The Rocky Road to Taking It Easy

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Senator Elizabeth Warren, Washington, D.C., 2013

Social Security may well be the most popular social program in America. It is without question one of the nation’s two or three most significant of the past century, the great accomplishment of the New Deal. Some 52 percent of all married couples sixty-five and older today receive half or more of their income from Social Security. Three quarters of unmarried retired people do. Social Security has been a major factor in the reduction of poverty among the elderly from 35 percent in the 1950s to about 9 percent today. It pays benefits to disabled workers, widows, and children of deceased workers. Moreover, those payments are mostly progressive; higher-income recipients receive more in absolute dollars but less as a proportion of their preretirement income than do lower-income recipients.

Fifty-nine million workers received $863 billion in benefits last year, somewhat less than a quarter of all federal spending, but in an early 2014 survey by CBS News, 73 percent of Americans thought the benefits paid by Social Security were worth the costs. Some three out of five in a 2013 survey undertaken at the time the congressional “sequestration” was being put in place to cut government spending believed that Social Security benefits should not be reduced. Social Security did not lose its popularity even when government spending became a major headline issue in the late 1980s and 1990s. A 1996 survey found overwhelming support.

This popularity may explain why it has seemed easy to frighten the general public about Social Security’s demise with an alarmist campaign by conservative think tanks and policymakers but also by some Democrats that has been underway since the 1990s and early 2000s, and continues today.

Reporters and policymakers routinely say that Social Security is going broke or is bankrupt. Some right-wing economists and policymakers repeatedly warn that the system has unfunded liabilities of tens of trillions of dollars. A more subtle tactic, often taken up by Democrats, is to claim persistently that Social Security must be “saved.” The Democratic economist Alice Rivlin did so in a Brookings Institution report, even while assailing those who exaggerate the problem. In just the first week of the new Congress, the Republican House voted not to use modest funds from Social Security taxes to replenish the Social Security disability fund—the separate fund to help disabled people of all ages—which it has done eleven times in the past. It said it feared weakening the future of payments to retired people. Now, there will be a showdown about disability payments in 2016 when its own fund runs out.

Since there will be far fewer workers to support retirees as baby boomers retire in ever-greater numbers in coming years, rhetoric about the frailty of Social Security may seem appropriate. But Social Security is simply not going broke or bankrupt. These claims, writes the business journalist David Cay Johnston in an foreword to Social Security Works!, one of the informative books considered here, are typically artful forms of deception or outright “lies.” I agree. Moreover, there is a new and growing countermovement among Democrats that favors not merely refusing to cut any benefits at all but also increasing benefits—which are now, after all, just enough for most people to keep going. Its main proponent is Senator Elizabeth Warren. In this presidential primary season, a big question is whether it will take hold.

The Social Security deficit is not meaningless but it is far smaller than often suggested. Every year, the trustees of Social Security are required to project its economic status—essentially, the difference between payroll tax receipts and the benefits paid—over seventy-five years. Payroll taxes will exceed benefits over much of this period, creating a temporary surplus that also accumulates interest income, but this will run down by the 2030s. At that point, as tax receipts lag behind benefits, Social Security will be in deficit. Over the projected seventy-five-year period, however, the deficit will come to only somewhat more than 1 percent of Gross Domestic Product. The liabilities of trillions of dollars into the future seem frightening only if one doesn’t compare them over the years to Gross Domestic Product, the nation’s total output, which in 2014 alone was more than $17 trillion. Even if nothing is done, Social Security will still pay out 75 percent of benefits in the 2030s and beyond, according to the projection, hardly the definition of going broke.

Still, a reduction to 75 percent of benefits is substantial and it is best to make plans to eliminate the deficit soon rather than wait to make a larger, more painful, and perhaps politically more difficult adjustment ten or twenty years from now. The question is whether to cut benefits or raise taxes, or a combination of both. Benefit cuts were instituted in 1983, mostly through a gradual increase in the retirement age from sixty-five to sixty-seven, and new income taxes on Social Security benefits for middle- to high-income retirees.

These changes are beginning to amount to a significant reduction in benefits compared to preretirement income. At the same time, retirees are also increasingly less well covered by private pensions, as we shall see. Thus, there is now a strong case to be made that the gap should be closed by tax increases, part of which would be progressive, rather than any benefit cuts at all.

Moreover, any tax increase would be moderate. Today, both workers and their employers contribute 6.2 percent of wages up to $118,500 to Social Security, or a maximum of $7,347 for a year, above which cap there are no taxes. The payroll tax need only be raised by 1.44 percentage points for workers and employers each, or an annual maximum of roughly $1,700, to close the projected gap completely. For a typical worker who makes, say $45,000 a year, the increase would come to about $650. Further, if the $118,500 cap on taxable income were raised to help reduce the deficit, rates on middle- and low-income workers need not be raised nearly as much as on others, making the system more progressive as higher-income workers pay more taxes.

Nevertheless, resistance to tax hikes among policymakers has raised the possibility that, with a Republican Congress and with the agreement of many Democrats, Social Security benefits will be cut this year or next. Raising the retirement age further is a commonly discussed proposal, but this would amount to a significant cut in benefits as workers receive lower payments over the remainder of their lives. Republicans and some Democrats often also propose cutting benefits for higher-income workers, or taxing them further, which to many may seem just. But to make a meaningful dent in the deficit, the reductions in benefits would have to cut beyond top earners deep into the benefits of middle-income retirees as well.

Such a proposal was made by President Obama’s deficit commission, headed by President Clinton’s former chief of staff Erskine Bowles and former Republican senator Alan Simpson. But many fear, I think rightly, that cutting benefits to middle- and higher-income people may undermine political support for this most popular of social programs, turning it into a conventional welfare program.

Many Democrats have been supporting cuts for years. President Bill Clinton has generally supported the idea, if not offering specific plans. He has spoken favorably of the Bowles-Simpson proposal, for example, which also calls for raising the retirement age to sixty-nine. John Podesta, the left-of-center presidential counselor, who has now joined Hillary Clinton’s staff, has argued in favor of some benefit cuts. Another commonly proposed benefits cut was supported in early 2014 by President Obama. It involved a technical fix to the way Social Security benefits are indexed to inflation, which would eventually have led to a significant reduction of benefits. By the end of the year, facing a political backlash, he abandoned the idea.

The Republicans have also long wanted to take Social Security private, giving some workers the choice to withdraw from the system and manage their own annual contribution in investment accounts. In the 2000s, Paul Ryan, now chairman of the House Budget Committee, backed a proposal, sent to Congress by President George W. Bush in 2005, to allow young workers the choice to opt out of paying payroll taxes and enable them to invest those dollars tax-free in individual investment accounts.

A major problem is that these proposals place the risks for managing investments on the workers, who in running their private savings plans, like 401(k)s, have already proven mostly inept. Moreover, privatizing Social Security will not itself reduce the future deficit because it does not add revenues to the system. And as workers drop out and stop paying their payroll taxes, there will be a shortfall in financing benefits for current retirees, thus increasing the deficit. Bush’s proposal did not receive adequate congressional support to pass, even from many Republicans.

The rapidly falling budget deficit recently has calmed some of the voices calling for Social Security cuts and privatization. But the presidential campaign could heat up their demands. Potential Republican presidential candidates like Ryan, Rand Paul, and Marco Rubio as well as right-wing think tanks today basically tell us the same story their counterparts did fifteen and twenty years ago: we must cut Social Security benefits to save the system.

The impetus to privatize the system, however, has lost some steam. After calling for privatization for years, Ryan’s latest version of “The Path to Prosperity,” his annual federal budget—which he formulated in a bill the House has passed—doesn’t include any such proposal. But it is likely it will be raised again as the presidential election nears, and almost certainly will after 2016 if a Republican manages to win the White House with majorities in both houses of Congress.

Hillary Clinton has not committed herself to a Social Security proposal as of this writing. It will be one of her more difficult decisions. While campaigning in the primaries in 2008, she proposed establishing a bipartisan commission to address Social Security’s solvency, which was seen by many as a way to accept benefits cuts without taking public blame. It was such a bipartisan commission that significantly reduced benefits in 1983.

But there is now a rising progressive movement among Democrats to increase Social Security benefits, especially in light of what many see as a coming retirement crisis. This will further complicate the campaign of Hillary Clinton, should she run. The proposed benefit increases are typically to be funded through tax increases on workers, including removing the maximum income cap. Last year, former senator Tom Harkin and Ohio senator Sherrod Brown proposed legislation to increase benefits, as did Linda Sanchez in the House, and their proposals were supported by the House Democratic Caucus.

In 2013, when a Washington Post editorial attacked the idea, Senator Warren rose on the Senate floor that same afternoon to reprimand those who would cut Social Security benefits and also to support an increase in benefits. “The absolute last thing we should do in 2013—at the very moment that Social Security has become the principal lifeline for millions of our seniors—is allow the program to begin to be dismantled inch by inch,” she said. “We should talk about expanding Social Security benefits—not cutting them.” Unsurprisingly, her words got much attention and the issue has become more central ever since. My own count of members of the House suggests that half of House Democrats now support increasing benefits.

Uninformed political rhetoric is likely to rise in volume as the presidential political season approaches, and two books under consideration here are particularly useful in clarifying the difficult choices in dealing with Social Security. They both argue that American workers face a serious shortfall in retirement income that the nation is not dealing with. The crisis, as noted, is caused, first, by the falling level at which Social Security benefits replace preretirement income, a fact not well known, and, second, by the sharp reduction in private pension coverage, which has not nearly been compensated for with 401(k)s that were supposed to take their place. These are tax-advantaged retirement accounts, sponsored by employers, but managed by individuals themselves. Individuals can also place tax-advantaged dollars in savings accounts known as individual retirement accounts, or IRAs. The shortfall is further exacerbated by low levels of regular savings among Americans and recent losses on the values of homes.

Erich Lessing/Art Resource
‘The Drunkenness of Noah’; fresco by Michelangelo from the ceiling of the Sistine Chapel, sixteenth century

Corporations are also cutting retiree health care benefits, and such costs are likely to rise faster than benefits. Finally, retirees are living longer, meaning their retirement income must continue to be paid over more years.

In light of the retirement squeeze, Falling Short by Charles Ellis, Alicia Munnell, and Andrew Eschtruth makes fixing Social Security an urgent priority. It doesn’t propose a single plan but offers a mix of moderate proposals from which to choose to assure Social Security’s solvency, including tax increases and raising the early retirement age at which a worker can receive benefits from sixty-two to sixty-four. It argues that raising the retirement age itself above sixty-seven to seventy would, however, result in too great a reduction in benefits. A retirement age of seventy would mean a 20 percent reduction in benefits for the typical earner. The authors also propose ways to increase employer and employee contributions to 401(k)s and improve investment returns.

Social Security Works! by longtime Social Security analysts Nancy J. Altman and Eric R. Kingson is more ambitious. Like the authors of Falling Short, they show that there will indeed be a coming retirement shortfall, and they make a passionate case for an increase in Social Security benefits by 10 percent across the board, along with expansion of benefits to the poor, children, and working mothers. The authors’ plan—called the Social Security Works All Generations Plan—is a comprehensive program, financed by higher taxes, that would lay the groundwork for a progressive shift in America’s safety net. Among other tax increases to pay for their proposal, they would raise the payroll tax gradually by one percentage point each on workers and employers and gradually eliminate the maximum tax cap.

Social Security has long been an ideological target of those who advocate small-government conservative ideology. David Stockman, Ronald Reagan’s budget director, once called it “closet socialism.” In the 1970s, Social Security did indeed have a serious financing problem. The deficit resulted from two major factors: first, higher inflation in the 1970s, to which benefits were indexed by Richard Nixon in 1972; and a major recession, reducing tax receipts. Conservative think tanks such as the Cato Institute and the Heritage Foundation exploited growing public concern that government was mismanaged, and undertook a mission to privatize the Social Security system.

But given Social Security’s popularity, not even President Ronald Reagan, a longtime critic, maintained his support for privatization. Instead, he appointed the bipartisan commission mentioned earlier, which was directed by Alan Greenspan, to recommend reforms that would preserve Social Security as it then was, and still is. In 1983, the Greenspan commission proposals raised payroll taxes and the retirement age gradually from sixty-five to sixty-seven. To offset partially the regressive nature of these changes, it also levied on higher-income recipients an income tax whose receipts are channeled to Social Security.

In the following years, the number of working baby boomers sharply increased and the growing payroll taxes exceeded benefits paid by a wide margin, resulting in the temporary but substantial surplus that has been invested in Treasury securities. It was in the 1990s that the Social Security trustees projected that the surplus and accumulated interest would run down by the 2030s, reducing benefits paid by 25 percent at that point if it were not fixed. This forecast, however, raised the basis for another heated political fight over new benefits cuts. After some years, a privatization movement again erupted in the 1990s.

The wealthy investment banker Peter Peterson, who favored a form of privatization, made it a personal crusade to change Social Security, writing a book in 1996 called Will America Grow Up Before It Grows Old?, and financing think tanks to support his cause. Time asked on its cover that year, “Time to Kill Social Security?” The long bull market in stocks, which began in 1982, made the privatization idea attractive for the time being. It looked like retirees could easily get a higher return investing their contributions privately than with Social Security. Bill Clinton considered a privatization proposal while president but some political observers claim the Monica Lewinsky scandal undid it. Bush put forth his own plan but, as noted, failed to win congressional support in 2005.

Had privatization succeeded under either Clinton or Bush, it would have been a disaster for workers. The high-technology crash of 2000–2001 and the 2008 mortgage securities crash would have devastated retirees, who would have naturally invested heavily in equities. Government-funded Social Security promises fixed benefits, whether the stock or bond markets rise or fall, and has paid them faithfully since its beginnings in 1935.

Peterson has published a new book, Steering Clear, that is above all interesting for its moderate tone. His main concern remains America’s budget deficit, but his proposals regarding Social Security straddle both camps, arguing for benefits cuts and tax increases. His one reference to privatization is a suggestion to consider mandatory savings accounts, which would be managed by the savers themselves. These would include subsidies for lower-income workers. The left-wing New School economist Teresa Ghilarducci and others have been making similar proposals, though in many proposals the government would manage or guarantee the investment.

In Falling Short, Ellis, Munnell, and Eschtruth make two central points clear. First, what many do not realize is that Social Security benefits, as noted, even if the deficit is erased, will eventually replace less of preretirement income. Peterson, for example, entertains the idea of benefits cuts with no mention that Social Security payments will amount to less during the following years. In the 1980s and 1990s, a typical sixty-five-year-old retiree had 40 percent of his or her preretirement income replaced by Social Security. That will fall sharply for several reasons.

First, the rising retirement age adopted in 1983 will reach sixty-seven for those born after 1959. This benefit cut will reduce the proportion of benefits to preretirement income to a projected 36 percent. Medicare costs for Part B coverage, which includes doctors’ payments, are now deducted from Social Security benefits paid. They increase with higher incomes, and are likely to keep rising as health care becomes more expensive.

Further, income taxes paid on Social Security benefits will increase. In 1985, 10 percent of beneficiaries paid taxes on their benefits. Now, individuals with incomes of $25,000 or more and couples with $32,000 pay taxes on up to 85 percent of benefits. By 2030, half of all recipients will be paying taxes on benefits. All together, the average percentage of preretirement income that is replaced for retirees will then fall to 31 percent.

Finally, if the nation does not eliminate the Social Security deficit expected in the 2030s, benefits may be cut by the aforementioned 25 percent. Adding it up, the replacement rate on average could fall to only 27 percent of preretirement income from its current 40 percent.

Aside from Social Security, according to the authors of Falling Short, retirees are facing a retirement crisis because their private retirement pensions are also in abysmal shape. By the 2000s, corporations mostly stopped providing pensions that promised fixed annual benefits to half of American workers and offered, instead, 401(k)s to their employees. This was beneficial to the corporations, which were now required to contribute significantly less to their workers’ retirement. But workers themselves had to contribute a tax-deductible proportion of their salaries to an investment account they were to manage themselves if they wanted a retirement benefit.

The result was hardly a surprise. Workers contributed far less than they were allowed to on average. They managed their investments poorly, often investing in their own company’s stock. If they left a job, they also often simply cashed out the proceeds and didn’t reinvest.

The authors show that the typical household with workers between fifty-five and sixty-four has only $111,000 in their 401(k)s. As a result of this and declining Social Security benefits, the Center for Retirement Research, run by one of the Falling Short’s authors, Alicia Munnell, finds that the percent of workers who will not have a retirement income near their former standard of living has gone up from 31 percent in 1983 to 52 percent today.

Conservatives led by economists at the Cato Institute are claiming that the projections of replacement rates are too pessimistic and that Americans will have more retirement money than conservatives have predicted. They argue that conventional analyses don’t take account of the likelihood that workers will save more when their children leave the household and that the elderly will spend less later in retirement. But to most experts, such assumptions are not sound. If the elderly spend less, for example, it will be because they have to, since their money is running out.

There is no silver bullet for fixing the private retirement system. Falling Short recommends that individuals increase their contributions to their tax-advantaged 401(k)s, which can be as high as $18,000 annually. Individuals over fifty can save up to a tax-deductible $6,500 a year. The authors of Falling Short also recommend President Obama’s new MyIRA, which is designed for lower-income workers. Those who participate have their tax-deductible savings invested in government savings bonds but they can withdraw the money tax-free after retirement.

The authors also urge retirees to use the equity they’ve built up in their houses, the only other large sources of savings, to fund retirement. This can be done through reverse mortgages, which allow homeowners to give up their equity in their property while receiving annual payments. Finally, they urge workers to plan to work later into their lives.

In Social Security Works!, Altman and Kingson propose a more generous public plan. They take the retirement crisis as a reason to raise benefits and expand the system. The Social Security system is a wide-ranging social policy, and they’d like to take advantage of that. It provides income not only for retirees, but also for their widows, for disabled workers, and for the children of deceased workers. Altman and Kingson want to increase Social Security benefits by 10 percent across the board, including disability insurance. They also want to make Social Security still more generous for the poor. In addition, they would adopt a paid family leave plan and provide $1,000 to families on the birth of every child.

They make other recommendations as well. Both books, for example, would invest part of the Social Security surplus in broad-based equity funds, which should over a period of, for example, twenty years, provide a better return than Treasury bonds.

Such progressive visions in Social Security Works! have foundered on concerns about whether the nation can afford them. Altman and Kingson propose phasing in a payroll tax increase from the current rate of 6.2 percent to 7.2 percent over twenty years beginning in 2020. They can keep the increase moderate by gradually eliminating the salary cap of $118,500 on which workers pay the payroll tax. Finally, among the bigger revenue-raising proposals, they would levy a new 10 percent tax on earnings of more than $1 million.

The Altman-Kingson plan is responsibly calculated but optimistic when we consider the current state of American politics. The 10 percent premium on those earnings over $1 million seems especially impractical since it will be fiercely resisted. More modest expansions of Social Security could also be undertaken that require less of a tax bite.

But the beneficial impact of such proposals is to broaden public discourse. Those who want to cut Social Security benefits fairly significantly often argue that, even in the richest nation on earth, it is a choice between more money for poor children or for the elderly. Altman and Kingson point out that many nations spend far more on the elderly than America does, while spending more on young children as well.

Elizabeth Warren has been issuing the strongest challenge to the current system. “The suggestion that we have become a country,” she said in her Social Security speech, “where those living in poverty fight each other for a handful of crumbs tossed off the tables of the very wealthy is fundamentally wrong.” Whether she can win the favor of more of the electorate has now become a central question.