Friday, April 12, 2013

Social Insecurity

Honor your father and your mother, so that your days may be long in the land that the Lord your God is giving you. 
Exodus 20:12

Religion that is pure and undefiled before God, the Father, is this: to care for orphans and widows in their distress, and to keep oneself unstained by the world.
James 1:27

Conventional wisdom says that if we are serious about reducing the deficit, then we will have to do something to curb “entitlements.” And in this context the entitlements under review are Medicare, Medicaid, and Social Security.

The obvious question is why we are so concerned about deficit reduction when the immediate need is for jobs and almost everyone agrees that cutting government spending will slow the recovery (or send us back into recession) and we can see that austerity has failed all over Europe. But we will leave that for another time.

Medicare and Medicaid belong in a separate discussion that focuses on health care costs. But let’s look at Social Security.

First, Social Security is not adding to the deficit. Right now, Social Security has a surplus and that surplus is being used to buy government bonds which are funding the deficit. If we do nothing, Social Security will eventually become a problem. In 2033, if we do nothing, Social Security will have to reduce payments by 25%. That projected shortfall, and the related assumption that Congress will appropriate funds from the Federal Budget to prevent a reduction in benefits, is what drives the idea that Social Security is part of the debt problem.

Correcting the problem is not that difficult. If we eliminated the cap on wages subject to Social Security, the fund would be solvent for the next seventy-five years. In other posts I have written about how the incomes of the richest Americans have grown much faster than everyone else’s. In terms of Social Security, that means that a larger percentage of total wages is not taxed for Social Security. Even if we did not eliminate the cap, we could still reduce the shortfall substantially by adjusting the cap on wages.

Second, we should be thinking about ways to expand Social Security, rather than ways to shrink it. Social Security is our most successful domestic program. It has dramatically reduced poverty among our elderly. Theoretically, Social Security is one leg of a three-legged stool that makes up American retirement accounts. The other legs are employer sponsored pension programs and individual retirement accounts. But the non-governmental legs are much weaker than they once were. Fewer corporations are offering pension plans, and individual accounts have been hard hit by the Great Recession. Fewer than half of households ages 55-64 have any retirement savings. And fewer than half of those that do have savings have more than $120,000.

The majority of retirees have incomes of less than $32,600 per year and receive approximately two-thirds of all their income from Social Security. And the average benefit is just $1,265 per month. Eighty percent of all seniors have incomes below $57,600 per year and receive, on average, half of their incomes from Social Security. Only the top 20% or seniors do not count Social Security as their largest income source, and that’s because most of them are still working.

Expanding Social Security sounds like crazy talk if you believe that the current budget discussions in Washington are sane. But we need to think hard about what sort of living conditions we imagine for future retirees. Most of the talk about “reforming” Social Security really means reducing benefits, either by increasing the retirement age or by decreasing the amount paid out. And that will translate into more seniors living near or below the poverty line.

We need to think seriously about how we can make Social Security into a reasonable replacement for disappearing corporate pensions. That will require increasing the payroll tax on almost everyone, and it’s hard to imagine our current leadership taking that on. But the alternative is a future in which the gaps between rich and poor increase as we age and are much greater in retirement.

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