The Washington PostDemocracy Dies in Darkness

Happy Birthday, Social Security! I hope I’m going as strong and beloved as you are when I turn 80.

Social Security is 80 years old today. Here's why it's just so damn great (and some thoughts as to how to keep it that way).

I realize we live in an age where that role is disparaged daily, in many cases by the very people who are paid by the rest of us to do a better job of running the government. And yet, even while gridlock and dysfunction persist, Social Security keeps on trucking along, providing a progressive, fully vested, universal, guaranteed pension to nearly all elderly Americans. And it does so highly efficiently, with administrative costs that amount to less than 1 percent of annual benefits, “far below the percentages for private retirement annuities.”

So, raise a glass (of Metamucil?) in her honor, and consider these points:

  • Most of the benefits of Social Security’s retirement program go to people who really need them. Using data from the Social Security Administration, the figure above shows the percentage of elderly individuals’ total income that comes from either Social Security or from earnings and assets combined. As you can see, Social Security retirement benefits provide an average of 83 percent of the income of the poorest 40 percent of Americans aged 55 or older (annual income: $22,021 or less, including Social Security). Without that income, 42.6 percent of seniors over 65 would have been in poverty in 2013; with it, the poverty rate among seniors was only 9.5 percent. Remember that next time some fact-bashing partisan claims “we fought a war on poverty and poverty won.”
  • Social Security doesn’t just help the elderly; children have a major stake in the program as well. As my colleague Bryann DaSilva explained recently, about 6 million children either “received their own Social Security benefits as dependents of retired, disabled, or deceased workers” or “lived with parents or relatives who received Social Security benefits” in 2013. Social Security also disproportionately benefits women and people of color. (FTR, I was one of those kids.)

While she’s a healthy 80, Social Security does face a long-run solvency gap. After 2034, according to the latest estimates, the program would be able to pay 75 percent of scheduled benefits. That’s not zero, as is often misrepresented by fear mongers, but it’s a serious shortfall that must be avoided. (The Social Security Disability Insurance trust fund is projected to face a shortfall much sooner, in 2016; but while this has led to alarmist critiques, a simple reallocation between the DI and old-age trust funds, a noncontroversial step that Congress has undertaken many times in the past, would enable both funds to pay full benefits through 2034.)

Broadly speaking, there are only three ways to close the solvency gap, which, looking out 75 years, amounts to less than 3 percent of taxable payroll: we can raise taxes, cut benefits, or do both. In considering our menu of options, we should remember that, as jumps out from the figure above, Social Security is an essential income component for low- and middle-income elderly families. These families cannot sustain any cuts to their benefits.

Some ideas:

Raise the maximum amount of wages subject to the payroll tax. Due to increased earnings inequality (an increased share of earnings going to the highest earners), this tax now hits only about 83 percent of covered earnings, well less than the 90 percent it applied to in decades past.

Gradually apply the payroll tax to employer-provided health care benefits. A few years ago, Pete Domenici and Alice Rivlin made the case—pretty convincingly, I thought—that the growth of employer-sponsored fringe benefits has fueled cost pressures in the health-care system and eroded the Social Security tax base, as a rising share of workers’ total compensation has come in the form of untaxed benefits rather than taxed wages. Their application of this idea closed around a third of the 75-year gap.

Broaden the tax base by subjecting voluntary salary-reduction plans, such as cafeteria plans and health care Flexible Spending Accounts, to the payroll tax (as 401(k) plans and similar retirement accounts already are).

Increase the payroll tax. As my colleague Kathy Ruffing has written, “Future workers are expected to be more prosperous than today’s.  Under the trustees’ assumptions, the average worker will be almost 50 percent better off — in real terms — in 2040 than in 2014, and twice as well off by 2070.  It is appropriate to devote a small portion of those gains to the payroll tax, while still leaving future workers with much higher take-home pay.  Social Security is a popular program, and poll respondents of all ages and incomes express a willingness to support it through higher taxes.”

Reduce benefits for wealthy recipients. But don’t expect to close much of the gap this way. As the figure implies, most of the benefits go to low and middle income households. Only 2 percent of Social Security benefits go to retirees with non-Social Security income of $100,000 or more each year, and only about 10 percent goes to people with income above $40,000. To fix Social Security this way, you’d have to break it.

Years ago, in a book called “All Together Now: Common Sense for a Fair Economy,” I wrote the following:

“Social Security creates a strong link between the aged and the working-age population. The idea behind the program is that today’s workers create the capital, the technology, and the wealth that will support tomorrow’s generation. Embedded in its formulas is the notion that those of us who came before, whether they were teachers, accountants, homemakers, mail carriers, barbers, cashiers, or lawyers, have built up the productive capacity of our nation.
When the children of these workers come of age (along with new immigrants), they will earn their living from this infrastructure while also making their own contributions. As they do so, we will peel off some portion of their earnings to provide pensions for their forebears, just as those forebears did for their own predecessors. If this were a Disney movie, music about the “Circle of Life” would swell up here, but suffice it to say, Social Security is an elegant collaborative solution to a universal challenge.”

For sure, none of those fixes are easy, and today’s politics seems quite removed from common sense and fairness. But ask yourself why this 80-year old program is so popular. I suspect it’s because behind the noise that passes for political debate, people recognize Social Security for what it is: an elegant, efficient, collaborative solution to a universal challenge.