Capital Commentary is the weekly current-affairs publication of CPJ, written to encourage the pursuit of public justice.
Fixing Social Security for All of Us
Todd P. Steen
April 5, 2013
By Todd P. Steen
On balance, Social Security is probably the most effective government program ever, and it may also be the most popular. Over the last 60 years, people have come to expect that Social Security will be there for them when they retire, when they become disabled, or when a spouse or parent dies. For many retirees, Social Security provides the lion’s share of their income, and the program has helped to significantly reduce the poverty rate among seniors. Since 1973 its benefits have kept up with inflation through yearly cost of living adjustments.
Two of the key characteristics of the program have been its certainty and its universality. The vast majority of the population pays into the system, and the vast majority also receives benefits from Social Security at some point during their lifetimes. This has been true for the rich and poor alike for over 50 years. However, with the graying of the baby boom generation, Social Security has lost the confidence of many of our young people, and with good reason. The program is just a few years from going cash flow negative, and the “trust fund” (which is really just government promises to pay in the future) will be exhausted by around 2033. As our nation also faces trillion dollar budget deficits and spiraling debt, there is a realization that Social Security needs to be reformed if it is going to be around for future generations.
Recently Social Security has entered the debate regarding government finance between Republicans and Democrats in a new way. Republicans have asserted that they will only approve new revenues (taxes) if there can be reform on entitlements. Historically, Democrats have strongly resisted any modifications to Social Security, and for almost all current members of Congress, this is still the case.
President Obama, however, has shown some flexibility on this issue. He has proposed a reduction in the annual cost of living adjustment in Social Security by using the “chained” Consumer Price Index (CPI) to measure inflation instead of the traditional CPI. The chained CPI more accurately accounts for changes in consumer behavior in response to price increases, and would decrease the adjustment for inflation by a few tenths of a percentage point each year. As a result, Social Security payments would increase by a lower amount, which compounded annually, would significantly reduce the outlays of the program and bring it more stability.
Given the difficulty of making changes to entitlement programs at all, as well as the need to strengthen Social Security, this modification seems both reasonable and just. As long as the adjustment is applied to all beneficiaries across the board, regardless of income, this change doesn’t modify the basic structure of Social Security nor does it transform the social contract that has historically been agreed to by most of the country. However, this is just the first of several revisions that need to be made to ensure the long term viability of Social Security.
Democrats have traditionally been against major changes in Social Security that would alter the perception of the program from one that benefits all to one that benefits just the poor. They believe that if Social Security were to be seen as just another welfare program, its popular support would drop dramatically. I believe this is actually a very wise perspective. Social Security has generally been seen by most taxpayers and recipients as fair, and this belief is something that we want to preserve. This is the case even though many people do not understand how the system actually works.
Social Security operates as a “pay-as-you-go” system, where the current taxes paid in are used to pay the current benefits of the recipients. There is no money being set aside for the future and there is no “account” with your name on it where money is accumulating for you. Social Security is very much different than a 401k account or an IRA.
Many taxpayers are also unaware that Social Security is already quite progressive (or in some sense “means tested”) in its current form. The Social Security program structures its payments relative to tax contributions (through some very complicated formulas) based on three “bend points.” Lower income taxpayers receive a Social Security payment computed as 90 percent of their average indexed monthly earnings, while higher levels of earnings and tax contributions result in just 32 percent and then only 15 percent of these taxes paid in being converted into benefits at the margin.
Proposals to further “means test” Social Security by reducing benefits or denying them altogether for upper income retirees would undo the social contract that keeps it strong. Denying benefits to richer taxpayers who have spent a lifetime paying into the program and planning their retirement based on expected benefits is neither just nor wise.
In order to make Social Security sustainable for the long term, I believe it is better to instead modify the program by increasing the tax rates paid into the program and by increasing the earnings cap over which amount Social Security taxes are not collected. These changes would rightly hit higher income taxpayers more significantly, but would not affect the benefits they receive. These modifications should be accomplished soon so that the program can regain some standing in the eyes of young people in our country, many of whom believe that they will never see any benefits from the program at all. It is time for politicians to take actions to restore the foundations of Social Security while maintaining the requirements of stewardship and justice. Surprisingly, this need not be an impossible task.
—Todd P. Steen is Granger Professor of Economics at Hope College in Holland, Michigan.
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Capital Commentary is a weekly current-affairs publication of the Center for Public Justice. Published since 1996, it is written to encourage the pursuit of justice. Commentaries do not necessarily represent an official position of the Center for Public Justice but are intended to help advance discussion. Articles, with attribution, may be republished according to our publishing guidelines.”