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Editorial

Social Security

Monday, January 17, 2005; Page A16

Old age is at once the most certain, and for many people the most tragic, of all hazards. There is no tragedy in growing old, but there is tragedy in growing old without means of support.

-- President Franklin D. Roosevelt

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Nov. 14, 1934

FROM THE MOMENT that Ida May Fuller, a retired legal secretary from Ludlow, Vt., collected the first monthly retirement check in 1940, the Social Security program has been a bulwark against the "poverty-ridden old age" that Roosevelt lamented. Social Security wasn't intended to be the sole source of retirement income but a backstop to personal savings and employee pensions. Today, without Social Security, almost half of elderly Americans would be living in poverty; with it, about 10 percent are. For nearly two-thirds of the elderly, Social Security provides the majority of their income. It is the only source of income for one-fifth of all elderly people, for 25 percent of non-married elderly women, and for 38 percent of elderly African Americans and Hispanics.

The argument over Social Security's future is as complex as it is emotional. To formulate a view on private accounts requires understanding many underlying questions: What is the role of Social Security in today's retirement system? What is the size of the shortfall? What are the alternatives for addressing it? What are the risks and potential benefits of private accounts? How have they worked in other countries? What is the best way to think about the "transition costs" of diverting payroll taxes to private accounts? How should private accounts be structured? If the system is to be overhauled in this way, how should other aspects of Social Security, particularly disability benefits, be addressed? Doctrinaire pronouncements from both sides -- privatization would destroy Social Security, and benefits must remain forever untouched; the system is in crisis, and personal accounts are the sole solution -- don't help.

Today we offer the first in an occasional series of discussions about Social Security that we hope will answer some of those questions; today's piece is a kind of Social Security 101, an introduction to the existing system. These editorials, along with our other, more news-driven coverage of Social Security, will remain available on our Web site, at www.washingtonpost.com.

Social Security is financed chiefly from payroll taxes -- 6.2 percent of income from the employee, an equal amount from the employer -- up to a certain ceiling, $90,000 this year. Only 6 percent of workers earn in excess of this cap. When the system was last revamped in 1983, 90 percent of wages were subject to Social Security taxation, but, because of growing income inequality, the existing cap reaches only 85 percent of wages, a phenomenon that could become relevant as some advocates urge increasing the cap on the payroll tax as a step toward attaining solvency.

Workers with low lifetime earnings generally receive more in Social Security benefits than they pay into the system, while the opposite holds true for those with average and above-average earnings. While the pay- roll tax is regressive, taking from the first dollar in income, the benefits are markedly progressive: Those who earned lower wages over their lifetimes -- and therefore might not have been able to save as much for retirement -- have a far higher share of their incomes replaced by Social Security benefits than do high-wage workers. Low-wage workers generally receive benefits amounting to 57 percent of their average annual wages, while average-wage workers get 43 percent and high-wage workers get 36 percent. The average annual benefit is $11,000; the maximum is $23,000. The age at which workers are eligible to collect full benefits is to rise this year to 66 and will climb gradually to 67 by 2022. Since Miss Fuller collected her first check in 1940, life expectancy at age 65 has risen by about five years, from 77 1/2 to 82 1/2, another factor pertinent to the upcoming debate.

Social Security is one leg of a stool whose other supports -- personal savings and employer-sponsored pensions -- have been changing over time. Personal savings have plummeted over the last few decades, though that phenomenon is counterbalanced by an increase in housing values and other investments. The average household today saves only about 1 1/2 percent of its disposable income, compared with about 11 percent two decades ago.

On the pension side, fewer than half of private-sector workers are covered by pension plans, and that coverage is not evenly distributed: Among the lowest-earning fifth of workers, 85 percent had no employer- sponsored pension in 2003. Moreover, while the share of workers participating in pension plans has declined only slightly, the nature of their coverage has shifted dramatically. Traditional pension plans that pay set amounts are disappearing; not even one in five workers has such a plan. In their place have come 401(k)-type plans, which rely on contributions from employers and workers and are subject to market fluctuations. These accounts have allowed many workers to accumulate significant retirement savings, but they may be of less value to lower-income workers who have less disposable money to put aside and enjoy less in the way of tax benefits from such savings.

Finally, Social Security is not only a retirement program. Its 47 million bene- ficiaries include about 33 million retired workers and their dependents, 7 million survivors of deceased workers, and 8 million disabled workers and their dependents.

That is a snapshot of Social Security today. Subsequent editorials will explore its prospects with and without reform. But as the debate over Social Security unfolds, it will be important to remember that the program has been, in the words of President Bush, "one of the greatest achievements of the American government." It has helped ameliorate the problem of poverty among the elderly to an extent that even FDR might not have imagined, and for many old and disabled Americans Social Security remains the lifeline.


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