Social Security was signed into law 75 years ago this month by President Franklin Delano Roosevelt. Today, it is the most important component of retirement security for most Americans. Unlike our damaged system of private pensions, Social Security is efficient, reliable and stable.
But rather than celebrate Social Security's successes at this milestone anniversary, many policy makers and much of the news media are focused on a different narrative. Social Security, they argue, is running out of money due to the impending retirement of millions of baby boomers. Social Security contributes to our ballooning national debt. We can't afford Social Security in its current form, and must scale back benefits.
This narrative is inaccurate, and it poses a serious threat to Americans' long-term retirement security.
While Social Security will require some modest adjustments to assure its long-term financial health, there is no imminent solvency crisis. Moreover, we should not be contemplating cuts in Social Security at a time when all the other pillars of retirement security have eroded to the point where many Americans won't be able to meet basic expenses in retirement. Instead, new revenue sources should be created to address Social Security's modest long-range solvency problem. And, rather than cut benefits, we should look at ways to enhance Social Security benefits for those who will need them most.
Consider these facts:
1. Two-thirds of Americans in the lowest pre-retirement income brackets will run out of the money they need to meet basic expenses within ten years of retirement, according to the respected non-partisan Employee Benefit Research Institute (EBRI); almost one-third of affluent Americans will run short after 10 to 20 years in retirement. Older boomers face the greatest risk, according to EBRI's research, but younger boomers and GenXers -- currently age 36 to 45 -- are on track to run out of money in retirement, too.
2. The value of private sector retirement plans plunged 19 percent in the ten-year period ending in 2008, according to Towers Watson, the employee benefits consulting firm, due mainly to the almost complete disappearance of traditional defined benefit pensions offered to employees by businesses.
3. We can afford to pay Social Security benefits without overwhelming our economy. Benefits are equal to 4.9 percent of gross domestic product (GDP) this year, and will rise to just 6.2 percent in 2035. After 2035, Social Security expenditures are projected to stay steady at that level of GDP through 2085.
4. Current benefits are modest -- but critical. The average retired-worker benefit is about $14,000 per year -- just a few thousand dollars above the official poverty guideline for an older single person. At the same time, Social Security provides an average of 40 percent of retirement income for the average American. The program keeps millions out of poverty, especially elderly women.
5. The Social Security Trust Fund is running a $2.5 trillion surplus that is headed toward a peak of $4.2 trillion in 2024, according to the Economic Policy Institute. That surplus was created as a result of the Social Security reforms of 1983, which included a substantial increase in payroll taxes levied on employers and employees, and a gradual increase in the retirement age from 65 to 67.
6. As boomers draw their Social Security checks in increasing numbers, the trust fund will be exhausted by 2035, according to the annual report of the Social Security Trustees, which was released last week earlier this month. At that point, absent any other changes, Social Security would have sufficient revenue to pay only 75 percent of projected benefit obligations -- hence the need to boost revenue or cut current benefits.
The claim that Social Security is running out money hinges, in part, on the program's shift into current-year deficit spending this year -- the program will take in fewer payroll tax dollars than it pays out. This change was long expected as boomers started to retire, but it came sooner than expected due to the severity of the recession, which cut into payroll tax collections and boosted the number of older unemployed workers filing for benefits.
The headlines about Social Security's red ink have helped those who worry -- rightly -- about our mounting national debt to conflate Social Security reform with deficit reduction. Social Security reform is at the top of the agenda of President Obama's National Commission on Fiscal Responsibility and Reform, and it's a favorite topic for deficit hawks such as Wall Streeter Pete Peterson, whose influential, well-funded foundation sponsored a national fiscal summit in June aimed at generating public discussion of the "tough choices" facing the nation on the budget.
These tough choices often seem to center on Social Security. Peterson and others like to argue that there is no real Social Security surplus, because the Trust Fund isn't sitting in some imaginary Social Security piggy bank. Instead the surplus is invested in a special type of Treasury bond. These are "full faith and credit" notes issued by the federal government -- no different than the bonds we sell to our creditors in China, for example.
Do deficit hawks really mean to suggest that the federal government should default on its promises to pay back the Social Security Trust Fund? Do they really mean to suggest that some portion of the payroll tax hike levied since 1983 for the express purpose of paying future Social Security benefits should be used to reduce the federal deficit?
The benefit reforms they recommend sound gradual and reasonable -- but they would produce unacceptable, large cuts in lifetime payouts to beneficiaries. One proposal calls for tweaking the formula for the annual Cost of Living Adjustment (COLA) -- one of Social Security's most important and valuable benefits. This change would have the greatest impact on older beneficiaries, since the reduction is cumulative over multiple years of benefits. A one percentage point reduction in the annual COLA now would reduce benefits over time so that a future 75-year-old would see an 11.9 percent cut in benefits, according to the Center for Economic and Policy Research
Another proposal calls for boosting (again) Social Security's full retirement age from 67 to 70. This sounds reasonable and perhaps even painless, since Americans are living longer and will be working longer, too. As a journalist and author focused on boomer retirement security, I advocate working longer wherever possible -- but it's easier said than done. The jobless rate for Americans over age 55 has jumped 339 percent since 2000, according to AARP. Workplace age discrimination is rampant. What's more, the suggestion that working longer is an appropriate solution for everyone is elitist and insensitive to the plight of older blue collar workers. It's one thing for lawyers and IT specialist to work into their late 60s, but quite another to tell someone who does physical labor -- or someone in ill health -- to toil away until age 70.
A higher retirement age is a cut in benefits, pure and simple. Raising the age to 70 would reduce monthly benefits by 19 percent," according to Social Security Works, an advocacy group. That kind of cut is not reasonable in light of our deteriorating retirement security. And it would come on top of benefit reductions already put in place by the 1983 reforms.
Since the Trust Fund will be sufficient to cover most of the boomer retirement wave, Social Security's viability and adequacy should be shored up for GenXers and the generations that follow.
New revenue sources should be identified to support the program. The possibilities include an increase in payroll taxes, raising the cap on earned income taxed for Social Security (currently set at $106,800) or tapping into a new revenue source, such as an estate tax or a tax on financial transactions.
And benefits should be enhanced for the beneficiaries who need help most. The National Academy of Social Insurance has outlined several good ideas for boosting Social Security's adequacy; these include a 5 percent increase in benefits for Americans over age 85, increasing benefits for widowed spouses, and increasing the current special minimum benefit for low-income workers to 125 percent of the poverty threshold.
A combination of new revenue and benefit improvements can keep Social Security viable for the future, and enhance the high value the program already delivers to Americans.