As we confront the intense pressure from the right to begin chipping away at and dismantling our social safety net, it is helpful to recall the words of FDR when he signed Social Security into law:
"Today a hope of many years' standing is in large part fulfilled. The civilization of the past hundred years, with its startling industrial changes, has tended more and more to make life insecure. Young people have come to wonder what would be their lot when they came to old age. The man with a job has wondered how long the job would last.
This social security measure gives at least some protection to thirty millions of our citizens who will reap direct benefits through unemployment compensation, through old-age pensions and through increased services for the protection of children and the prevention of ill health.
We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.
This law, too, represents a cornerstone in a structure which is being built but is by no means complete. It is a structure intended to lessen the force of possible future depressions. It will act as a protection to future Administrations against the necessity of going deeply into debt to furnish relief to the needy. The law will flatten out the peaks and valleys of deflation and of inflation. It is, in short, a law that will take care of human needs and at the same time provide the United States an economic structure of vastly greater soundness.
I congratulate all of you ladies and gentlemen, all of you in the Congress, in the executive departments and all of you who come from private life, and I thank you for your splendid efforts in behalf of this sound, needed and patriotic legislation.
If the Senate and the House of Representatives in this long and arduous session had done nothing more than pass this Bill, the session would be regarded as historic for all time."
In spite of the great success of Social Security, or perhaps because of it, we find Social Security falling prey to the ideological assaults of the modern right. Ironically these attacks come during what are surely some of the greatest "hazards and vicissitudes" of our lives. These attacks come precisely when we need to "lessen the force" of our ongoing recession. These attacks come precisely at the moment when we need to "flatten out the peaks and valleys" so many Americans are experiencing as part of this Great Recession. To undermine Social Security at this time in history would surely be "regarded as historic for all time".
As FDR noted, Social Security was never intended to protect our citizens agains one hundred percent of their financial struggles, because it was intended to be part of a "3 legged stool" for our retirement involving Social Security, pensions, and personal savings, typically home ownership. Since then, the idea of the company supplied pension has become all but extinct. For example, in 1985 about 80 percent of employees in medium and large companies had pension benefits and today that number has fallen to about 10 percent. Recently we've seen $trillions evaporate in the mortgage crisis and economic downturn. Specifically, US households have lost almost $12 trillion in wealth since 2007. Much of this lost wealth is in the value of their homes and stocks in their 401k plans. What better time, with two of the 3 legs all but disappeared, to kick out the third leg of Social Security?
Unfortunately for our friends on the right, the case to save Social Security is a simple one, while the case against can only be made from ideological grounds.. Social Security has been successful, arguably one of the most successful efforts our government has ever undertaken. It is beloved by the American population. Finally, the problem affecting the future of Social Security is easily solved. What's more, there are some who point out that Social Security should not only be saved, but even expanded with increased benefits. As economist Greg Anrig notes, the amount paid to retiriees in US Social Security benefits ranks 25th among 30 OECD (Organization for Economic Cooperation and Development) countries. Put simply, the richest nation in the world rewards it's retired workers, for all they have done to support and build our great nation, with benefits that rank 25th out of 30 nations.
We clearly have room for improvement. So if our Social Security safety net is to be preserved, and perhaps even enhanced, how can it be done? Beyond the rhetoric, what are the problems the program faces?
Scope Of The Problem
To hear the voices of the modern right, like those of Congressman Paul Ryan, you would think that the great scourge of Social Security is a problem so large, so terrible that it threatens the very fabric of our nation. Before panic sets in, let's take a moment to look at the problem that confronts us. In essence the problem that confronts us is that the baby boomers are nearing retirement. That's it, simply that the baby boomers are approaching retirement.
The problem with Social Security is not one of government waste. It's not one of corruption, in fact if there is anything upon which to place the blame, it is our failure to look ahead and see the obvious problem as it approached us. The failure of Social Security is our own failure to plan ahead, to prepare for the future that we knew would come, predictably at this very moment. By law, the Social Security trustees are required to look at the viability of the trust fund within a 75 year window. Because of this requirement, we knew this problem was coming. Repeatedly in the Trustees Reports one can find warnings of the impending problem and the need to act. The trustees repeatedly point out that the sooner we act, the smaller the overall impact on the economy and the easier it will be to keep Social Security solvent into the future. Yet we failed to act.
However, even waiting to act until this late moment, the problem is not insurmountable. In fact according to the CBO and the Social Security Trustees reports, if we were to do nothing at all, the program would still be able to pay about 75% of benefits for the next 75 years. The baby-boomer induced increase in beneficiaries is a one time problem. Once we solve this problem, it is solved forever. There will not be such an extreme jump in beneficiaries again in our history. The choice is simple, solve this one time problem and strengthen our social safety net forever, or overreact and dismantle the safety net, perhaps forever.
Let's look at the problem in a couple of different ways.
What does the retirement of the baby boomers mean for the numbers of beneficiaries and the overall composition of beneficiaries? This chart from the CBO demonstrates how the numbers of beneficiaries will rise.
The practical impact of this increase in beneficiaries is how it impacts the worker to beneficiary ratio. The ratio in 2010 was 2.8 workers per beneficiary. As the baby-boomers begin retiring this number falls to 2.4 in 2020 and then continues to fall to 1.9 in 2030 remaining around that level through 2050.
This change is the effect of the change in birth rates. Since the baby-boomers were born, birth rates have fallen from three children per family to two children per family. It's worth noting that the birth rate has stabilized and so the shortfall we are experiencing will only last until around 2035. The punchline…we only need to fix the problem once. Adjusting the system for the change in birthrates now will fix the system essentially forever.
Another way of thinking about the future of Social Security is to consider it in relation to GDP. As the Social Security Trustees Report notes, the primary cause of the problem is the retirement of the baby-boomers and the smaller subsequent generations. The result of this shift will be an increase in Social Security expenditures from about 4.9% of GDP in 2010 to about 6% by 2035. According to the CBO and the Trustees Report, the average increase in GDP for social security will be between 0.6% and 0.7% over the next 75 years.
It's important to give numbers like these context. What is GDP anyway? Is 0.6% a big number or a small number? The CBO notes that in 2010, 0.6% of GDP totaled about $90 billion, compared to the overall program cost of $700 billion. It's useful to remind ourselves that in 2008 we spent $13 trillion to bail out the banks. Likewise, our annual budget for military spending is approximately $680 billion. In fact, our military spending has increased by 81% in the last decade. You can decide for yourself if 0.6% of GDP seems insurmountable.
A third way to think about the problem is to consider the growth of the program in relation to taxes. In his testimony before congress, economist John S. Irons notes that "Over the 75-year horizon used by the Social Security actuaries, outlays for benefits will exceed payroll tax revenue by about 2 percent of taxable payroll."
Currently taxes are capped at the first $106,800 earned, which represents the 90th percentile at the time it was set. Income above that level does not get taxed to support social security. Sadly, the cap itself is fixed and is at the same level as when it was originally set in 1983. It was set at the 90th percentile of 1983 wage earners, and was not designed to increase or adjust in relation to increases in wages and inflation. Since this cap was put in place, the percentage of income above the earnings cap has grown from about 10% in 1983 to about 16% today. What this means is that as the wealthy increase their wealth, less and less of their income is taxed to support social security. John S. Irons points out that "earners in the second and third quintiles pay an effective payroll tax of 10.4 and 10.9 percent. In contrast, the top 1% and top 0.1% pay payroll taxes of 1.5 and 0.7%."
Without going too deeply into solutions to the problem, resetting the cap to the 90th percentile in today's terms would eliminate 75% of the budgetary shortfall for Social Security for the next 75 years. Some will say that raising the cap is a tax increase, and they would be correct. However, this increase would only affect 6% of taxpayers. It's also interesting to note that of the 30 countries who are members of the Organization of Economic Cooperation and Development, the United States has the 27th lowest tax burden.
Another way to think about this problem from the tax perspective is to consider that the entire 75 year shortfall for Social Security is equal to the cost of extending the Bush Tax cuts for just the wealthiest 2 percent of tax payers. Consider that for just a moment. We have the choice of forcing everyone to retire later and receive less benefits, or we could raise the taxes of the wealthiest 2% of taxpayers by just 4%. The Center for Budgets and Policy Priorities put it best when they noted "Members of Congress cannot simultaneously claim that the tax cuts for people at the top are affordable while the Social Security shortfall constitutes a dire fiscal threat." Surely, the wealthiest nation in the world with one of the lowest tax burdens among wealthy nations, can find a way to increase tax revenue to strengthen our social safety net.
Optons and Solutions
At this point it should be clear that the problem is not as big as the voices on the right make it out to be. It's also clear that what we are talking about is a decrease in the birth rate on the heels of the largest generation in the history of our nation. This is not government waste. It is not some inherent laziness in the American people. It is not fraud or abuse, but rather a numbers problem, it's basic math. With that clearly established, we can look at the myriad of solutions with a clear head.
As we think about solutions, there are three key points to keep in mind.
1. The longer we wait the bigger the problem becomes and the more difficult it becomes to fix the system.
2. The primary driver of cost increases for both Social Security and medicare over the next few decades is driven by the size of the baby-boomer generation.
3. Virtually all of the cost increases to be accounted for happen between now and 2035. Solving the problem now, solves it in perpetuity.
It's difficult to resist the temptation to point out the foolishness of the Bush Tax Cuts. As the Social Security Trustees point out, acting sooner rather than later is paramount. The decision by the Bush administration to waste our surplus on tax cuts for the wealthy rather than addressing the known cost increases of Social Security is deeply troubling. Worse still is the often unmentioned problem, stagnant middle class wages. Middle class wages have been flat or decreasing, depending on the economist, since about 1972. How much more revenue, how much more value in their homes and 401k programs, how much larger would our economy be if the bottom 90% of earners had been realizing wage increases for the last 40 years? Would we still even be facing a Social Security shortfall?
The simplest summation of options and solutions is offered by the CBO's "Social Security Policy Options" document which offers 30 different ideas each scored in relation to GDP. As you look at this chart, reflect on the ongoing commentary from the modern right, on how difficult a problem we are facing, how seemingly impossible it is and how close to the verge of destruction our nation is. As you consider this right wing rhetoric, look at your favorite ideas and their scores and realize just how simple it is to arrive at 0.6. In fact, you'll likely note just how simple it is to arrive at 0.6 without cutting benefits or raising the retirement age.
The CBO's ideas fall into the following categories:
1. Increases in Payroll Taxes
2. Reductions in Benefits
3. Increases in benefits for low earners
4. Raising the Retirement Age
5. Reducing the Cost-Of-Living-Adjustments (COLA)
A few notes on tax increases. In this era of tax demagoging, it's helpful to look at tax increases with a few facts rather than simply through the right wing talking point lens in which taxes are always bad. In their debate, economists Sawhill and Anrig point out that simply cleaning up our tax code could result in a surge of revenue. They note that the CBO identified 165 tax expenditures and loopholes that largely benefit the wealthy and corporations. These 165 tax loopholes alone will cost us and our government almost $5 trillion in just the next 5 years.
US News formulated that if we raised the Social Security tax form 6.2 percent to 7.3 percent it would eliminate the entire Social Security deficit. They concluded that this would represent a tax increase in 2010 dollars of about $478 per year or about $9.19 a week.
Bigger and Better
Lost in the conversation of Social Security is the idea that not only should we look to save it, but perhaps we should look to expand Social Security and increase the benefits we pay. With so much talk about American exceptionalism it's worth noting that when compared to other OECD countries who provide about 70 to 75% of their retirees last working salary, the United States only pays between 33 and 40%. The wealthiest nation in the world pays it's workers less than other countries, and we also pay our retirees less as well. This is not the kind of exceptionalism we should be pursuing.
It's clear that Social Security is not the problem that the modern right would have us believe. It's a simple straight forward problem with simple straight forward answers. Perhaps the toughest question is what kind of nation do we want to be? Do we want to actually be exceptional in how we take care of our retirees and the least among us, or do we want to bear the shame that comes with both being the wealthiest nation in the world and the nation with the poorest, sickest retirees?