Interesting Stuff – 26 July 2010
Heat Waves and Elders

REFLECTIONS: On Social Security

SaulFriedman75x75 Pulitzer Prize-winning journalist Saul Friedman (bio) writes the twice-monthly Reflections column for Time Goes By in which he comments on news, politics and social issues from his perspective as one of the younger members of the greatest generation. His other column, Gray Matters, formerly published in Newsday, appears each Saturday.

Category_bug_reflections We thought Social Security was safe when Barack Obama was elected. He had opposed George Bush’s attempt to turn the program into millions of 401(k)s subject to the whims of the stock market.

And Obama pledged to keep and preserve Social Security as it is, a defined benefit pension/insurance plan that pays $650 billion to 53 million older Americans, the disabled and the surviving spouses and children of beneficiaries.

But Obama has fallen for the cut-the-deficit frenzy, appointing a commission run by banker Erskine Bowles and right-wing, former Wyoming senator Alan Simpson, that began its work by attacking and talking about cuts in Social Security’s benefits.

The president, who says he is still hostile to such cuts and that its long-term financial problems are easily fixed, adds ominously that “everything is on the table.”

That makes me nervous because Obama compromises too much with sworn enemies of Social Security, so perhaps he, as much as the rest of us, needs a primer on the crown jewel of the American moral imperative towards its older population.

How It Works
Social Security is about to celebrate its 75th year and still too many people don’t know much about it. It has lasted through wars and recession, longer than many blue chip corporations. Yet the reasons for its abiding strength are not universally understood.

For example, I’ll wager that not many of us realize that Social Security’s basic benefit – Old-Age

Survivors and Disability Insurance (OASDI) - was designed to replace, on average, about 40 percent of a worker’s final salary. Now, 75 years later, give or take one or two percent, that average replacement rate remains about the same.

But more than that, Social Security was designed to be progressive, which means lower-salaried workers can count on pensions replacing a larger portion of their wages than more affluent persons. To oversimplify, the low-wage waitress, who earned, say, $15,000 a year through most of her working life, can live fairly comfortably on a 40 percent replacement rate.

For a person earning $200,000 a year, Social Security’s benefits are relatively small, but not inconsequential, for the checks will be available no matter the changes in even an affluent beneficiary’s situation during retirement.

There should be no means test excluding the rich from Social Security; the sudden disappearance of the value of 401(k)s, belonging to Enron retirees is a case in point.

Redistribution of Income
It is true, as the experts say, that Social Security was designed to redistribute income from the more affluent wage earners to the lower income workers. That, of course, is the essence of progressivity and one large reason the program has been so successful and beloved. It’s worth knowing the details.

To begin with, Social Security consists of the old age benefit, (35 million workers and dependents), disability insurance (9 million), and survivors’ insurance (6 million, mostly children).

According to the Urban Institute, the Social Security programs redistribute income in five major ways:

  1. From richer workers to poorer workers through a progressive benefit formula.
  2. From shorter lived groups (blacks, men and the less skilled and educated) to longer-lived groups (women and the better educated white collar workers).
  3. From single persons to married couples through survivor benefits paid to spouses and children who don’t need to make further contributions.
  4. From the healthy to the disabled through disability payments for persons who qualify.
  5. And from later generations to earlier generations.

Pay As You Go System
The “redistribution of income,” of course, is anathema to conservatives and many Republicans, who have battled Social Security from its beginning as too much government. But younger persons (and many older beneficiaries) have little understood that Social Security is and always was a pay-as-you go system, in which today’s payroll taxes provides the benefits for the older generation.

Some in the younger generations resent that they pay for my benefits, but some day, with luck, the younger generation will grow older and will need their children’s contributions for their benefits. This pact between generations is one of Social Security’s great strengths and moral contributions.

Not a Ponzi Scheme
Another complaint heard from the younger generation is that Social Security returns too little on their investment, or that its like a Ponzi investment scheme, taking from newer members to pay older members.

But Social Security is not now and never was an investment plan; it is a pension and insurance plan with defined benefits based on one’s lifetime earnings, supported by $800 million (in 2008) in payroll taxes (12.4 percent, split between employer and worker) on incomes up to $106,800.

More on that cap later. But know this: in its 75 years, Social Security has never been on the red.

Nowhere Near Bankrupt
Nevertheless, too many young people – and demagogues in politics and business – have fallen for the myth that Social Security is near bankrupt and benefits won’t be there when they become eligible. But the 2009 report of the Social Security trustees, whose reports are made yearly, contradicts the gloom sayers.

Under the law, the trustees are obliged to peer 75 years into the future to assess Social Security’s health. Nowhere in any report have the trustees anticipated bankruptcy.

In the short-term, the trustees reported, the combined Old Age and Survivors Insurance (OASI) and the Disability Insurance (DI) trust funds are now adequately financed over the next ten years. Most such projections are based on very conservative economic growth rates and other estimates (by the Congressional Budget Office) are more optimistic.

Even though the recession has meant more money is being paid out that is coming in payroll taxes, the Social Security system remains in the black because of its increased earnings from interest (about $700 million a year) paid to the massive $2.4 trillion trust fund, which is expected to increase to $3.9 trillion by 2018. What a tempting dish of money the greedy privatizers would love to lay their hands on.

But in the longer term, if the growth rates are lower than they are now or have been, the trustees concluded that around 2018 the benefit costs will rise more rapidly than income, largely because of the retirements of the post-World War II baby boom generation (persons born between 1946 and 1964).

Economist Paul Krugman asks, “What happens in 2018 or whenever, when benefit payments exceed payroll tax revenues? The answer is nothing,” for the system can redeem some of those bonds it holds.”

Eventually, around 2037, say the trustees, Social Security will have to begin to cash in some of the special issue treasury bonds it holds to pay current benefits, but only if nothing is done by the Congress in the meantime.

We will get to proposed solutions, but I should note here how small the problem is: The trustees say Social Security’s deficit for the next 75 years amounts to two percent of payrolls, which means an increase of one percent in payroll taxes split between employee and employer could solve the coming shortfall.

But do you know of any bank or corporation that can say they will be in business for the next 30 years? Let me count: Whatever happened to U.S. Steel, the Pennsylvania and New York Central Railroads, Enron, AIG, and dozens of defunct banks and saving and loans?

Social Security and the Deficit
The privatizers and Obama’s commission are worried that entitlements such as Social Security are adding to the budget deficit. But the fact is that Social Security now adds not a penny to the deficit. Here’s why.

The heart of Social Security, the $600 billion plus benefits it pays, come out of self-sustaining trust funds paid for by payroll taxes. It is not – repeat - not part of the budget.

This year, the Social Security system, with more than 15,000 employees in Washington, its vast headquarters in Baltimore and hundreds of offices throughout the country, has asked for $21 billion for administration expenses.

It is one of the most efficient organizations in the land, sending out millions of checks on time, keeping track of the earning of millions of card holders, as well as monitoring Medicare and deciding on disability and survivor claims. That $21 billion, a tiny fraction of the benefits paid, is the only money that’s part of the deficit. (If Social Security, at some distant time, must redeem its bonds, the Treasury will reimburse Social Security and that expense would become part of the federal budget, but that’s a very long shot).

So why the fuss about Social Security adding to the deficit? The reason is the dishonesty of Republicans and their right-wing allies on the Commission who are using the deficit to dismantle and turn the program, which they’ve long opposed, into millions of private investment accounts.

Simpson told a reporter, contrary to the trustees, that Social Security is already broke. Erskine Bowles, Bill Clinton’s chief of staff was making a deal with Newt Gingrich to cut Social Security when it was sidetracked by Cinton’s troubles with Monica Lewinsky. If Bowles and Simpson are honest, they must know that the Social Security problem is not the deficit, but the long term financial health of the nation’s most treasured social insurance program.

That’s happened before and it took a couple of Republicans to save and strengthen the system.

Past Problems and Fixes
In 1983, when Social Security was in imminent danger, President Ronald Reagan, convened a commission headed by Alan Greenspan to solve its financial problems. Reagan had been a critic of Social Security, even suggesting that it be made voluntary, which would cause its collapse.

But Reagan grew in office and the Greenspan commission saved the system for the next 75 years with a few significant fixes. It slowly raised the retirement age to 67, it raised Social Security payroll taxes beyond what was needed to pay benefits and, most important, the commission brought into the system all federal (and many state) employees, including members of Congress who had their own retirement programs.

The result was the growth of the trust fund to an amount that will be able to pay benefits to the 70 million boomers. Simpson scoffs that the treasury bonds are “a bunch of IOUs” forgetting that all bonds are, in essence, IOUs. But the United States has never defaulted on its bonded debt.

Current Social Security Problems
Today the problems of Social Security, as the trustees indicated, are not grave. Greenspan says the coming Social Security shortfall “is not a big problem.” Yet members of Obama’s commission are seeking draconian fixes – all of which would cut benefits.

For example, they are considering slowly raising the retirement age to 70. But because Social Security is vital to keeping older people out of poverty, raising the retirement age would consign millions to live in poverty waiting for their benefits. How many people in their sixties who worked hard at tough jobs will die while waiting?

A study for the AFL-CIO by the liberal Center for Economic and Policy Research (CEPR), notes that the commission so far has talked only about cutting Social Security benefits rather than shoring up the system. One proposal, changing the formula for calculating benefits, would reduce checks by up to 9.6 percent for middle income wage earners who are in their late 40s.

Raising the retirement age to 70 would cut benefits by up to 10 percent for workers in their forties and fifties.

And cutting the cost-of-living adjustment even by one percent would result in a 12 percent cut in benefits for retirees.

Economist Dean Baker, director of the CEPR, noted that so far the commission seems to be considering only benefit cuts. “There is a great deal of talk in policy circles about cutting Social Security, but very little discussion of the financial situation of those affected by the cuts.”

A poll by the University of New Hampshire Survey Center, commissioned by the National Committee to Preserve Social Security and Medicare, found that only two percent of Americans believe Social Security is a major cause of the deficit and 78 percent oppose raising the retirement age.

Easy Fixes for Social Security
There are easier fixes that won’t cut benefits: Obama proposed the simplest solution when he was running for president and before he became enamored with turning the cheek of compromise. At the moment, as I mentioned, the Social Security payroll tax is imposed on the first $106,800 of earnings, which means the most affluent executives pay no more than their secretaries. Obama proposed raising the cap to $250,000 while lowering the taxes for many workers.

The National Committee poll found that 50 percent of Americans, including some high wage-earners, favored solving Social Security’s future problem by removing the cap. The Washington Post’s Ezra Klein said the Congressional Budget Office estimates removing the cap would raise $100 billion a year in revenues. And it would solve Social Security’s future shortfall.

Even the most affluent figures, including Warren Buffett and Bill Gates, have suggested removing the cap. Social Security could also raise money by being allowed to invest in higher-yielding Treasury bonds rather than the lower yielding special bonds.

You can do some research on how to solve Social Security’s 30-year financial problem by playing the Social Security game at the site of the American Academy of Actuaries. It shows how removing the cap would more than solve the program.

But we Social Security advocates need you to understand that if the present version of the Republican Party regains control of Congress, it leaders and its candidates have promised to kill the nation’s finest contribution to social justice. They will dance on Social Security’s grave rather than celebrate its diamond jubilee.

For one of the best statements on Social Security and the deficit commission, here is the testimony of John Kenneth Galbraith's son at the deficit commission.

At The Elder Storytelling Place today, William Weatherstone: Seniors Beware: Modern Technology


Saul, I have written to all my representatives as well as President Obama. And I have linked this post over at my place.

You fight the good fight,sir.

Wow thanks for the thorough post! The game is really helpful too!

Thanks, Saul. I've linked this my blog and urged every senior and anyone who wants to be a senior someday, to read it. Best regards.

Thank you for this excellent article. I am posting it to my list and very much appreciate your work here.

It's not just Republicans we have to fear.
Yes, they are worst, but they have democrat friends now. And, then there are the young people who want old people to all just go away--you know what they really say, but I can't repeat it. We are strong still due to our numbers, but weaker this time around than before and in another 10 or 20 years, they they truly will slash it for good. For now, fight on as we can mostly win. My plan is to extend the Bush tax cuts but also remove cap on social security tax to unlimited income taxed. Everybody wins.

Thank you for a very clear and detailed explanation of the history of SS as well as where it stands today--a primer for some and a reminder for the rest of us.

I completely agree that the earnings cap should be removed so that highly-paid workers pay into SS on all of their earnings, and I completely disagree with the Republicans that SS should be privatized in any way whatsoever. Certainly the last few years should have convinced the average citizen that the stock market is no substitute for the dependable retirement income provided by SS.

I have always opposed in principle making SS a means-tested program. However, before our government decides to reduce benefits, cut the cost-of-living adjustment or raise the retirement age to 70 across-the-board, ultra-wealthy retirees who clearly do not need SS benefits should not receive them. If such individuals subsequently encounter unforeseen economic hardship in retirement, they should be able to reapply. I still work in a white-collar job at age 73, but many of those who work in physically-demanding jobs will need to retire sooner for health reasons.

By means testing, it changes the plan to welfare.

Sal thanks for the visit and kind words the article is wonderful, fills in so many blanks things I didn't know...

Well written and easily understandable..
if only there was a prayer that we could unite and make a difference...

Dorothy from grammology

Thank you for an excellent blog. I, too, have bookmarked it for future reference and links.


only one quibble

raising the cap would tend to turn SS into welfare because people would be paying a tax for benefits they would not expect to collect.

better is just to raise the tax one quarter of one tenth of one percent each year. this is twenty cents per week and it WILL, I guarantee, solve the SS "shortfall."

this will pay for your longer life expectancy... and keep social security what it was meant to be... an insurance plan for workers paid for by the workers themselves "so no damn politician can take it away from them (FDR)"

after reading all of this I fell a lot younger,great great great grandma is sure our president will do what is right for us oldies we love you so hang in their we will do the same for you.

The interest that comes to the trust fund is in BILLIONS, not millions.
The better news is that the more optimistic of three annual forecasts prepared by the Trustees foresees NO significant dangers to the program. This most optimistic forecast, universally-ignored by the mass media, has proved to be closer to reality than the Intermediate forecasts which are the source of the heartburn among Social Security's putative friends, and of the glee among its sworn enemies.

What an outstanding, timely, and comprehensive post, Ronnie.

I remember that years ago when Erskine Bowles and Alan Simpson were reviewing the status of the Social Security system, they referred to recipients of the earned benefits as "greedy geezers."

If there actually were a budget deficit, several possible solutions spring to mind:
1. Eliminate farm subsidies which are no longer needed. Paying people, including some who are quite wealthy, not to grow certain crops is bizarre.
2. Encourage discussion of the serious downside of privatizing certain government functions, such as running prisons, developing Common Core type tests, or operating air-traffic control at airports.

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