Food for Thought: Retiree Leaders Speak Out
By Bill Lemmey
Social Security is about people. It is a social insurance program to provide dignity to most members of the American Society. It helps retirees, parents, children, and the disabled. Social Security is the best anti-poverty program American ever had. It pays more benefits to children than any other government program.
Six million children living in households receive some form of Social Security benefit. Approximately 50 million retirees and their spouses get benefits. For 25% of older Americans Social Security provides 90% of their income. Surprisingly, four out of ten men and three out of ten women will die or become disabled before reaching retirement age. The average benefit is $14,750 a year.
Survivor benefits are worth $476,000 for a 30 year old worker and the long term disability benefits are valued at $330,000.This is why Social Security is about people. The earned and extended benefits that people receive also benefit society by preventing poverty, homelessness, and depression. More than 21 million Americans avoided poverty and 9 million jobs were created due to Social Security. This is one of the main reasons why Franklin D. Roosevelt said upon the passage of the Social Security Act: "I place the security of the men, women and children of the Nation first."
One of the critical advantages of Social Security compared to pensions, private insurance or annuities is that benefits are guaranteed, portable, and inflation protected. Since 1972 a COLA has been added to the benefits.
We pay 6.2% in payroll taxes up to $110,000 and 1.45% to Medicare. Social Security is an entitlement. It is Title II of the Social Security Act. Once you meet the qualifications for benefits and then file a claim for your benefits and get approved then you are legally entitled to those benefits. However, although it is an entitlement it is also a participating plan where people contributed to the system to gain social insurance.
How is Social Security Funded?
Social Security is basically a pay as you go program. People working today are paying into the fund for retirees and other beneficiaries. The Social Security pay roll taxes deducted from wages goes into two U.S. Treasury accounts where it is used to pay benefits. Close to 85% goes to the Old-Age and Survivors Trust Fund. The remainder goes into the Disability Insurance Trust Fund. These two funds had assets of $2.6 trillion in 2010. The revenues not used to pay benefits are invested in Treasury securities. These securities earn interest and provide income for the Social Security Fund. The reason the fund puts its money into United States bonds is because this is one of the safest investments.
What Challenges will the Social Security Fund Face?
The Social Security Trust fund is large and will pay full benefits until 2030. However, there are future problems. Today more than 40 million Americans are age 65 and up, but by 2036 the number rises to 78 million. Today there are almost 3 workers for each beneficiary. By 2036 there will be 2.1 workers. The pay as you go system will face increasing demands to give out full benefits. The retirement of 78 million baby boomers will add stress to the system. Baby boomers will cease paying much in payroll taxes but start to collect benefits. The trust fund will have to reduce payments or fund new ways to solve the problem.
How Can the Underfunding of Benefits be Resolved?
There are several ways to solve the shortfall in Social Security funding:
1. Raise the Wage Base Cap. The cap on Social Security payroll taxes is at $114,000. If the cap was raised to $215,000 then 30% of the shortfall would be made up. The negatives of this solution would weaken the link between contributions and benefits.
2. Raise the Social Security Payroll Tax. Raising the tax from the current 6.2% to 6.7% would make up 40% of the shortfall in Social Security. The negatives would be possible loss of jobs and employers cutting wages.
3. Modify the Inflation Formula. This method has been much discussed by President Obama and the Congress. The change would switch from using the Consumer Price Index for Urban Wage Earners (CPI_W) to the chained CPI. The chained CPI assumes that consumers switch their purchases if prices go up too much. Adopting the chained CPI would reduce the shortfall by 23%. The negatives are a cut in benefits especially for those receiving benefits after five years.
These are only some of the proposals to keep Social Security solvent. Nevertheless, you can be assured that Social Security will always be a part of the American safety net. Consider this one statistic: 75% of Americans have only $30,000 in their retirement accounts. Without Social Security many people would face a bleak future. As Franklin Roosevelt said: "We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and his family."
* For an informative analysis of the history of Social Security see Nancy Altman’s work.