Social Security often is called the “third rail of American politics.” On some subways and railroads, the third rail carries the electricity that powers the system. Touching the third rail often is fatal. That’s the thinking with Social Security – politicians who offer any reform proposal risk political death. There is some truth to this caution: Every credible Social Security reform imposes a cost to someone. Any politician who promises a free lunch on Social Security reform simply isn’t being honest.
To NOT take action now to strengthen Social Security is very risky. Policies and inaction over the past generation have saddled our children and grandchildren with mountains of debt, unmet infrastructure needs and billions of dollars in unfunded obligations for the future. Allowing America’s basic retirement income program to erode on top of all the other costs being kicked down the road is nothing short of political malpractice.
First, some facts about Social Security (provided by the Social Security Administration).
- Retirement income is just one part of the Old-Age, Survivors and Disability Insurance (OASDI) program. This government program is a vital safety net for retirees, the survivors of deceased workers and workers who become disabled.
- Retired workers and their dependents receive about 72 percent of the total benefits paid through OASDI.
- Disabled workers and their dependents account for 16 percent of the total benefits paid.
- Survivors of deceased workers receive about 13 percent of total benefits paid.
(Note: The total benefits add up to more than 100 percent due to rounding.)
- Social Security is NOT going bankrupt, at least in the way we usually think of bankruptcy. It will continue to pay benefits to retired workers even if no changes are made. However, experts are virtually unanimous in agreeing that the reserve funds of OASDI will run out between 2033 and 2035. That means benefits to retirees will be funded exclusively by the taxes paid by workers and their employers. Today, there are about 2.8 workers for every retiree. By 2035, that ratio will drop to 2.2 workers for every retiree. While the work force is growing more slowly than it has in the past, the older population is booming. The number of Americans 65 and older is projected to grow from approximately 49 million today to over 79 million in 2035.
- If there are no tax changes or other reforms, retirees after 2035 can expect to receive only about 75 percent of the scheduled benefits.
- The average monthly retirement benefit at the end of 2017 was $1,404. That is about one-third of the income for the typical elderly person. However, for large segments – 23 percent of married couples and about 43 percent of unmarried persons – Social Security is 90 percent or more of their income.
It’s urgent that action be taken as soon as possible. The longer the delay, the bigger the changes that will be needed to assure that workers receive the full benefits to which they are entitled. Thoughtful policymakers and organizations like AARP, the Heritage Foundation, the National Academy of Social Insurance and others have offered thoughtful solutions. Here are some I believe are worth exploring:
Raise the full retirement age. In 1940, a 65-year-old could expect to live only about 14 more years. Today, the typical 65-year-old looks forward to 20 additional years. The full retirement age for Social Security benefits will gradually rise to 67 years for those born in 1960 or later. People can claim benefits as soon as age 62; delaying taking benefits (up to age 70) increases the monthly pay-out. Given improvements in the health of older people and their longer lifespans, it’s not unreasonable to increase the age at which maximum benefits can be taken to 72, while still allowing reduced benefits to be taken as early as age 62.
The Social Security payroll tax applies to annual earnings up to $128,400 in 2018. Both the employee and the employer pay taxes on these wages. This cap is set annually based on the government’s estimate of inflation-adjusted wage growth and now covers about 83 percent of total earnings in the nation. Raising the cap to cover a higher percentage of total earnings would contribute significantly to solving Social Security’s shortfall, with the cost falling on higher-wage workers and their employers.
Another solution is to enroll all state and local government workers in Social Security. Currently, about one-fourth of state and local government workers are covered by retirement plans provided by state or local governments and are not participants in Social Security. Requiring that all newly hired state and local government workers enroll in Social Security would not break agreements between current workers and state and local governments while adding a significant pool of new workers to the Social Security system.
Other worthwhile proposals would only affect high-income retirees. For example, eliminating annual cost-of-living adjustments for those with very high retirement incomes would save a substantial amount of money without imposing a significant financial burden on the well-off. Another plan would limit the size of spousal benefits for higher-income retirees. In some cases, non-working spouses of high-earning retirees receive a higher monthly benefit than some low-income people who worked and contributed to the program throughout their lives.
In addition to changing benefits for some top-end income earners, it also makes sense to boost the security of low-wage earners. For example, creating a new minimum benefit for those who have worked an entire career in low-wage jobs would be a significant boost to these retirees. Another plan would provide an increase in benefits for low or modest-wage earners after 20 years or more of retirement, offsetting some of the lower cost-of-living adjustments they receive.
Other proposals include privatizing Social Security. The two biggest arguments against privatizing Social Security, in my opinion, are these:
- Social Security is part of a safety net that provides insurance for workers who become disabled and the survivors of workers who die during their working years. Undermining part of it threatens the entire program.
- Social Security benefits are designed to supplement retirement incomes. Private savings and stock market investments are important components of a balanced retirement portfolio. But they also are volatile. People can’t always control when they retire. A person retiring in 2001, for example, would have seen his or her stock market portfolio decline by about one-third (as measured by the S&P) during the first eight years of retirement. Even though the market climbed about 235 percent in the following eight years, that 30-percent-plus loss is a big hole for a low-wage saver to climb out of.
Public policy needs to promote a balanced and comprehensive approach to retirement. Let’s take action NOW to shore up Social Security and make sure everyone receives the benefits to which they are entitled. And, we need to boost private savings and increase the ability of workers to save for their own retirement. According to the Social Security Administration, 46 percent of the workforce in private industry has no private pension coverage; 39 percent of workers report that they and/or their spouse have not personally saved any money for retirement.
Incentives to promote private savings can and should be accomplished through thoughtful and innovative tax reform while we also strengthen Social Security.