The truth is that there are two separate tax programs at work here — the payroll tax and the income tax... The first pays for Social Security and the second for the rest of the federal budget. Most Americans pay more payroll tax than income tax. Not until you pull in $200,000 or more ... are you likely to pay more in income tax than payroll tax. ...
Since 1983, the money from all payroll taxpayers has been building up the Social Security surplus, swelling the trust fund. What's happened to the money? It's been borrowed by the federal government and spent on federal programs — housing, stimulus, war and a big income tax cut for the richest Americans, enacted under President George W. Bush in 2001. In other words, money from the taxpayers at the lower end of the income scale has been spent to help out those at the higher end. That transfer — that loan, to characterize it accurately — is represented by the Treasury bonds held by the trust fund.
The interest on those bonds, and the eventual redemption of the principal, should have to be paid for by income taxpayers, who reaped the direct benefits from borrowing the money. So all the whining you hear about how redeeming the trust fund will require a tax hike we can't afford is simply the sound of wealthy taxpayers trying to skip out on a bill about to come due. The next time someone tells you the trust fund is full of worthless IOUs, try to guess what tax bracket he's in. ...
If Social Security has any problems in its current form, they won't become apparent for decades, and if they do, they could easily be dealt with. Conceding anything on this point only strengthens the hands of the privatizers, who are using fear of bankruptcy to promote an ugly and dangerous agenda.Economics
First, the economic arguments, which are based on some fundamental demographic "facts." The U.S. population is aging. Birth rates aren't what they were during the Baby Boom, and the people born during those years (1946–64) will start joining the ranks of the official elderly starting in 2011. Today, about 12% of the U.S. population is 65 and over; the Trustees of the Social Security system, who make the official projections, see that rising to 18% in 2025, 21% in 2050, and 23% 2080. Sounds dire: since the pension benefits of today's retirees are paid by today's taxpaying workers, then the increasing ratio of old to young will put a burden on the retirement system—any retirement system, private as well as public, though that detail is rarely mentioned.
But how serious a problem is this? Nowhere near as serious on the second glance as the first. As with many of the projections, the Trustees' are considerably gloomier than those produced by other entities. The Census Bureau, for example, projects the 65-and-over share of the population to be less than 22% in 2080. That may not sound like much, but if the Census Bureau is right and the Trustees are wrong, that adjustment alone could reduce the system's projected deficit 75 years from now from 2.1% of GDP to 1.6%.
And looking only at the elderly share of the population is a very selective analysis. A broader analysis would ask how many nonworkers is each member of the paid workforce projected to support. In 2080, the Trustees project that there will be 1.01 nonworkers for every paid worker, up from 0.90 today (see nearby chart). But the 2080 figure is still way below 1955's 1.68, when there were many more kids running around, and many fewer women in paid employment than today. Even if you don't buy the nonsense about the New Economy's productivity revolution, it's hard to imagine why the U.S. economy of 2080 would have a rough time coping with the same nonworker/worker ratio that it did in the mid-1980s.
Speaking of that productivity revolution, it's nowhere in the projections. Over the very long term, output per worker in the U.S. has grown around 2% a year. Some reputable economists project that the infotech has kicked us up to a higher rate of 2.5% a year, though that seems like a stretch. (Some boosterish business pundits are even pushing an implausible 4% rate.) Lost in their gloomy world, the Social Security Trustees are projecting a 1.6% rate of annual productivity growth through 2080—20% below the long term average. Those differences might not sound like much, but they really compound over time. At 1.6% a year, productivity in 2080 would be almost 230% of today's levels; at 2.0%, over 340%; at 2.5%, almost 540%. Obviously, the bigger the number, the better the economy will be able to afford its retirees—but the Trustees chose a very small one.
Economic growth isn't only a matter of growth in productivity per worker; it's also determined by the growth in the labor force. And the Trustees project that the growth in the labor force over the next 75 years will be about one-sixth as fast as it was between 1960 and 2004. Some slowdown is likely, since women's entry into paid labor is a trend that may have run much of its course (though just 57% of adult women are working, compared with 72% of men, so that gender gap in employment hasn't closed any more than the pay gap has).
But the Trustees' projection represents a stunning drop from historical experience, and one that can only be partly explained by the 60% slowdown in population growth they foresee. (And one reason for the slowdown in population growth is that they also foresee a sharp dropoff in immigration—important, since immigrants tend to be young, making them net contributors to Social Security.) Oddly, they're projecting that the labor force will grow more slowly than the population, even though it's grown nearly twice as fast as population since 1960. Maybe the Trustees are implicitly projecting a breakdown in the American economy's prodigious powers at putting people to work—but if that's the case, it's a big deal, and we should really be talking more explicitly about it.
It's historically and theoretically inconsistent to project a slowdown both in labor force and productivity growth; across time and space, lower population growth has often resulted in higher productivity growth. If labor is plentiful, employers are less keen on squeezing more out of the workforce and are less likely to invest in capital equipment. But this inconsistency is fully consistent with the Trustees' outlook, which is as dark as a goth teen's worldview.
When you put all the Trustees' projections together, productivity and labor force growth, you get a sharp dropoff in projected GDP growth—from a historical average of 3.4% to an extremely sluggish 2.0%, which is little better than what we saw in the Depression-afflicted 1930s. If the Trustees really expect near-depression rates of growth for the next 75 years, we should be talking explicitly about that as well. Were the economy were to grow at a more normal pace, then the Social Security system could easily pay its projected benefits with no cuts or tax increases.
But no, reply the privatizers; if growth were higher, wage growth would be faster, and therefore benefits (which are keyed to wages) would also rise more quickly, so it'd all be a wash. Someone should tell the Trustees: they're projecting no dropoff in wage growth from now to 2080 despite the sharp drops in productivity and GDP growth. And someone should also tell U.S. employers that higher productivity growth means higher wages: workers have gotten only about 28% of the productivity acceleration since the mid-1990s in the form of higher wages. The rest has gone to profits, which is very nice if you're a CEO or a big stockholder.
Social Security provides disability insurance and survivor's benefits, but when people talk about it, they tend to be referring to its role as a program that provides income support to retirees. The average monthly benefit of $1,170 replaces about 39 percent of the person's pre-retirement earnings. Over the next two decades, the "replacement rate" is slated to drop to 31 percent. That is less than in most developed countries -- the Organization for Economic Cooperation and Development ranks it 25 out of 30 member nations.
The system, in other words, is not that generous, and it's becoming less so every year. The age at which you can begin collecting full Social Security benefits is moving from 65 to 67, as part of a deal struck in the 1980s to ensure the system's solvency. And all this at a time when employers are getting rid of defined-benefit pensions, which means that most workers will have no guaranteed retirement income except for Social Security.
Which brings us to Social Security's financial "crisis." The issue isn't that Social Security is spending too much or that we're living too long. It's that we're not having enough children (or letting in enough immigrants). As Stephen C. Goss, the system's chief actuary, has written, Social Security projects an imbalance "because birth rates dropped from three to two children per woman." That means there are relatively fewer young people paying for the old people. "Importantly," Goss continues, "this shortfall is basically stable after 2035." In other words, we only have to fix Social Security once.
The size of that fix is significant, but not astonishing. Over the next 75 years, the shortfall will be equal to about 0.7 percent of gross domestic product. How much is 0.7 percent of GDP? To put that in perspective, the Center on Budget and Policy Priorities calculates that it's about as much as George W. Bush's tax cuts for the rich will cost over the same period. Saying we can afford those cuts -- which is the consensus Republican position -- but not Social Security's outlay is nonsensical. Coming up with 0.7 percent of GDP isn't a crisis. It's a question of priorities.
That doesn't mean that Social Security shouldn't be on the table when we look at how to balance the budget. Everything should be on the table. And Social Security is our single largest program -- though Medicare is projected to overtake it in the next couple of years. But if you really put everything on the table -- the health-care system, the tax code, military spending, farm subsidies, etc. -- then raising the retirement age or otherwise cutting Social Security stops looking so good.
Start with the basic rationale for raising the retirement age. As Rep. Paul D. Ryan (R-Wis.) has argued, when Social Security was signed into law, the retirement age was 65 and life expectancy was 63. "The numbers added up pretty well back then," he said on Fox News. But that's misleading. That figure was driven by high infant mortality. If you were a white male who'd made it to age 60 in 1935, you could expect 15 more years going forward. If you're a white male who lives to 60 today, you can expect 20 more years going forward.
Moreover, those averages conceal a lot of inequality. In 1972, a 60-year-old male worker who made less than the median income had a life expectancy of 78 years. By 2001, he had a life expectancy of 80 years. Meanwhile, workers in the top half of the income distribution shot to 85 years from 79. Insofar as the argument for raising the retirement age is that "Social Security beneficiaries live a lot longer today than they did in 1935," it should be restated as: "Social Security beneficiaries tend to live somewhat longer today than they did in 1935, and that's much more true of rich beneficiaries than poor beneficiaries."
And so what? Lurking beneath this conversation is an unquestioned assumption: We live longer, so we should work longer. That's pretty intuitive to members of Congress, who seem to like their jobs and don't seem to like the idea of retiring. It's also pretty intuitive to blogger/columnists, who spend their time in air-conditioned rooms opining about pension programs. But most people don't work in Congress or in the media. They work on their feet. They strain their backs. They're bored silly at the end of the day. By the time they're in their 60s, they want to retire.
You see that reflected in Social Security. Age 66 is when you get full benefits. But most people begin taking Social Security at age 62. They get less, but they can retire earlier. To them, the trade-off is worth it. And remember, the country is much richer than it was in 1935. Adjusting for inflation, our gross domestic product in 1935 was $865 billion. In 2009, it was more than $12 trillion. We have more than enough money to buy ourselves some leisure time at the end of our lives. At least if that's one of our priorities.
Polling suggests that it is. An August survey from Greenberg Quinlan Rosner Research tested reactions to a variety of Social Security fixes. One of the options was raising the retirement age to 70. Two-thirds of respondents opposed it. Another option was eliminating the cap on payroll taxes so that well-off workers pay the tax on their full income, just as middle-income workers do now. A solid 61 percent supported it.
That's almost the reverse of the conversation in Washington, where affluent people who like their jobs propose cutting benefits for the poor (which is, after all, what raising the retirement age would do) rather than lowering benefits or increasing the payroll tax on, well, themselves. Which is not to say that we should be raising taxes or cutting benefits on the better-off, either.
The universally unpleasant options for reform are a testament to Social Security's efficiency. It's a simple transfer program, with administrative costs that amount to less than 0.9 percent of total spending. There's not much fat to cut.
That can't be said for much else in American public policy. Our health-care system costs twice as much as the German system and doesn't deliver better results. Our defense sector is wasteful and bloated. Our tax code could raise more money and do less to harm growth if we cleaned it out. Our home prices are driven upward by the mortgage interest tax deduction. Our health insurance premiums are goosed by the exclusion of employer-sponsored insurance from taxable income.
Reforming any of those sectors (or, in the case of health care, reforming it more) would be politically difficult, but would mean better policy. Reforming Social Security will be politically difficult and result in worse policy. That's the good thing about putting everything on the table. It allows you to think more clearly about what should be taken off.
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