“Keeping the Social in Social Security” by John Edward

This is the second in a series of column’s by John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell. John’s earlier column in this series, “A Healthy Budget”, was posted on January 13, 2013 and can be found here. The following is installment number two, this on social security:

President George W. Bush tried to privatize part of Social Security. During fiscal cliff negotiations, House Republicans tried to reduce retiree benefits.

President Reagan and Alan Greenspan had the right idea. We have to secure the program while keeping the social in Social Security.

Social Security should not be part of the budget debate in the first place. The Social Security Trust Fund was “off-budget” until 1968. President Johnson included it in a “unified budget.” Trust fund surpluses made the federal deficit appear smaller.

In 1983, President Reagan formed the National Commission on Social Security Reform. It is also known as the Greenspan Commission, named after the chair, Alan Greenspan.

The Greenspan Commission recommended taking Social Security off budget again. As stated by the commission: “The National Commission believes that changes in the Social Security program should be made only for programmatic reasons, and not for purposes of balancing the budget.” President Reagan approved.

For most of its history, Social Security ran a surplus. Workers contributed more than retirees collected in benefits.

The ratio of workers to retirees was very high when the baby boomers were paying in. Now the baby boomers are retiring. The ratio has dropped significantly and will continue to do so.

Social Security is now running a deficit. The Social Security Administration knew that would happen eventually. The Great Recession made it happen sooner than expected. Many people filed for early retirement or became eligible for other social security programs.

The good news is our social safety net helped avoid a repeat of the Great Depression. The bad news is the Great Recession is stretching the safety net thin.

The Social Security Administration now projects their trust fund will dry up by around 2033. That is a few years earlier than previously forecast.

Excessive inequality is largely to blame.

Payroll taxes provide most of the revenue for the Social Security Trust Fund. Only income up to a certain level is taxed. The income limit is $113,700 for 2013.

When Congress created Social Security, 92.5 percent of total wage income was subject to social security payroll taxes. Wages taxed dropped to 85 percent by the late 1970s.

Reagan and Greenspan came to the rescue. The Greenspan Commission modified the formulas used to bring wages taxed back up to 90 percent. They also started adjusting the income limit for inflation. However, they did not think to adjust it for inequality.

High-income earners are making a lot more than they use to relative to the rest of us. The result – only 84 percent of income was taxed in 2012. The Congressional Budget Office projects the percentage of income taxed will continue to fall.

The obvious solution is to raise the limit or eliminate it. For example, Congress could set the limit at the same level of income below which they preserved the Bush tax cuts.

Social security payroll taxes are very regressive. Raising the limit would make them less regressive.

The Business Roundtable and many in Congress want to increase the full-retirement age to 70. The justification is longer life expectancy. Their rationale has flaws.

Life expectancy at birth has increased significantly. Life expectancy at age 65 has not changed much. Workers in physically demanding jobs get lower social security benefits, and have a shorter life expectancy.

There is also a push to reduce cost-of-living adjustments. The flaw here is a Bureau of Labor Statistics study that shows the cost of living for seniors has been increasing faster than the inflation rate currently used.

The Business Roundtable has another proposal that does make sense. They want all new state and local government workers in the social security pool.

As an employee of the Commonwealth of Massachusetts, I do not participate in Social Security. Nationwide, twenty-five percent of state and local workers do not.

Robert Ball is a former Social Security Commissioner and was a key member of the Greenspan Commission. He estimates that putting all new state and local workers under Social Security would eliminate one-tenth of the projected 75-year deficit of the program.

As is true of Medicare, Social Security is extremely efficient. The program pays out ninety-nine cents in benefits for every dollar collected.

President Roosevelt envisioned Social Security as an insurance program, not welfare. To that end, it has been very successful. The Center on Budget and Policy Priorities estimates that without Social Security more than 20 million additional people, and more than 40 percent of the elderly, would be in poverty.

The Social Security Act was originally the Economic Security Act. When he signed it into law Roosevelt said, “It is a structure intended to lessen the force of possible future depressions.” The Great Recession would have been far more painful without it.

The focus of Social Security has never been redistribution. Everyone who pays into the program long enough will be eligible for benefits. High-income earners get much higher benefits.

Social Security is not government spending. It is government sponsored social insurance.

Social Security is not a private retirement plan. We should not allow individuals to risk trust fund assets in the stock market. We need to keep the social in Social Security and keep it secure.

In his letter to Congress recommending the creation of “a bipartisan effort to save Social Security” (the Greenspan Commission) President Reagan said, “This administration is not wedded to any single solution.” However, he did vow to “steadfastly maintain… the basic principal… this nation must preserve the integrity of the Social Security trust fund and the basic benefit structure that protects older Americans.”

We need that type of flexibility, integrity, and bipartisanship now. Preserving Social Security is not a hard problem, except for the politics.

Social Security did not cause budget deficits. We need to find real solutions to federal budget problems. That includes reducing government spending. I will describe a plan for identifying specific spending cuts in my next column.