average benefit of about $1,000 a month. Although much of that money goes to people who may not need it — just as all workers’ wages are taxed regardless of income, so do all who were taxed receive benefits when they retire or become disabled — the monthly checks account for more than half the income of about 60% of those over 65, and help keep nearly 20 million people out of poverty.
As Social Security has grown, though, the cost to taxpayers has increased dramatically. The program is funded through taxes on wages and on Social Security benefits paid to higher-income recipients. The payroll tax rate has climbed from 2% in 1937 — half paid directly by workers, the other half paid by employers — to 12.4% today. That’s more than two-thirds of U.S. wage-earners pay in income taxes.
The challenge facing Social Security isn’t the expanded benefits as much as it is changing demographics. The taxes paid by today’s workers finance current retirees’ benefits, but a drop in birthrates and family sizes following the baby boom generation is reducing the ratio of workers to retirees. Anticipating this, Congress raised the payroll tax and scaled back benefits in 1983 to build up the trust fund’s reserve, but those steps haven’t been enough to solve the problem.
The cost of benefits is on track to surpass payroll tax revenues for good by the middle of this decade. Interest on the trust fund should cover the gap until 2025, at which point benefits will start draining the fund. By 2037, the trust fund is projected to be empty. Whether it lasts more or fewer years, though, will depend on several variables, including the increase in lifespans, the growth in the economy and wages, and the rates of inflation, unemployment and immigration. The harder it is for new workers to enter the country and pay payroll taxes, the more quickly the trust fund will be depleted.
Coming up with a solution that works actuarially is relatively simple. The hard part is the politics. Any path lawmakers choose will involve sacrifice on someone’s part — workers, beneficiaries or both.
Conservatives have tried for several years to use the trust fund’s long-term troubles as a rationale for privatizing Social Security. But allowing workers to take control (and responsibility) for all or part of their accounts would only exacerbate the problem. That’s because, despite $2.5 trillion in reserves, the trust fund isn’t large enough to finance the benefits promised to workers already in the system. Shifting payroll taxes from the trust fund to private accounts would make the shortfall worse.
Privatization would also remove the most important feature of the system: its ability to provide a stable source of income. The trust fund invests in long-term U.S. government bonds, which deliver returns that are smaller but far safer than the stock market’s. If you doubt that, compare the performance of Treasury bills with what’s happened in recent years to your 401(k).
The real options for improving the trust fund’s solvency include raising the retirement age, which analyst Henry Aaron has likened to an across-the-board benefit cut of more than 6% per added year. The trust fund board’s report also said the gap could be closed by immediately and permanently raising payroll taxes by nearly 2% or by cutting benefits by 12%. But the former would deter employers from hiring, sabotaging the economic recovery, and the latter would have the greatest impact on those struggling to stay afloat.
The Committee for a Responsible Federal Budget has outlined several less draconian approaches. These include trimming the automatic cost-of-living adjustments, which some analysts believe overcompensate for inflation; tweaking benefit formulas to replace a smaller percentage of high-income workers’ wages; and basing an individual’s benefits on a longer work history, which would reduce benefits for some workers by factoring more of the years they spent working for lower wages. Another alternative is raising the amount of wages subject to the payroll tax above the current cap of $106,800. Unless the taxes on those wages translated into higher benefits for the people who paid them, however, the change would make Social Security look less like insurance and more like a transfer of wealth.
Again, there are no pain-free approaches. But the longer lawmakers wait to fix the problems lurking in the trust fund, the larger the percentage increase in taxes or decrease in benefits will have to be. It may take years to drain the Social Security Trust Fund, but the most painful option for Congress is to do nothing in the meantime.
