What’s Going to Happen to Your Social Security?

If nothing is done, Social Security is forecast to go broke. Expenditures began exceeding payroll tax revenues for the first
time in 2010, and payouts are nibbling away at the so-called "trust fund" which, at its peak before the downturn, held four times the amount of annual expenditures. It sounds like a far off problem, except if left to fester, remedies will become intolerably drastic.

Proposed fixes are typically to curtail benefits in one or another way. But pulling in the other direction is a progressive wing that has stirred debate with the argument that there is a "retirement crisis", that the elderly poor are in trouble, that benefits should be increased. That was the long-held view of Tom Harkin, ex-senator of Iowa, and the baton has passed to Massachusetts Senator Elizabeth Warren, who took up the cause starting with a Senate speech in 2013. Now. both Hillary Clinton and Bernie Sanders have signed on.

The Republican candidates are in the opposite camp. Most propose further postponing the age for full benefit eligibility or trimming the benefits paid to the wealthy. What's to be done?

Children born after the troops came home from World War II, the baby boomers, account for the huge bulge of seniors who are now retiring at the rate of 10,000 a day and are the cause of having to draw from the trust fund. Children born today will create their own bulge, expected as they are to live until age 90. It should be clear that we cannot work for 40 to 45 years paying, together with employers, an eighth of our income into the system and then expect to receive a substantial benefit payout for another 25 years.

If current entitlement benefits and payroll tax rates continue unchanged, by 2025 tax revenue will pay for Medicare, Medicaid, Social Security, interest on the debt and nothing else, says Ezekiel Emanuel of the Center for American Progress. There will be no money for defense, transportation, education, and so on, nor for government itself.

As for Social Security, it is slated to go bust in 2033. Earlier, says the Congressional Budget Office; if its two funds — retirement and disability — are considered together, the cupboard goes bare in 2029. Only current payroll taxes would then be available for payout to retirees, meaning benefits in 2030 and thereafter would need to be reduced by 29%, says the CBO.

The Social Security Administration (SSA) says it would take an immediate 4.37% increase above the existing 12.4% payroll tax to keep the fund solvent for the next 75 years, the standard horizon against which the SSA calculates its future. It would be close to impossible to find a politician who would vote to impose what would be a 16.77% tax on wage earners and their employers. Not even Sanders. He ducks a tax increase and instead would raise the limit beyond which payroll is not further taxed from $118,500 to $250,000. That would at least avoid asking the younger to pay still more for the older. Slightly more than half of current workers in a Gallup poll last April doubted they will ever receive Social Security benefits and therefore view the taxes they pay as money thrown away.

Some in the liberal camp think there should be no cap — thinking that would take care of the 75-year shortfall all in one go. But taxing all earnings would erase only 41% of Social Security’s long-term deficit because the added contribution would be reduced by the correspondingly higher benefits the wealthy would earn. Unless the unmentioned intention is to pay them no added benefits. But to ask them simply to contribute with no ultimate payback weakens the liberals' egalitarian principle that Social Security is a virtuous circle of pay and receive, and would yield to the conservative argument that it would become simply another tax. Also, there's the philosophical question: should someone earning $1 million have to pay (in addition to income taxes) $124,000 for the benefit of others? Maybe. Maybe not.

Others argue that "means testing" — those of greater means, greater wealth, should get reduced benefits — treats higher income households more equitably than simply raising their taxes. The more one has, the less one needs from the government, so trim the benefits. (For the record, there already is some degree of means testing. First, those with lower incomes get a higher ratio of benefits relative to their incomes; benefits decline as a percentage for those with higher lifelong incomes. Second, those who have other income in their retirement years see their Social Security benefits taxed on a sliding scale — a particularly pernicious deceit considering that the government already taxed the money when it made off with it years ago as a payroll deduction.)

The age for full benefit eligibility, once 65, is now headed for 67, but not until 2027, a leisurely postponement that won't do much for the annual revenue gap that began five years ago. Should the age be postponed further (and sooner) or are there other ways to go about it?

If the eligibility age were 70, people would be spurred to work longer to produce income to fill the gap, so goes the theory. But that assumes that work is available in a culture where employers discriminate against age, where younger workers are thought to be more productive, more willing to adapt to new ways and new technologies, and are cheaper. Besides, those who worked physical jobs all their lives cannot go on working those jobs in their senior years.

The problem with a single retirement age is that one size doesn't fit all. The well off live longer than their low-income counterparts. A 2007 Social Security Administration report showed that almost all the rise in life expectancy was enjoyed by the more affluent. Among 65-year-old men born in 1941, the SSA found that the top half of income earners was projected to live an average of 5.3 years longer than the bottom half. Those in the bottom rung, those who need Social Security the most, have since the 1970s not seen their longevity rise much above 65 for one or another reason — their physical jobs did physical damage, they weren't able to afford proper healthcare, and so forth. With less life to live, having to wait extra years alongside the longer-lived affluent class, and then to only receive foreshortened benefits, would be an injustice. They should qualify sooner.

What if age deferment and means testing were combined? The principle would be, the richer one is, the older one must become to qualify for Social Security. Remembering the connection between wealth and longevity, graduated postponement across, say, five years, where those of lower means qualify for benefits right off whereas those with greater means would wait extra years determined by their wealth, would tend to give each means group a roughly equal number of benefit years. This would not be difficult to put in place. The SSA already has all the data about how much each of us has been earning throughout our lives.

Beyond that plan, keep going by adopting the proposal of many to reduce payments to high earners on the grounds that it makes little sense to spend benefits on those who need them least. Again, though, the reminder that even liberals advise against cutting too much else it could create a powerful, monied class of people with no stake in the Social Security program and who might be inclined to work for its destruction. Like an Albanian blood feud, there is the Republican element that, from one generation to the next, has never given up the goal of avenging FDR's "socialist" scheme. Stephen Moore, the chief economist of the Heritage Foundation, has said that Social Security is “the soft underbelly of the welfare state”; “jab your spear through that” and you can undermine the whole thing.

If all-of-the-above steps are needed to secure the future of Social Security, how can expansion even be considered? But the liberal wing says it has to be considered because the apparently permanent structural changes in the economy left in the wake of the 2008 crash have put so many in jeopardy.

Andrew Biggs, the Social Security expert (once an SSA official) at the American Enterprise Institute, says in a Wall Street Journal op-ed that the retirement crisis is "phony", but the "typical middle-income individual born in the 1960s" he cites as living comfortably with the added income from investments and a 401k is not representative of those lower on the income ladder.

In that stratum, 36% of retirees rely on Social Security for 90% or more of their income; 65% of retirees rely on it for more than half of theirs. Yet the average benefit of around $1,300 a month is insubstantial — it's the same as the federal minimum wage, amounting to only $15,600 a year. That's poverty level.

The Government Accountability Office reports that in American households with someone 55 or older, 52% have nothing saved for retirement, and of that 52% only half will get anything from a company pension. For those ages 55 to 64 who do have retirement savings, the median amount is barely in the six figures. Retirement experts say those embarking on retirement need a nest egg more like $250,000 coupled with their Social Security benefits to maintain a reasonable standard of living.

The 2008 financial plunge and the drop in wages that followed squeezed out families who once saved for retirement. The Employee Benefit Research Institute finds that now only 57% actively save anything. Three quarters of Americans nearing retirement in 2010 had less than $30,000 socked away. That shouldn't imply that most have even close to that amount. "Less than $30,000" comprises the 34% that a Harris poll of a few years ago said had nothing at all saved for retirement — "not even a hundred bucks".

Women are a special case. Those with children have worked less years than men, to this day are still paid less, and with benefits tied to earnings, will receive less from Social Security. What savings they have need to be stretched further, because women live longer than men by three to four years. Not surprising that the poverty rate in 2013 for single (either never married, divorced or widowed) women age 65 and older was nearly three times that of married women. Data from that same year said women received an average of $12,857 a year from Social Security. Men got $16,590.

How, then, can we at the same time solve the Social Security shortfall outlined in the first part of this article, while funding an increase in benefits for the echelon of persons just described who have not been able to save anything from the flatlined wages of the past quarter century.

Clearly, radical changes are needed. People must set aside far more and for that a steep increase in the payroll tax is essential if they are to earn higher Social Security benefits in their elongated retirement years. For that to be possible, they need to earn more. That says that a much higher minimum wage must be mandated at the federal level — such as the $15 an hour being tried in places around the nation — and indexed to inflation. People must have higher incomes out of which to pay the higher payroll taxes.

Yes, this will cause disruption. Jobs will be lost. But far more will benefit from the higher wages than will be harmed. And it will push up wages for those already earning above the $15 minimum. Prices will increase. Businesses that cannot sell at those higher prices will close. Consumer buying power will shrink. But huge changes must be made if we are not to create a destitute underclass. Drifting along on our present course is simply unsustainable.

And we haven't even touched on Medicare which is in far worse shape than Social Security.