Okay, maybe not Captain Ahab, but definitely some cranky politicians who don’t have to worry about retiring on a fixed income. 

Social insurance programs

But mostly Social Security

Some basics:

• Origins as guaranteed social insurance program
• How is it financed? Administered?
• Who is eligible?
• Why wouldn’t it be self-sustaining in perpetuity?
• Why the efforts to curb ‘entitlements?’
• What can be done to ensure SS continues to help elders avoid poverty?
  • Cut benefits
  • Tax benefits/add revenue
  • Convert to means-tested
  • Hand over to private sector
  • Raise FICA tax rates (especially for Medicare)
  • Raise FICA cap
  • Raise retirement age
  • Other(s)?

Context (From the National Council on Aging):

• 21% of married Social Security recipients and 43% of single recipients aged 65+ depend on Social Security for 90% or more of their income. (Social Security Administration [SSA], 2016)
• More accurate measures of economic well-being—including the Elder Economic Security Standard™ Index and the Institute on Assets and Social Policy’s Senior Financial Stability Index—show millions of older adults struggling to meet their monthly expenses, even though they’re not considered “poor” because they live above the FPL.
• On average, older women received about $4,500 less annually in Social Security benefits in 2014 than older men due to lower lifetime earnings,  time taken off for caregiving, occupational segregation into lower wage work, and other issues. Older women of color fare even worse. (SSA, 2015)
• Nearly half a million older adults aged 55-64, and 168,000 aged 65+ who wanted to work were unemployed 27 weeks or longer in 2014. (Bureau of Labor Statistics [BLS], 2015)
• Older workers of color are most at risk for unemployment, with older African American men twice as likely to be unemployed as older white men. (BLS)
• One-third of senior households has no money left over each month or is in debt after meeting essential expenses. (Institute on Assets and Social Policy)
• In 2013, 61.3% of households headed by an adult aged 60+ had some form of debt. Among senior households with debt, the median total debt was $40,900. (Federal Reserve Board)

Social insurance is the difference between assistance and, well, insurance. In the case of Social Security, it is designed to keep people leaving the workforce from falling into poverty. More generally, there are four basic, widespread insurance programs–Workers’ compensation, Social Security, Unemployment, and Medicare.

Social Security, the biggest program, created originally in 1935, cost over $670 billion in 2009 (that amount varies–why?); over $883 billion in 2015. It is technically OASDI (old age, survivors, and disability insurance). So it is actually three programs rolled into one: Retirement pension, survivors’ insurance (for survivors and dependents up to age 18), and disability insurance.

Some details:

• ‘Full’ retirement age: 66 years (reduced benefits are an option after 62 years), but really 67 years for people born in 1960 or later (here’s a chart)
• Average age at retirement: 63.7 years
• You need to pay FICA tax over your work life to be fully insured, and have worked at least 10 years (with qualifications)
• If you’re below full retirement age you can earn up to $14,000 without losing SS benefits

Benefits:

• Survivors: dependents of deceased worker, under 18 years old; or spouse if 60 or over
• Spouses and 10 year marriage rule–spouses are covered after they’ve been married ten years (in most cases, women are covered under men’s–that could change in the future)
• Monthly checks (average benefit in Dec 2009: $1,168; in Jan 2017: $1,360; maximum benefit is just shy of $2,400). How much one earns depends on years of work, and on retirement age (retiring at 62 will mean lower monthly payments than retiring at 70, for instance). In other words, a mount depends on what you put in to it (there’s a range), but benefits increase the longer you wait to claim them
• The replacement of income is progressive–in other words, proportionally, poor people get more back (57%), even if they put in less (middle rate is 45%, high income earners 38%). Logic being they likely have no other substantial retirement income.
• Comes with cost of living increases (in most years, but not in 2010)
• Part of benefits is taxable – either 50% (this goes to the social security trust fund) or 85% (to Medicare)
• Who benefits? In 2009: Retirees (63%); survivors (15%); disabled workers (12%); families of disabled, retired workers (10%)
• Some differences in benefit levels: men average more ($1500 vs $1182for women, who generally have lower average incomes); whites average more than blacks ($911 vs $775 for African Americans)
• Benefit amounts are adjusted for inflation
• It’s guaranteed, and probably the most popular welfare program.

How is it paid for?

• It’s a pay as you go system, so the workers of today pay for the retirees of today.
• Employees and employers each pay 6.2% payroll tax (self-employed pay the full 12.4%, but can deduct half on taxes). State government employees generally have a different plan.
• Any money not paid out is invested, so investments earn returns;
• Payroll tax is capped at $127,000 (i.e., any income over $127,000 isn’t taxed)
• In 2003, $535 billion was collected (in 2015, $920 billion)
• In 1939, a trust fund was set up. In 1983, Congress passed a law to shore up the trust fundfor baby boomers (e.g., 2003–$632 b collected; $479 b paid out), in anticipation of high retirement rates and fewer workers to pay for them. However, tax cuts in 2001, and wars in Afghanistan and Iraq still ongoing in 2011, have led to a draining of the trust fund, and estimates are that trust funds could be exhausted around 2030.

Some SS funds are taxed (about $12 billion collected in 2003).

So, Social security is financed by payroll taxes, but our contributions pay for others’ retirements–this is a straight income transfer, pay as you go–an intergenerational transfer, because retirees are getting the money workers are paying in now. The FICA (Federal Insurance contribution act) tax on payrolls comes from both employers and employees. Employees’ contributions don’t go into their own accounts, they pay to those currently receiving Social Security. Our contributions, employment history determine our eligibility and benefits, though.

Now, even though the income replacement mechanism is progressive (that is, poor people have their incomes replaced at higher rates than wealthy individuals), FICA is a regressive tax, similar to a sales tax–people who make less pay proportionately more. When you hear about the “lucky duckies” who don’t pay taxes because they’re poor, if they work they are paying FICA tax (the promoters of this position hide this by focusing solely in income tax), and they’re paying the same rates as people making $10 million/yr–and those people are only paying on the first $113,700 of their income. In addition, the earned income tax credit (EITC) was partially designed to address the regressive nature of the FICA tax by giving back some of the money to the working poor in the form of tax credits.

In addition, most SS payments go to people who are not poor. Remember, it is designed to prevent people from experiencing poverty, not necessarily to assist those in poverty (though it does that for elderly poor). Everyone gets what’s coming to him/her, regardless of need, keeping in mind it is based partly on how much you’ve put into it during your working life. The percent of elderly income derived from SS increases from 65 (about 27%, according to Schiller), to 80 (about 52%). So most people have other sources of income. The average benefit in year 2000 was $1,000/month.

Social Security is administered by the SSA (Social Security Administration).

SS in trouble?

You don’t have to be a demographer to figure out why social security is may be threatened in the future. The age structure of the population has changed over time, since the Social Security Act of 1935 (Medicare and Medicaid were added in 1965). The baby boom began in 1945 in the U.S., when soldiers returned from WWII. Fertility rates increased dramatically. The first baby boomers will begin to retire, or at least be eligible to draw social security, in 2010. The following three population pyramids tell the story of demographic change–one for 1950, one for 2010, and the other projected for 2025–they show how there will be less workers supporting more retirees (careful as you read them–notice the scales are different, so don’t make specific visual comparisons without accounting for those differences). Also, note in the 2010 pyramid that women tend to outlive men, as the 80+ category shows. The total number of retirees will almost double from about 48 million today to about 89 million in 2035. Because social security is an intergenerational transfer of funds, this is critical, and something that its creators likely didn’t think about 76 years ago–that the age structure of the population is dynamic (as the following figure shows, here animated).

source: US Census Bureau (2017)

The ‘problem’ is that fertility rates have since declined. If you consider that current workers are funding current retirees, and that there are more retirees than workers (even if mortality rates increase with age), you can see the problem.

Now, surprisingly, even though there has been a fair amount of fear mongering from critics of ‘entitlements’ across the political spectrum, suggesting the need to reduce payments or increase retirement age, Social Security would be in decent shape if we left the trust fund alone. The trust fund, created by Congress in 1983 in anticipation of demographic changes,  has in the past been used to pay down the national debt, which has increased under the Bush Administration, with additional contributions from the Obama Administration’s stimulus package and federal responses to the Great Recession of 2008.  The national debt is over $20 trillion, and the government is several hundred billion in deficit spending per year. Yet even with all this bad news, Social Security should be pretty sound fiscally through 2040 or so, thanks to Congress’ foresight in the 1980s (never thought I’d be writing that sentence …).

But at some point, the discrepancy between the shrinking workforce and growing retiree population will come home to roost. And those wanting to dismantle Social Security resort to scare tactics and misleading arguments, the latest fashion being to call SS a ‘ponzi scheme‘ (note: few of these critics will be among the millions of Americans actually needing monthly Social Security checks when they retire from writing incendiary opinion pieces).

What to do?? Here are some ideas floated:

1. Lower benefits to future retirees
   1. As cost of living increases? Would this help prevent people from going into poverty after their working years have ended? This isn’t the social contract working Americans signed on to.
   2. Equity (fairness) issues–people pay into the system, and there may be great resistance to paying in (at current, taxed up to $106,800 in personal income) and receiving nothing (even though this is often what happens with insurance, if we’re lucky)
   3. Tax benefits–a cost recovery program of sorts, essentially using the payroll tax to fund the benefits, and then putting a percentage back into the system through income taxes. Wouldn’t be popular, but some benefits are currently taxed (a small fraction at the moment)
   4. Cost of living increase changes–change in how they’re calculated could reduce costs by .3%, which would amount to a very large sum of money.
2. Add revenue to the system
   15. Increase FICA rate (regressive?). Right now it’s 15.3%. Of that, 12.4% is for Social Security (6.2% paid by employee), 2.9% for Medicare (1.45% paid by employee)
   16. Remember–employer and employee pay this (one could increase only employers’ contributions. What sorts of drawbacks to that?)
   17. Increase FICA cap, at $147,000 in 2022. Political issues?. How to handle benefit differences? Equity issues here again. On the one hand, someone making $147 K pays about the same as someone making $25 million into Social Security. And perhaps neither will need it when he/she retires. Employers would not like this, not one little bit. If FICA caps were increased to, say, $200K or $250K, those making such sums (with more political clout than you and I) would protest that it’s unfair. One could ‘skip’ and have the FICA tax kick in at $500K or more. Which might be reasonable to accommodate places with high costs of living. But opponents of this point out that people would pay in to the system at full levels, more than they would receive out of it.
   18. Tax only those with low levels of need for SS. But what does that do to political support for Social Security, and its status as a social insurance program, among people with the clout to have their opinions heard, and possibly acted upon?
3. Raise retirement age(people live longer, can work longer)
   1. competition with younger workforce
   2. health care costs related to older people still working?
   3. This is happening, slowly (e.g., people born in 1960 will be eligible for retirement with full benefits at 67, not 65. I hope not to see any of you around campus unless: you’re working and paying into my SS by then)
4. Create private accounts
   1. g., invest in stocks–let people control more of their own retirement, instead of the current ‘pay as you go’ system
   2. This would mean diverting some or all of the payroll tax revenue into private accounts
   3. Conservatives like this option, as do, I imagine, stock brokers, who would stand to make millions in fees on these accounts
   4. Risk??What happens if the economy and stock market tank? Which they will, at some point. What safety net will exist for those who might have chosen unwisely in their private accounts? This option socializes the risk of what is now a guaranteed program. The senior lobby, American Association of Retired Persons (AARP) is against this option, even when ‘privatize’ is replaced with ‘personalize.’
5. convert to means-tested program
   1. reduce or eliminate benefits for those who don’t need them
   2. We know by this point what the difference is, in terms of widespread public acceptance, between social insurance and means-tested programs, don’t we?? Political support would wane, at least from younger current workers paying for current or impending retirees.

What sorts of things might we consider, and what might be the political costs/risks associated with them?

• We could increase the FICA tax rate. This seems sort of stupid, though–it’s already a regressive tax, only partially compensated by the earned income tax credit. But . . . we could increase it only on the part of employers. That of course would have its own ramifications, and large employers and industry have lots of political clout because of their role in funding campaigns.
• We could raise the ceiling on income above $127,000 (the original goal was 90% of income). Wealth and income inequalityhas increased dramatically in the U.S. in the last 30 years, as we have discussed. In fact this FICA cap has increased steadily, from $76,000 in the 1990s. There is no doubt SS loses a lot of money because someone making $113,000 and someone making $5 million pay the same amount toward social security and Medicare. Problems? Well, there is the issue of fairness–wealthy paying greater amounts into the system, money that they could be investing elsewhere in the economy. And since wealthier groups also make large campaign contributions, they tend to have more political clout as well. If you don’t think so, examine the two tax cuts of the Bush/Cheney Administration. This could be done gradually, by the way (over as much as 40 years).
• We could privatize–allow people to put part of their retirement into private accounts, presumably earning higher rates of returns. However, with the state of the stock market and corporate corruption, that may not be looking like such a great idea these days. A level of trust in the honesty of corporations has been lost. Those with inside information have a decided advantage in markets, at the expense of most investors (see George Packer’s piece in the New Yorker if you have the stomach). And what happens if people make lousy investments? Does society pick up the tab when they retire? Although the privatization argument is favored by private industry and insurance companies and financial institutions, who would benefit from this shift. In addition, what would it mean if the government began allowing people to divert payroll taxes into private accounts, knowing what you know now about how Social Security is funded? All of the sudden the money needed from today’s workers to support today’s retirees would be drastically reduced. The government would have to borrow in the billions, possibly trillions, to cofer this gap.
• We could base benefits on need. This seems reasonable. Some people don’t need social security because they have other income/investments. But then it’s no longer a poverty prevention, insurance program. It becomes a means-tested program, and it could lose the broad public support that it has enjoyed. Some people who paid into it wouldn’t see any return, and there would be a clamor to allow people to not pay into it and invest their money elsewhere (e.g., in private accounts).
• We could raise the retirement age, increasing the workforce (provided there are jobs out there . . . ) and FICA payments. People are living longer, more productive lives. Yes, it will go up to 67 years by 2027, but that seems like a fairly small, incremental increase that won’t help with the looming problems. But who wants their parents and grandparents working during their ‘golden years?’ We could make this optional. It would be politically suicidal, though, especially as our population gets older (meaning more retirees voting) to suggest increasing the age at which people start drawing benefits. Also, would this increase competition for jobs?
• The Center for Budget and Policy Priorities has some modest proposalsthat would ensure Social Security’s solvency. AARP also has a list of reform proposals. But they’re not free, they all have political costs and would face fierce resistance, and the CBPP points out that the bigger problem is Medicare and Medicaid (which get a much smaller proportion of the FICA tax). The Affordable Care Act changes some of this dynamic.

What are we considering doing? Well in 2000, Congress did raise earnings limits for workers aged 65-70, meaning an older worker wouldn’t be punished (have benefits reduced) for working. Considering a payroll tax deduction as part of the tax stimulus package of the Bush Administration. Also, you might think about who might benefit / who would be harmed by any of the above measures, or others you come up with. The Bush Administration sought to privatize the program. However, privatization hasn’t been a popular notion with the public, and this attempt was a pretty spectacular failure. Social Security has been around for almost 80 years, and changing the program doesn’t garner much support among the public and the elderly, where Social Security has broad support, and most are willing to pay more to keep it solvent. Letting people take money and put it into private accounts would benefit firms on Wall Street, however. The problem is that the level of trust in Wall Street has been shaken to the core in recent years by spectacular scandals like Enron, Tyco, WorldCom, Global Crossings, Adelphia, Arthur Andersen (an accounting firm), Xerox, Qwest, and Merrill Lynch. Then came the so-called Great Recession in 2008, ushered in by high-risk/high-profit investment instruments peddled by Wall Street investment banks. This latest round of scandals and the economic and political fallout dwarfs what happened earlier in the last decade. What happens if people, not always shrewd investors, lose this portion of their retirement on the stock market? Do taxpayers cover the difference, or we just blame them for being lousy investors (i.e., for trusting stock analysts and corporate earnings statements, in the absence of substantive reform and greater enforcement by the Securities and Exchange Commission)? In addition, what happens if people’s investments don’t work out? We leave them penniless in old age? One of the key reasons Social Security has been staggeringly popular as a poverty prevention program is that it has been guaranteed.

Some critical issues:

• Social security is counter-cyclical: when employment is high and retirees low, the trust fund can accumulate. But when unemployment is high, there are less paying in to current retirees.
  • It’s a popular program, and its constituents have quite a bit of electoral power
  • What to do with the trust fund?
    • leave it to collect interest (for, say, 2010, when baby boomers begin to retire)
    • give it back, let people use it for their own retirement accounts
    • What do you think? How to balance out demographic variation over time with the need to keep social security solvent?
  • Gender
    • Women and the 10-year marriage rule for eligibility–is this a ‘gendered’ policy? Think about our other discussions of the feminization of poverty and women’s dependence on spouses, for instance
    • Women and men’s benefits are usually split–survivor of two-earner couples may earn less than one income-earning families
  • So what to do?
    • Earnings sharing (add up total earnings and divide by 2)
    • Double decker (two tiers of benefits-there would be a minimum guaranteed income, and a second part based on combined contributions of both spouses)
    • Homemaker credits–radical idea, huh? Giving homemakers credit for allowing their spouses/partners to go out into the workforce.
  • Popularity of program, political power of its constituents
  • the trust fund
    • leave it to collect interest
    • give it back, let people use it for their own retirement accounts

Workers of the world . . . . run and hide!

Cited:

• US Bureau of the Census. 2017. National Population Projections. Washington, DC: Bureau of the Census.
• Many documents from the Social Security Administration website
• Pew Research Center. 2014. American’s morphing age pyramid. June 10, Pew Research Center.