Reports from the Economic Front

a blog by Marty Hart-Landsberg

Prepare For The Coming Attack On Social Security

Powerful financial interests want you to believe that Social Security is a broken, bankrupt system.  Don’t believe them—it’s not true.

They don’t care that Social Security is an incredibly popular program that has, for decades, successfully provided a reliable income floor for seniors.  Their ultimate goal is to privatize the system, transforming the more than $2.8 trillion dollars in interest-earning, non-tradeable US government bonds that are currently held in the Social Security Trust Fund into a pool of investment funds they can profitably manage and invest in the stock market.

Candidate Trump said he would defend Social Security.  But his appointments suggest otherwise.  A case in point: his selection of South Carolina Congressman John Mulvaney to run the Office of Management and Budget.  Mulvaney made clear during his confirmation hearing that cutting Social Security was one of his priorities.  The Republican Party leadership has long been on record in favor of gutting Social Security, a first step towards its privatization.   Now that the Republicans control both the Senate and House, as well as the Presidency, it takes no stretch of the imagination to believe that Social Security is in danger.

Sadly, it is an open question how much we can rely on the Democratic Party leadership to defend the system.  Presidents Clinton and Obama both embraced the idea that Social Security was a broken system that needed radical change, one option being its privatization.

In short, it is going to be up to us to defend, if not expand, the system.

Social Security Basics  

In broad brush, the Social Security system works as follows: workers and their employers make yearly payments into the Social Security system.  Workers pay 6.2 percent of their wage and salary earnings, up to a cap which rises each year based on the movement in average wages.  The 2016 cap was $127,200.  Their employers pay a matching amount.  The self-employed pay both shares, for a total of 12.4 percent. Social Security beneficiaries receive inflation-adjusted monthly payments based on a formula tied to their lifetime earnings, years of work, date of birth, and age at retirement.

From 1983 to the present, payments into the Social Security system have been greater than payouts to retirees.  By law, the surplus was invested in interest-earning, non-tradeable, US government bonds and held in the Social Security Trust Fund.  The combination of yearly surpluses and interest earnings produced the trust fund surplus of roughly $2.8 trillion.

Every year the Social Security Board of Trustees issues an annual report on the financial health of the system.  The report includes future projections of the earnings and expenditures over a 75 year period.  Three different outcomes, based on different assumptions about the likely movements in key economic variables, are highlighted.  The intermediate outcome is the one commonly used for assessment of the stability of the system.

Since 2010, worker and employer yearly contributions into the system have been too small to cover payments to beneficiaries; the gap has been covered by using some of the interest earned from the system’s bond holdings.  Still, up to now, the interest earnings have been large enough that their reinvestment has enabled the Trust Fund to keep growing.  However, the Trustees project that beginning in 2020, the system’s non-interest deficit will grow so large that interest earnings will be insufficient to fill the gap. Bonds will have to be sold to meet beneficiary obligations.  Finally, they believe that in 2034 the Trust Fund will be depleted, making it impossible to fully pay scheduled benefits.

It is on this basis, that important political players from both Republican and Democratic parties, representing powerful financial interests, declare the system in crisis and call for its radical transformation.

The Trumped-Up Crisis

There are many reasons to reject this declaration of crisis.  First, the conclusion depends heavily on the assumptions used in the projections of the economy’s movement over the next 75 years.  These assumptions are vetted by the system’s trustees.  There are supposed to be six Trustees.  Four hold positions in the federal government: the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human Services, and the Commissioner of Social Security. The other two are “public representatives” appointed by the President, subject to confirmation by the Senate.  The two Public Trustee positions are currently vacant.  Significantly, all the trustees are political appointees.

A slight change in assumptions can dramatically change the outcome.  For example, the report assumes, for the intermediate forecast, an annual productivity rate of 1.68 percent.  Is that reasonable? For the 41-year period from 1966 to 2007, the annual increase in total-economy productivity averaged 1.73 percent.  From 1995 to 2010 productivity grew by a yearly average of 2.18 percent.  The lower the assumed rate of productivity the more likely the system is to run short of funds; assume a higher rate and the crisis disappears.  The same question can be asked with regard to the assumptions made about immigration and wage increases.

Successive administrations, Republican and Democratic, have talked about the necessity of weakening or actually privatizing Social Security.  One has to wonder about the forecasting assumptions chosen by their appointed trustees.

The role of assumptions also figures prominently when examining the arguments commonly made by advocates for privatizing the Social Security system.  These people almost always point to the historical performance of the stock market to argue that returns would be higher and thus the system more secure if the system were privatized.  But there is a slight of hand here—the conclusion that the Social Security system will fail is based on a future projection of relatively slow growth.  An honest comparison would involve projecting the future earnings of the stock market using the same relatively gloomy assumptions.

However, that is not what is done.  Rather, we are asked to accept the historical performance of the stock market as a reference point for its likely 75 year future performance–an assumption that strongly biases the comparison in favor of privatization.  And, of course, this comparison ignores the considerable fluctuations in stock market performance; a worker who retires during a market slump could be left with little in retirement support.

Another reason to reject the crisis story:  even if we assume that the Trustee’s forecasts are accurate, it is not true that the system would be bankrupt in 2034, leaving retirees penniless.  Funds would still be contributed after all.  As a Newsweek article points out:

The Social Security Trustees estimate that in 2034, there will be enough revenue from payroll taxes and other sources to pay 79 percent of projected benefit obligations based on current law. Granted, a one-fifth cut in benefits will be painful for many Social Security recipients, but it won’t be the catastrophic disappearance of monthly checks.

Moreover, it is not difficult to dramatically reduce, if not eliminate this shortfall.  As noted above, wage and salary income is taxed up to a cap, which in 2016 was $127,200.  That cap means that income earned from work above that level is not subject to social security taxes. [Investment income is never subject to social security taxes.]  The use of a cap means that Social Security’s financial health has been negatively affected by the explosion of income inequality.  As Dean Baker wrote in 2013:

In 1983, the Greenspan commission set the cap at a level where 90 percent of wage income would be subject to the tax, meaning that 10 percent would escape taxation.

Since that date, the upward redistribution of wages has increased the portion of wage income over the cap to 16.8 percent, with just 83.2 percent of wage income subject to the cap. The share going over the wage cap is projected to rise further, reaching 17.5 percent of wage income in a decade. In this way, the upward redistribution of income directly worsens the finances of the program. . . .

The chart below shows the path of Social Security revenue and spending if there had been no upward redistribution of income over the last three decades. In 2012, if 90 percent of wage income has been subject to the tax then the system would have raised another $58.1 billion in taxes. It would have paid out an additional $15.7 billion in benefits for a net increase in revenue of $42.4 billion, before counting the additional interest.

number-1

If we imagine keeping the cap adjusted to maintain the 90 percent path and include the interest earnings on the newly generated surplus, the projected social security shortfall comes close to vanishing.  A recent proposal calls for applying the social security tax on incomes over $250,000.  As we see below, only 5.8 percent of workers have incomes above the payroll tax cap and only 1.6 percent have incomes above $250,000.  As Alan Barber and Cherrie Bucknor report, “According to an analysis from the Social Security office of the Chief Actuary, this [policy of imposing the social security tax on incomes over $250,000] would have eliminated 80 percent of the projected Trust Fund shortfall.”  Another proposal calls for limiting the tax to the 0.7 percent of workers whose incomes are above $400,000.

number-2

If we were to make all wages subject to the tax, then even under the assumptions used by the Social Security Administration, the system would remain solvent until the year 2067, at which point there would be a 14 percent shortfall in mandated benefits.

The Importance of Social Security

Millions of people count on Social Security.  In fact, over 60 percent of seniors, more than 24 million people, rely on Social Security for at least half their income.  “This includes 53% of married couples and 74% of single beneficiaries. What’s more, 33% of Social Security beneficiaries rely on Social Security for nearly at least 90% of their income.”

It is also an incredibly popular program.  A strong majority support doing whatever it takes to ensure its future.  As Matthew Frankel explains:

According to a survey by the National Academy of Social Insurance, 85% of Americans agree with the statement “Social Security benefits now are more important than ever to ensure that retirees have a dependable income.” This percentage included a majority of all political affiliations, income levels, and age groups.

Additionally, 81% say they don’t mind paying Social Security taxes because of the stability it provides to millions of retirees. And 72% say that we should consider increasing Social Security benefits — including 65% of Republicans, 61% of high-income individuals, and at least 65% of every age group.

So it’s fair to say the consensus is that Social Security is worth preserving.

In short, Social Security is not in crisis.  It is a strong program and, if necessary, simple reforms can ensure its continuing smooth operation.  What does need our attention is the broader workings of our economy.  Among the most pressing issues is the disappearance of secure, well-paying jobs.  In fact, a growing number of analysts worry that the labor market has become so bad for workers that we may be facing the end of retirement; low pay and the lack of benefits will force people to work until they literally drop.  That we have come to this point is a real crisis.

 

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