Expand Social Security Now!: How to Ensure Americans Get the Retirement They Deserve - Steven Hill (2016)
Chapter 4. The Nine Biggest Myths and Lies about Social Security
Social Security is bankrupting us. It’s outdated. It’s a Ponzi scheme. It’s socialism. It’s stealing from young people. The opponents and pundits determined to roll back the United States to the “good old days” before the New Deal regularly trot out a number of bogeymen and bigfoots to scare Americans into not supporting their own retirement well-being. That hasn’t worked too well. Americans of all political stripes remain strongly supportive of Social Security and other so-called “entitlements” like Medicare. But the other reason for plastering the media waves with a chorus of myths and lies is to stir up a political climate in Washington, DC, that causes politicians of both parties to cease looking for better alternatives other than to cut, cut, cut, or even to maintain the inadequate status quo. Below are rebuttals to some of the biggest whoppers regularly told about one of the most popular and successful federal programs in our nation’s history.
1. Social Security is going broke and will bankrupt the country.
Social Security is not going broke, not by a long shot. The Social Security Board of Trustees released its annual report to Congress in July 2015, and among all the tables, charts, and graphs in that big fat report, it would be easy to miss the most important take-home message: Social Security is one of the best-funded federal programs in US history. That’s because it has its own dedicated revenue stream, which is composed of the insurance premiums paid by every worker (deducted from our paychecks by what is called “payroll contributions”), which are automatically banked into the Trust Fund.1 Even the Pentagon and the defense budget do not have their own dedicated revenue stream.
In fact, Social Security has not one dedicated revenue stream, but three. Besides the payroll contributions, Social Security is also funded by income generated from investing all those set-aside wages into US treasuries. That money earns a sizable return on the investment. And Social Security is also funded by revenue that comes from levying income tax on Social Security recipients (yes, your Social Security check and that of other Americans is treated as income and taxed—and it brought in $756 billion to the Trust Fund in 2014). Those three revenue streams combined have banked $2.8 trillion in the Trust Fund and resulted in a $25 billion surplus in 2014.
Bankrupt? That charge does not even pass a good laugh test.
Indeed, because Social Security has its own funding source, and by law is not allowed to spend any money it does not have, it is actually impossible for Social Security to add to annual operating deficits or the national debt. Moreover, the Social Security Board of Trustees is required by law to report to Congress every year about the financial fitness of the program. The annual trustees report projects its revenues and payouts, not just for the next five, ten, or twenty years, but for the next seventy-five years. It’s one of the few programs anyone can identify that has had the wisdom to plan for the future, rather than planning around short-term political calculations and the next election cycle.
Pensions expert Nancy Altman analyzed the trustees’ report in 2015 and concluded, “Over the next 5 years, Social Security has sufficient funds to pay every penny of benefits and every penny of associated administrative costs. That is true for the next 10 years. And also the next 15 years.”2 However over the next twenty years, as more and more of the huge population bloom known as the baby boomers continues to retire, Social Security is projecting a modest shortfall of just 0.51 percent of gross domestic product (GDP). If nothing is done to plug that gap, sometime in the 2030s the Trust Fund will have enough to cover only 75 percent of benefits. But there are so many budgetary ways to cover that shortfall, it becomes clear that the problem is not the finances of finding the money but the politics of partisanship and paralysis. No other government program can claim that it is fully funded for almost the next quarter century. What government critics ever say that the Defense Department or the Departments of Energy or Education are going bankrupt? Yet those programs don’t have dedicated revenue streams, and certainly no one plans or projects costs for those programs over the next seventy-five years.
No, these sorts of charges are leveled by the Peter G. Petersons of the world for political reasons, not economics or finances. And even in terms of the shortfall that will emerge in a couple of decades, that gap could be covered with a few minor tweaks. For example, simply removing the payroll cap and taxing all income brackets equally would not only be fairer to all Americans, it would also raise all of the money and then some to plug any Social Security funding shortfalls twenty years from now. So we would have lots of time to phase in a fair reform like that. Opinion polls have demonstrated that most Americans think if they pay Social Security tax on their full salary, others should as well. So removing the income cap and making all income levels pay according to the same rules would be a very popular reform, and would safeguard the nearly $3 trillion Trust Fund for decades to come. That’s just one example of the many adjustments we can enact that would make the US retirement system more fair, robust, and stable, and better adapted to the realities of today’s economy. (In the next chapter, I will explore other funding options that will not only stabilize Social Security, but will double its monthly payout.)
2. Social Security is unsustainable because we have fewer workers for every retiree, even as our society is “greying” and people are living longer.
Another charge leveled by critics is that the number of workers compared to the number of non-workers—what is known as the dependency ratio—is declining, and so as a result Social Security is unsustainable. President George W. Bush really pushed hard on this point in his bid to gut the program and turn it into private accounts. In his 2005 State of the Union address, President Bush said:
Social Security was created decades ago, for a very different era… . A half-century ago, about 16 workers paid into the system for each person drawing benefits… . Instead of 16 workers paying in for every beneficiary, right now it’s only about three workers. And over the next few decades, that number will fall to just two workers per beneficiary… . With each passing year, fewer workers are paying ever-higher benefits to an ever-larger number of retirees.3
President Bush’s key strategist, Karl Rove, had the president tour the country to promote his privatization plan for Social Security, and he repeated his talking points everywhere he went, in state after state and city after city. President Bush must have set some kind of record: rarely has anyone been so wrong so often about Social Security as the president was during his “privatization or bust” tour.
Yet this claim by not only President Bush but key Republican and even some Democratic leaders reflects a deep misunderstanding. The fact is, the 16 to 1 ratio comes from the initial years of Social Security when it was dramatically ramped up to cover millions of new workers. Because these new workers were still employed and contributing their premiums through payroll contributions into Social Security, none of them were as yet collecting any benefits. So initially there were not that many beneficiaries, compared to the number of workers paying into the program. As Nancy Altman and Eric Kingson point out in Social Security Works!, “This is the kind of ratio experienced by all pension plans, public and private, at the start when few workers have yet qualified for benefits.”4 By 1955, the worker-to-beneficiary ratio had already been cut in half to around 8 to 1, and by 1975 it was down to 3 to 1. It has remained there for approximately forty years.
And that’s just a small slice of the overall picture. The “dependency ratio” is not just a factor of the number of workers compared to the number of retirees. It has to be configured according to the number of total dependents, including children. A different picture emerges when children are included.
The fact is, declining birthrates have resulted in a fall in dependent children, so the rise in the number of retired will be partly offset by a decline in the number of dependent children. According to Gary Burtless, an economist and demographic expert at the Brookings Institution, when the decline in children is factored in, total dependency ratios in many countries in 2050 will look more favorable than the ratios were in the 1960s, when the majority of the baby boom generation were still children. In the United States, for example, the dependency ratio peaked in 1965, when there were ninety-five dependents (both children and retirees) for every one hundred working adults. By 2050 the figure will be eighty dependents for every hundred workers, which, while much higher than the highly favorable figure of forty-nine dependents in 2000, will still be markedly lower than the number of dependents in 1965. “The crisis of supporting a large future dependent population will evidently involve a smaller burden than was borne by working age adults in the 1960s,” Burtless says.5
How did we as a society manage to get wealthier in the 1960s and ’70s despite such a much higher dependency ratio? The answer, in a word, is “productivity.” Labor productivity is a measure of the amount of goods and services produced by each worker, which in a well-functioning economy increases over time due to the implementation of technology, greater education and job skills training, as well as more efficient business practices. If our labor productivity continues to increase, and the political system passes on the economic gains in the form of a broadly shared prosperity, then the rising tide will float all boats. Political analyst Michael Lind has argued that “productivity growth can solve much or all of the pension funding problem,” and as proof of that he points out that if the ratio of workers to retirees goes from 3 to 1 today to the expected 2 to 1 in the future, that is quite a minor shift compared to a change from a ratio of 16 workers to 1 retiree in 1950, or even 8 workers to 1 in 1960, to 3 to 1 today—a shift made relatively smooth and painless by education, training, and technology-driven productivity growth over the past half century.
Gary Burtless agrees, saying that the measure of dependency “does not provide a meaningful measure of worker welfare. Workers are presumably much more concerned with the actual consumption they can afford,” rather than the amount they have to pay out of their wages for all dependents. “If real wages … rise fast enough, future workers who face a higher dependency burden can enjoy higher levels of real consumption than present-day workers who face a smaller dependency burden.” If wages and incomes continue to rise as fast as they have during the past sixty years, Burtless explains, future workers will enjoy higher consumption than today’s workers in spite of a ratio of fewer workers per dependents. That’s because “an overwhelming share of the growth in final consumption is due to higher worker productivity… . The growth in output per worker has been fast enough so that it has overwhelmed the impact of a higher dependency burden, and this is likely to remain true in the future.”6
That’s academic-ese for saying another Social Security myth bites the dust. That doesn’t mean that we can ignore factors like dependency ratios, but the fact is that as long as our economy is healthy, robust, and growing, creating jobs and increasing productivity, and the political system is inclusive and passes on the increased prosperity to the general public in the form of higher wages and a robust safety net, there is no reason that the greying of society or the ratio of workers to dependents should hamper the nation’s economic future.
3. IRAs and 401(k)s have replaced private pensions and Social Security. Americans want to be self-reliant on their own private retirement accounts, because you can do better investing on your own.
One would think that the volatility and havoc wreaked by the stock market in recent years would have laid to rest the notion that “self-reliant” Americans can invest and save on their own. It’s really not that easy to build up a private nest egg sufficient for the nearly $1 million in savings that an individual will need to cover their needs during their postwork years. As noted in chapter 1, the fact that three-quarters of Americans nearing retirement age have less than $30,000 in their private savings—less than 5 percent of what they will need—shows what a bust of an idea this really is.
For years, advocates for deregulation and entitlements have pushed for privatized retirement accounts—401(k)s, IRAs, and other private savings vehicles managed by Wall Street’s financial managers, which skims off the top their own lucrative fees. At the same time, businesses have pushed to shut down their “defined-benefit” pensions, which have long provided a guaranteed monthly payout for life, just like Social Security’s lifetime annuity. Now that we have nearly three decades of experience with replacing pensions with 401(k)s and IRAs, and of Americans trying so hard to stuff their retirement piñatas, it’s clear that most American retirees are no more secure than before. In fact, they are much less secure.
The 401(k) system that was positioned in the 1980s to replace pensions was sold to American workers as the new and improved successors to the guaranteed payout of a defined-benefit pension. Business leaders and the politicians took away what worked and replaced it with an experiment. But that experiment has failed, and proven to be more fragile and inefficient than the system it replaced. Besides having failed to produce enough retirement savings for the vast majority of Americans, the 401(k) system has forced everyday Americans to face a number of significant risks. The most obvious of these risks is that you can lose your personal savings to unpredictable stock market gyrations or a housing-market downturn, especially since most people have little expertise in how to navigate the ups and downs. But there is also the uncomfortable fact that, with wages flat over the last few decades, millions of individual workers have been unable to save enough. Consequently, as we have seen, 80 percent of the federal subsidy for individual retirement savings goes to the top 20 percent of income earners—the people who need it the least.
For all of these reasons, the transition to this individualized and privatized system has not turned out to be the pot of gold at the end of the retirement rainbow that was originally promised. Indeed, about a third of households don’t have a savings account at all, let alone savings. And according to a Federal Reserve study, as discussed in chapter 2, nearly half of all households don’t have the savings to deal with an unexpected expense of a mere $400.7Indeed, in a vicious cycle, the need for “survival money” is so great that many workers have been forced to tap into their 401(k)s early, before retirement, which carries heavy penalties. In 2010, following the 2008 collapse, contributions to defined-contribution pensions totaled $176 billion, while early withdrawals totaled $60 billion. These are not the hallmarks of a successful retirement system.
And let’s be clear: most businesses claimed they were eliminating their company pensions and replacing them with a 401(k)-type savings plan as a cost-saving measure—yet those same companies paid increasingly astronomical salaries and bonus packages to their executives. There’s no question that US workers were insured more efficiently and more securely under the traditional company pension system which provided a guaranteed monthly payout for the rest of the retiree’s life. Various reforms that have been proposed to 401(k)s and IRAs would not repair this fundamentally broken system of private savings vehicles. They have manifestly failed to stabilize the retirement system in the aftermath of the collapse of private company pensions and personal savings. After three decades, it’s time to admit this experiment has failed.
Another way to think of Social Security is as a form of “wage insurance.” Just as we have health insurance, car insurance, and home insurance, we need insurance for when we are too old to earn wages anymore. That’s what Social Security is, when you get right down to it: insurance against your loss of wages during your elderly years. You pay into it all of your working life; it’s not asking too much for it to provide you with a comfortably secure safety net in your post-working life.
4. Social Security is stealing from young people and saddling them with a level of overwhelming debt.
Billionaire Peter G. Peterson has been one of the pioneers of this kind of intergenerational doomsaying. Headlines about the old stealing from the young certainly grab the media spotlight. But this one is an old, old trope that never made any sense. Peterson first raised it back in 1982, in the midst of the deliberations of the Greenspan Commission. Social Security, Peterson wrote, “threatens the entire economy… . The Social Security system will run huge deficits … these deficits will push our children into a situation of economic stagnation and social conflict and create a potentially disastrous situation for the elderly of the future.”8
Peterson became greatly distressed when the Greenspan Commission did not undertake his prescribed overhaul of Social Security. So after Peterson made his billions on Wall Street, he founded his eponymous Peterson Foundation, as well as other organizations like the Concord Coalition and Committee for a Responsible Federal Budget, to help promote his wild-eyed prophecies about the coming intergenerational war. He has used his various organizations to, among other crusades, fund college and high school campaigns and organizations called “Up to Us,” The Can Kicks Back, Lead … or Leave, and Third Millennium, which have served as the youth arm of his various entitlement-busting efforts. The Can Kicks Back president Ryan Schoenike was quoted in the Washington Post as saying, “The [federal] debt is now the top of line issue for most young people,” but Salon’s Alex Pareene called that “a weird lie.” Pareene also pointed out that this wasn’t the first “pretend youth group” founded or funded by Peterson.9 Peterson has spent a good chunk of his billions stirring up a youthful mob with pitchforks, pushing them to bang at the gates of their grandmas and grandpas for stealing their birthright.
But Peterson hasn’t been the only Cassandra prophesying a generational war between young and old. More recently, the Washington Post’s Robert J. Samuelson took up the cause. “We need to stop coddling the elderly,” he wrote in a 2013 column, calling Social Security and Medicare “a growing transfer from the young, who are increasingly disadvantaged, to the elderly, who are increasingly advantaged.”10 In a 2014 column, Samuelson continued his anti-elderly and antigovernment debt diatribe, writing, “Giving the elderly as a class special treatment heaps the costs of deficit reduction on workers and children.”11
Pitting the elderly against children makes little sense for many reasons, but one obvious one is that today’s children will one day be seniors themselves. And they will need the retirement benefits that people like Peterson and Samuelson are trying to cut from retirees. Robbing Peter to pay Paul might make sense from a maniacally focused budget buster’s perspective, but it makes little sense from a public policy perspective. If that makes sense, then why not cut funding from cancer research, or diabetes treatment, since those ailments mostly affect older people and not the young. But obviously the young today could be attacked by those ailments tomorrow. Society benefits as a whole when it tries to address conditions that affect humanity as a whole.
One of those conditions is growing old. Everyone will pass through that stage of life (unless death comes knocking prematurely), and it makes no sense to not do all that is humanely and financially possible to help the elderly. Otherwise, where might this sort of knee-jerk reaction end? Why not pit middle-aged people and their needs against seniors? Or against children, for that matter? Or, as Altman and Kingson put it, “There is much more inequality within any given age group than there is between age groups.”12 For example, there is a lot more inequality between wealthy seniors and poor seniors, and between youth from wealthy and poor families, than there is between seniors and youngsters. It simply makes no sense to carve up the class distinctions in this way and point an incriminating finger that pits the young against the old.
Interestingly, economist Dean Baker, from the Center for Economic Policy and Research, points out that other countries have successfully supported both the elderly and the young. According to Baker, “Countries that spend a larger share of their GDP supporting their seniors also spend a larger share of their income supporting the young.” In his study, Baker found that a dollar of additional per capita spending on kids is associated with sixty-seven cents of additional spending on seniors. In other words, he says, it’s not a case of one or the other. “The countries that are willing to spend more to support their seniors are also willing to spend more to ensure that their kids get a decent start in life.”13 And in looking at policy choices over the past couple of decades, what becomes additionally clear is that any savings from cuts to Social Security and Medicare are not necessarily going to benefit programs for children. More likely they will end up as tax cuts for businesses, banks, or the wealthy, or will pay for the latest high-tech versions of military equipment.
In fact, if you want to really deal with the sources of debt that will drown the prospects of younger people, let’s talk about health-care costs. The nation now spends over 17 percent of our GDP on health care, which is twice as much as the amount spent by virtually every other developed nation (and we only cover about 89 percent of the US population, compared to those nations covering 100 percent). Those costs are simply unsustainable and will bankrupt future generations. Note that cutting Medicare or Medicaid benefits, as the Pete Peterson’s of the world want to do, will solve nothing because it will just push those costs onto the private sector (in fact, that would make things even worse, since Medicare and Medicaid are actually much more cost efficient than the private health-care system). So yes, future generations will in fact drown in debt—if we don’t address health-care-cost inflation. But that has nothing to do with Social Security, or even the thrifty Medicare.
Social Security will always have somewhat of a perception problem among younger Americans. For a certain number, it will always be viewed as “money for old people who get it from the government.” For people of any age who are working and having taxes deducted from their paychecks, Social Security is a benefit for someone else—elderly retirees. But at some point in their life, those people will no longer be able to work, and, like any type of insurance, Social Security will be there to protect them with “wage insurance” from a complete loss of earned income. Social Security is self-insurance in that way, that is, protection against the risks we all face due to old age, disability, or death. That’s a point that must be brought home to every new generation of young Americans.
And the evidence shows that younger people are figuring it out. Much to the chagrin of the “generational war” propagandists, their campaign does not seem to be gaining traction. A poll in August 2015 commissioned by senior advocacy group AARP found that nine in ten young people (adults under thirty) believe Social Security is an important government program, and nearly nine in ten (85 percent) want to know it will be there when they retire.14Nevertheless, the fact that this baseless idea periodically arises from the crypt is proof that if enough money is thrown at a bad notion, it can live forever.
5. We have to raise the retirement age because people are living longer and the nation can’t afford to pay for all these aging retirees.
Wrong. We do not have to raise the retirement age. As we will see in the next chapter, there are common-sense changes we can make to Social Security that would not only safeguard it financially for the future, but would actually allow us to double the monthly benefits for retirees. For example, we could increase tax fairness by lifting the cap on the payroll tax so that wealthy Americans make the same percentage contribution as every other American. At the same time, the payroll contribution base could be extended to profits from investment income, such as capital gains. This would raise additional revenues in a progressive fashion that could be used to enhance the program for all Americans.
Also, it’s not exactly true that everyone is living longer. Only some of us are. People with higher incomes and more education, especially men, are the ones who have gained the most in life expectancy.15 There is a myth that Americans tend to stop working in their early sixties, shortly after becoming eligible for (reduced) Social Security benefits at age sixty-two and well before the designated “full” retirement age of sixty-six, but in fact that’s not the case. Studies of the labor force participation rate of US workers show that the number of older Americans working is high by historical standards, and close to the postwar peak. It’s another myth that all these Americans are retiring early.16
So raising the retirement age doesn’t really solve “the problem” of people retiring too early or living too long. Beyond that, let’s be clear—raising the retirement age is the equivalent of a cut in Social Security. In fact, actuarial experts have estimated that raising the retirement age by a year is mathematically equivalent to cutting the amount of lifetime benefits by 6-7 percent. Already the retirement age has been increased to sixty-six years of age from sixty-five, and is due to rise to sixty-seven beginning in 2027. That will amount to a 13 percent benefit cut for all retirees.17 Proponents of cuts flippantly say that people can make up the shortfall by working longer. But that mentality doesn’t even consider the fact that as people age, it becomes harder and harder to find or retain decent employment. With headlines blaring that robots and automation are taking over our jobs, Americans in their fifties and early sixties who lose their employment are having a harder time getting back into the workforce. So they may have no choice but to retire early at sixty-two and start taking their Social Security benefits. Yet, because of the rules of how Social Security works, it will be at a much reduced benefit level that will stay permanent throughout their retired life.
Now the budget busters are proposing that we increase the retirement age yet again, to seventy years old. We haven’t even had a chance to assess the impact of an increase to sixty-seven years on low-income workers, minorities, women, and other vulnerable populations, yet already some are eager to cut retirement benefits further still. One of the foremost proponents of this idea has been Alicia Munnell, an economist and professor at Boston College. Munnell is one of the nation’s foremost retirement scholars, who has added immeasurably to our understanding, but on this point, I think she is quite wrong. In a recent book she coauthored, titled Falling Short: The Coming Retirement Crisis and What to Do About It, she proposed a “pull yourself up by your bootstraps” solution to the retirement crisis, in essence a proposal that Americans should save more and work longer.
Munnell and her coauthors recommended making 401(k)s mandatory, even though all the research shows that most people do not have enough discretionary income to put into their 401(k), even if they had one. And with interest rates so low, it means these people would need to risk that money in the stock market to get decent returns, despite their lack of expertise in stock market investment. The authors also recommend reverse mortgages for tapping into one’s house as a retirement vehicle, which might work fine for those who own a home, but even then, as we saw in the economic collapse of 2008, a home can be a risky investment.18
This is not the first time Munnell has proposed these sorts of measures. In 2009, in her coauthored book Working Longer: The Solution to the Retirement Income Challenge, she proposed much the same.19 In short, these sorts of proposals do not really grapple with the extent of the retirement crisis, and Munnell’s solutions would likely help only a small number of strongly self-directed individuals with sufficient income that allows them to save. But her recommendation that Social Security benefits should not begin until seventy years old represents a huge cut in Social Security benefits. With each additional year added to the retirement age equaling a 6-7 percent cut in benefits, Munnell’s proposal is the equivalent of cutting benefits by a third, when compared to the previous retirement age of sixty-five years, and a 20 percent cut over the future retirement age of sixty-seven. These proposals are taking us backward. There are better ways to pay for Social Security, not only to maintain the status quo but to actually expand it.
6. Social Security’s disability program will run out of money by the end of 2016, and then sometime in the 2030s the retirement portion will also run out.
Finally, the prophets of doom can say they were right all along. Besides paying retirement benefits to tens of millions of Americans, the Social Security program also has a separate disability program for those 11 million Americans of whatever age who are too disabled to work. Yet these disability recipients face steep benefit cuts by the end of 2016 unless Congress acts. That’s because, according to the 2015 Social Security Trustees Report, the disability trust fund will run out of money in the middle of a presidential election year, which would trigger an automatic 19 percent cut in benefits.20
Hah, say the budget busters, you see? We told you, first it’s going to happen to the disability program, and not long after that it will happen to the retirement program.
That sounds ominous, but in fact it’s not correct. By law, the payroll premiums deducted from all workers’ paychecks are divided between the disability trust fund and Social Security’s much larger retirement fund. The retirement fund is supposed to receive about 85 percent of the money, and the rest goes to disability to provide benefits to Americans with serious and permanent disabilities, as well as to their families.21
But over the past twenty years, for various reasons, the fund balances have gotten out of whack, causing a temporary shortfall in the amount allocated to the disability fund. Congress can easily fix this by simply redirecting a small amount of the revenue already in the retirement fund to the disability fund. It has done this several times in the past, most recently in 1994. If Congress were to do this, the retirement fund would lose only one year of solvency, but we would have nearly twenty years to figure out a longer-term solution to any underfunding in the 2030s.
In the past, this has always been a simple fix. But in today’s poisoned partisan climate, nothing with the word “Congress” in it is simple. The Republicans, in particular, but also some conservative Democrats, are using this “bankruptcy moment” to score points in their drive to slash away at entitlements. Republicans claim that simply redirecting the revenue would be taking money from retired workers to pay disabled workers—robbing one fund to finance another. They are demanding reductions in disability benefits—which go to the most vulnerable Americans—as well as restrictions on eligibility. They are also insisting on new measures to combat fraud—an old Republican canard for attacking government programs, from welfare to food stamps to voting—though no one has proven that the disability program is rife with fraud.
The GOP budget fire breathers have their work cut out for them in trying to publicize the usual scare stories about “disability queens” cheating the system. Most disability beneficiaries were earning middle incomes when they became disabled, averaging a little more than $42,000 a year. And now, their disability checks? About $14,000 a year.22 That’s less money than a full-time minimum-wage worker earns, to support American workers who have been tragically injured with serious and permanent disabilities. That is the type of “waste and fraud” that apparently causes the entitlement slashers to go ballistic.
It’s not like the shortage of money in the disability trust fund wasn’t predictable. In fact, it was entirely expected. Known demographic factors like the aging of the large cohort of baby boomers has resulted in more people seeking disability benefits. In addition, the increase in the number of women in the labor force has led to more disabled workers and a rise in payments from the fund. The solution should be fairly simple, as it has been in the past—just redirect revenue from the retirement to the disability trust fund. But opponents of entitlements are using their timeworn tactic of manufacturing a crisis and holding disabled Americans as their hostages in their ideological battle to force negotiations over other budget cuts they want. This is another example of the politicians playing winner-take-all sandbox games over important national policy, even with an extremely popular program like Social Security, and even if it’s going to hurt the most disadvantaged among us.
7. Social Security is un-American and too “socialistic” for most people in the United States.
Un-American? Too socialist? Social Security remains one of the most popular and successful government programs in history—opinion polls show nearly 70 percent of Republicans don’t want it to be cut or hurt. So if Social Security is too “socialist,” Americans must all be a bunch of closet socialists. Millions of Americans from all political persuasions now depend on Social Security, and no amount of divisive rhetoric, or even Pete Peterson’s billions of dollars, can change that fact.
8. Social Security is old-fashioned and a relic from another era. The Greenspan Commission made cutbacks in 1983, and now we have to cut back further.
A brief history of the Social Security program reveals something important: its expansion is more in keeping with US tradition and the history of this popular program than its rollback. In 1935, eligibility for social security was so limited that only a minority of the population could hope to benefit from social insurance. Entire categories of Americans were excluded, most notably the majority of blacks and women. In addition, huge occupational categories such as maritime, transportation, and agricultural workers were excluded, so that even the majority of white men were ineligible. Social Security was established as a complementary system to the private retirement system, intended to provide only a basic foundation for private employer pensions to build upon.
Consequently, initial benefits were extremely low by today’s standards—the first Social Security benefit, for example, was only about $300 a month in 2008 dollars. In 1937, Social Security had barely 53,000 beneficiaries and they were paid a total of only $1.3 million. But within three years those numbers increased more than fourfold, to 222,000 beneficiaries and $35 million. Still, Social Security was kept on a short leash by an alliance of conservative Republicans and Southern Democrats (known as Dixiecrats) who first blocked and then delayed the expansion of payroll tax rates after 1937, which kept the system underfinanced.23 The combination of ongoing political opposition, limited revenue, and limited benefits, and a series of decisions on how private pensions would be treated favorably by the Internal Revenue Service, acted as severe constraints on Social Security’s initial growth.
But over the next forty years, Social Security was to prove its worth, again and again. It was more efficient, more portable, and slowly became more universal than private pensions. The system was amended repeatedly to expand eligibility, raise the level and variety of benefits, and establish innovative programs to cover new populations. A Trust Fund was established that allowed the system to support a higher benefit level. In 1939 benefits were added for survivors and the retiree’s spouse and children. In 1956 disability benefits were added, and agricultural and domestic workers were included, adding the majority of African Americans to both Old Age and Unemployment Insurance programs. In 1965, a related program, Medicare, which provides health insurance for the elderly, was signed into law. In 1972, Social Security benefits became indexed to inflation with a permanent cost-of-living adjustment (COLA); Supplemental Security Income, which provides an additional pension for the elderly poor, was established two years later.24
Over this time, as the population increased, participation in Social Security correspondingly increased as well. By 1950 there were 3.5 million beneficiaries who were paid a total of $961 million; by 1960, 14.8 million beneficiaries and $11.2 billion; by 1970, 26 million beneficiaries and $32 billion; nearly 36 million beneficiaries and $121 billion by 1980; and about 40 million beneficiaries and $248 billion by 1990 (all figures unadjusted for inflation).25 However, as Social Security expanded over the years to include those with disabilities, spouses, and survivors, the number of beneficiaries began to include more Americans who were not elderly retirees. In 2015, about 65 million Americans were receiving Social Security benefits of one kind or another; of that number, about 43 million were retired seniors or their spouses sixty-five years or older, collecting retirement benefits. The cost to provide benefits to just that population of retirees currently amounts to about $662 billion per year.26
That’s a lot of money. In terms of the amount of dollars, the Social Security program is one of the single largest expenditures in the federal budget, with 20.8 percent of the budget spent on Social Security, compared to 20.1 percent for Medicare/Medicaid and 20.5 percent for the Pentagon’s defense budget (though that amount does not include what was spent on the Iraqi and Afghan wars, as well as on other federal agencies involved in defense-related activities, such as the Department of Homeland Security, Department of Energy, Veterans Administration, and others).27 Social Security is currently the largest social insurance program in the United States, estimated to keep roughly 40 percent of all Americans age sixty-five or older out of poverty.
So the history of Social Security has been more one of expansion than retraction since the 1930s, shifting in response to economic downturns as well as concerns over demographics.It is important to reacquaint the public with that history for the battles that loom ahead. Legislatively speaking, the federal amendment process is the means by which Social Security became the political cornerstone that it is today. This history of gradual expansion through amendment has benefited from the known traditions and customs of Congress. Members of Congress are very familiar with the stakeholders and interest groups aligned on this issue, as well as the ins and outs of the amendment process. Perhaps not coincidentally, researcher Steven Attewell points out that virtually all of the previous Social Security amendments “were passed in the autumn of election years when voters were paying the most attention to Congress.”28 Amending the Social Security Act little by little over time, taking on manageable bite sizes that the political system can cope with, has been the right vehicle for enacting sweeping public policy changes.
Attewell, a Social Security reform advocate, has proposed that if we want to construct a new system of social protection, history suggests that advocates should “restart this process of regular amendments. Amendments could be offered annually or biannually, each one incorporating gradual expansion.” This process should continue until the conditions have been created for providing retirement security for all Americans.29
9. The United States already has the world’s highest living standard, with an overly generous retirement system for seniors. We must be more realistic.
The United States is a very wealthy country, but because of rising inequality, the enjoyment of that wealth has not spread to as many Americans as in previous decades. Economists and social scientists have created new indexes and statistics to measure the success of an economy, and to determine the quality of life beyond the overused measurements of gross domestic product, unemployment rates, economic growth rates, and the like. These indexes have names such as the Index of Economic Well-Being, Weighted Index of Social Development, United Nations’ Human Poverty Index, Genuine Progress Indicator, the Ecological Footprint, and Mothers Index (ranking the best and worst places to be a mother and child). The Economist magazine, the World Economic Forum, and the European Commission also have developed their own quality-of-life indexes. These various indexes include a number of human values that are ignored in purely economic calculations, such as income inequality, access to health care, life expectancy, poverty levels, crime rate, ecological sustainability, family/social networks, democracy/political participation, and personal security, among others.
The remarkable thing that stands out is that in nearly every index the United States is an outlier, rated at the bottom among developed countries, with only a few indexes rating the US in the middle of the pack. None of them rate the United States at the top. Meanwhile, many European countries, as well as Canada, Japan, Australia, and others, occupy the top ratings. Such side-by-side comparisons with other developed countries undermine the credibility of American claims of economic superiority or leadership.
One of the reasons these other nations surpass the United States is because many of them have more robust national retirement systems. They take better care of their elderly people, not only through an adequate individual pension but also with better housing policies, much less expensive health care, more efficient mass transportations systems, and other ways that have reduced the cost of living for seniors.
Indeed, the United States is quite a bit less generous to its retirees than other developed nations. The Organisation for Economic Co-operation and Development (OECD) is an alliance of thirty-four developed countries committed to democracy and a market economy, and it tracks and compares features like national pension systems. According to its numbers, the US pension “replacement rate” for the average earner—the share of gross income the pension is expected to replace—is 38.3 percent, which is below the OECD average of 54.4 percent and 58 percent for countries in the European Union.30 For low-income workers—defined as earning 50 percent of the average wage—the United States was even more stingy, with a replacement rate of 49.5 percent compared to the OECD average of 71 percent and 73.9 percent for EU countries. Like in the United States, retirement pensions in most of these other nations are funded by regular payroll deductions from both workers and employers.
On other replacement metrics like “transfers in retirement income,” which measures the share of retirement income made up by both public pensions and social welfare assistance, the United States also looks stingy. The OECD average is 58.6 percent while the US average is only 37.6 percent, barely half the average of the EU countries at 70.6 percent and just above Mexico and South Korea. Consequently, the poverty rate for seniors in the United States is substantially higher than in most other OECD countries, nearly 20 percent compared to 12.8 percent in the OECD and 8.9 percent among EU countries in the OECD. The US rate is even higher than in Chile and Turkey.31
These measurements by definition mostly assess pensions, which use retirement income as a proxy for relative levels of well-being. But that income is used to purchase the services, food, shelter, medical care, and other items that a retiree needs. In many developed nations, health care, transportation/mass transit, senior care in institutions, and other senior services are less expensive and more cost efficient than in the United States. Natixis Global Asset Management, an investment firm that publishes its own annual Global Retirement Index, rates countries based on twenty key trends across four broad categories: health, material well-being, finances, and quality of life. Together, these trends “provide a measure of the life conditions and well-being expected by retirees.”
In the 2015 index (see figure 4.1), the US retirement system placed nineteenth globally for the third year in a row, ranked behind nearly every advanced nation except the United Kingdom and Italy. The United States was ranked behind Switzerland, Norway (ranked first and second, respectively), Japan, Germany, France, Sweden, Canada, Australia, New Zealand, Denmark, Belgium, and others. The United States was even ranked behind countries like the Czech Republic and South Korea.32
The United States ranked so low in part due to its overreliance on unstable private savings plans like 401(k)s and IRAs, and its “relatively large gap in income equality.” Many European countries were seen as “leading in quality of retirement,” benefiting from “strong pension financing and social programs” and “well-developed and growing industrialized economies with strong financial systems and regulations, broad access to healthcare, and substantial public investment in infrastructure and technology.” Despite relatively high tax burdens, these countries “rank high in per-capita income levels and low in income inequality.”33
To be sure, pension systems in European countries have also faced their own challenges, particularly in the aftermath of the global Great Recession. But mostly they have not experienced the kinds of shocks that private retirement accounts in the United States have endured in the years since the economic collapse. Some European countries like Germany and Greece enacted reforms to their public pension systems, in some cases decreasing what were once extremely generous benefits. Some countries with “pay-as-you-go” systems are trying to build in a greater level of prefunding so that aging demographics don’t make their plans unaffordable down the road. Nevertheless, in most cases the public retirement programs in most of these countries are more generous than what we have in the United States. And they act as an automatic stabilizer and economic stimulus that helps balance the overall economy, particularly during downturns.
Figure 4.1 Natixis Global Retirement Index 2015, Annual Study: The Top 20 Nations (Along with Their Standing in 2014)
Natixis Global Asset Management, February 2015, http://ngam.natixis.com/docs/282/659/GRI%202015%20US%20News%20Release%20FINAL.pdf.
As we have seen, the opponents and critics of Social Security, as well as of entitlements in general, have been willing to stretch the truth, spread misinformation, and spend whatever it takes to undermine these vital programs with the American public. Consequently, all of these phony claims and allegations keep springing to life, no matter how many times they are knocked down and shown to be as dead as a dinosaur. Instead of trying to diminish the importance of Social Security, we should increase and expand it so that it has a more robust foundation for Americans’ retirement plans. Instead of obstructing Social Security from stepping into its crucially needed role as the nation’s primary system of retirement income, we should take the next step in the natural evolution of our society that will allow us to maintain a vibrant middle class.
In the next chapter, I will present two proposals for how to greatly expand the Social Security payout for America’s retirees, as well as how to pay for this expansion. One of these proposals shows how to double the current payout and make our retirement system fully portable. That’s the type of bold step that our country needs. Our American nation is heading into an anxious era driven by a new, high-tech economy in which more workers will have to gain access to a portable safety net without the benefit of a single employer or a regular workplace. Many workers will have multiple employers, none of whom would be expected to provide much of a safety net under the current, antiquated model. If we are going to provide adequate resources for our retired seniors, we have to update, upgrade, and modernize our retirement system. In the next chapter, I show how we can do that.