What You Didn't Know About Social Security but Were Afraid to Ask

I 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, subjected 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. 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 ship 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.

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 program redistributes 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.

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.

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.

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?

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. 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 66, 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.

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.

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, its 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.

Write to saulfriedman@comcast.net. Friedman also blogs for www.timegoesby.net