President Joe Biden has been praised for his State of the Union defense of Social Security. While he correctly called out Republicans for their machinations, it was not so long ago that Democratic Party leaders — for example, Bill Clinton and Barack Obama — appeared willing to support plans for weakening the program. Moreover, as the economist Paul Krugman warns:
“I’ve seen numerous declarations from mainstream media that of course Medicare and Social Security can’t be sustained in their present form. And not just in the opinion pages: There’s been at least some reversion to the early 2010s practice of including anti-social-insurance editorializing in what are supposed to be straight news reports, with highly disputable claims about these programs’ futures presented as simple facts.”
Don’t let the critics fool you. Our Social Security system is a sound and essential program that can be, if desired, easily strengthened and improved.
Social Security basics
Our Social Security system works like this: workers make yearly payments equal to 6.2% of their wage and salary earnings into the system, up to a “cap” which rises each year based on the growth in average wages. The 2023 cap is $160,200. Their employers pay a matching amount. The self-employed pay both shares. Social Security beneficiaries receive inflation-adjusted monthly payments based on a formula tied to their or their spouses’ lifetime earnings, years of work, date of birth and age at retirement.
From 1983 to 2010, yearly payments into the Social Security system were greater than payouts to retirees. The resulting surpluses went into a trust fund with the money automatically used to buy special interest-earning government bonds. Since 2010, worker and employer contributions into the system have been too small to cover payments to beneficiaries. However, interest earnings on the bonds held by the trust were large enough to fully pay retirees and allow the trust fund to keep growing. That ended in 2021, when the payment gap grew too large to be covered by interest earnings. Beginning that year, the system had to start drawing down trust fund reserves to pay benefits.
According to the most recent Social Security Board of Trustee projections, which by law cover a 75-year period, these drawdowns will continue, enabling the system to pay its required benefits, but only until 2034. That year, the trust fund will be exhausted and no longer able to meet its obligations. It is on the basis of this projected outcome that the enemies of Social Security call for major changes in the system, including slashing benefits, raising the full retirement age or even privatization.
Challenging the crisis narrative
There are three main reasons to reject this crisis narrative. The first is that even if trustee projections turn out to be right, and the trust fund is exhausted in 2034, social security payments will not end. At that point, if nothing else is done, Social Security would still be able to pay approximately 78% of promised benefits using its annual tax income.
The second is that Social Security projections are only as accurate as the assumptions used in making them, and given that these projections cover a 75-year period, even small changes in the assumed values of key variables like productivity, wage growth, immigration and interest rates, can produce dramatically different outcomes. Economists struggle to make accurate quarterly forecasts of major variables like GDP — are we really ready to take dramatic action on the basis of a long-term forecast that suggests there will be a crisis 10 years out?
In fact, trustee reports include three different projections that are labeled low cost, intermediate and high cost, depending on the assumptions made about key variables. The trustee’s projected 2034 trust fund bankruptcy uses the intermediate assumptions. Use the low-cost assumptions, and you get a dramatically different result: the system is fully operational out to 2069.
Significantly, the assumed values that anchor each of the two different scenarios are not so different. For example, the intermediate scenario assumes an average annual productivity growth of 1.63% over the years 2026 to 2096, while the low-cost assumes an average annual increase of 1.93%. For real interest rates the corresponding values are 2.3% and 2.8%. This kind of comparison also highlights the important role that policy can play in changing trends and ensuring the stability of Social Security. In other words, there is every reason to believe that our Social Security system can continue to deliver its promised payouts for many more decades.
The third reason for rejecting the crisis narrative is that Social Security can easily be changed in ways that can strengthen it. One simple but powerful change: remove the cap on income. As the system works now, income earned above the cap is not taxed and thus does not add to the trust fund. Not surprisingly, the explosion of income inequality, with those at the top capturing an ever-greater share of income, means that the social security tax covers an ever-smaller share of earned income.
The share of income captured by Social Security taxes has fallen from 90% in the early 1980s to roughly 82% now and is likely to fall further in the future. As a Congressional Research study points out, ending the income cap would eliminate almost three-fourths of Social Security’s predicted 75-year shortfall.
The Social Security Expansion Act, introduced by senators Bernie Sanders and Elizabeth Warren and representatives Jan Schakowsky and Val Hoyle, takes a different approach. It would subject all earned income above $250,000 per year to the Social Security payroll tax. Rather than continue to limit the tax to wage earnings, it would establish a separate Social Security tax on investment income, using tax thresholds of $200,000 for a single filer and $250,000 for a married couple filing jointly.
The act includes other changes, such as a $2,400 increase in yearly individual Social Security benefits. A Social Security Administration analysis of the act determined that “enactment of the act’s (nine) provisions would extend the ability of the OASDI program to pay scheduled benefits in full and on time throughout the 75-year projection period.”
The importance of Social Security
The average Social Security retirement benefit in January 2023 was approximately $1,850 a month or $22,200 a year. For someone who worked all their adult life at average earnings and retires at 65, these benefits replace about 37% of past earnings. This percentage places the United States near the bottom among developed countries; the average replacement rate for OECD countries is 49%.
Yet, millions of people in the United States depend on Social Security for their retirement. As The Oregonian points out: “State economists say a third of Oregon seniors receive essentially all their income through the program. It represents more than half of monthly income for 6 in 10 seniors.”
We need to deliver the message clearly and with confidence: Social Security is not in crisis. What does need our attention is the broader workings of our economy. Among the most pressing issues is the disappearance of secure, well-paying jobs. In fact, a growing number of analysts worry that we may be facing the end of retirement; low pay and the lack of benefits will force people to work until they literally drop. That we have come to this point is the real crisis.
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