Reporting without context on the nation's greatest policy achievement ever

By Larry Polivka
lpolivka2@fsu.edu

While Washington rushes to reduce benefits in the name of a nonexistent crisis, the overwhelming reality is that Social Security is becoming more, not less, essential for most Americans. Any changes should be with the goal of strengthening it, not reducing benefits.

Journalists covering the debate seem to have forgotten the essential context. Social Security, after all, is an extraordinary public policy achievement that provides economic security for millions of older Americans. Social Security is the major reason that poverty among those 65 and older has been reduced from 30% to under 10% since 1960. Without Social Security benefits, the percentage of older Americans below the poverty level would now exceed 40%. Over 70% of all retirees depend on Social Security for most of their income. Social Security is the essential pillar of the U.S. system of retirement security.

It is also rapidly becoming even more essential, not less, due to the erosion of the private retirement security system. Defined benefit private pensions have disappeared for most workers and been replaced by poorly funded defined contribution plans (401(k), IRA). Many of the remaining defined benefit plans in both the private and public sectors are underfunded. Most working families have meager savings caused by stagnant or declining incomes and the increasing costs of education, housing and health care. The wage replacement value of Social Security is already expected to decline from 40% to under 30% by 2030 due to increasing taxes and health care costs. These trends will increase the percentage of baby boomer retirees unable to maintain between 70 and 80% of their last wage while working. Over 50% of older boomers and over two thirds of those born between 1960 and 1964 will not be able to achieve that benchmark, which is generally considered necessary to maintain an adequate standard of living in retirement.

At this point, it looks as if most future retirees will be more dependent on Social Security than their parents for their economic security in retirement. This means that the preservation and strengthening of the program should be the central focus of efforts to ensure retirement security for decades to come.

The Social Security Trust Fund currently has a surplus of $2.6 trillion, which is sufficient to keep the program fully solvent until 2037. After 2037, the money flowing into the Trust Fund through the payroll tax will be enough to pay beneficiaries about 75% of benefits currently promised in law. Social Security is not facing an immediate funding crisis; only modest changes are needed to ensure the program’s long term capacity to pay promised benefits.

These modest changes should not include cuts in benefits that would result from increasing the eligibility age for full benefits to 69 or 70. The eligibility age is already scheduled to reach 67 by 2016 and each additional year equates to a cut in benefits of 6.7%, or more than 20% if the eligibility age is raised to 70. A reduction of this magnitude, along with decreased income from savings, investments and private pensions, for those who have them, would put true retirement security well beyond the reach of most future retirees. Furthermore, increasing the retirement age creates a serious disadvantage for blue collar workers whose aging bodies make physical labor increasingly difficult or impossible. These workers make up over 40% of the labor force.

Ensuring Social Security solvency does not require means testing the program by cutting benefits for those with higher incomes. The vast majority of beneficiaries have a total income of less than $30,000 a year, and cutting the benefits of those with higher incomes would not generate significant savings unless the benefits of those with modest incomes were also reduced. Moreover, means testing Social Security would weaken political support for the program and jeopardize its long term survival by diminishing its status as a social insurance rather than a welfare program.

The relatively small gap between available funds and promised benefits projected to emerge between 2037 and 2040 can be closed without reducing benefits. The fairest policy responses would be to increase the payroll tax cap on taxable income, which is now set at about $106,000, or to increase the payroll tax rate by 2 to 3 percentage points (from 12.4 to 14.4, half paid by employees) over a 40 year period, or to appropriate some portion of a restored estate tax. These modest adjustments would cover the projected shortfall without unduly burdening employees or workers and would go a long way toward ensuring the future of retirement security, even in the face of eroding private pensions and savings.

The recent announcement by AARP that its board supports reducing Social Security benefits to restore long-term solvency in the program undermines the interests of its own membership and the broader public, which overwhelmingly opposes any cuts in benefits. This opposition reflects the public’s awareness of how tenuous retirement security has become since 1980, and especially since the beginning of the Great Recession and the destruction of trillions in retirement wealth. Strong public support for Social Security and the rigorous advocacy efforts of many organizations has so far succeeded in keeping the Obama administration and Republicans in Congress from including Social Security in negotiations to reduce the budget deficit, which Social Security does not contribute to because of the statutory requirement that it be self-supporting. AARP’s announcement, however, offers encouragement to Social Security critics who falsely claim that Social Security is a source of the deficit that cannot be managed without cuts in benefits. 

Instead of supporting cuts in benefits, AARP should be pushing for increases to offset the decline in private pensions and savings.  Social Security is our most efficient and reliable source of retirement security and the best vehicle we have to confront the growing threats to economic security in old age.

These threats are especially acute for older women, almost half (46%) of whom depend on Social Security for over 80% of their retirement income.  Women on average receive 25% less in Social Security payments than what men receive and are more likely to be living below the poverty level. Among the many older women who live alone, 17% are below the poverty level.  Without Social Security, 50% of all women over 65, and over two thirds of those who live alone, would live in poverty.  Many of these women are living just above the poverty line and would benefit enormously from increased payments.  

We have plenty of time to make the kinds of adjustments described earlier and to plan carefully for the permanent survival of our only reliable source of retirement security. As Ezra Klein wrote for the Washington Post last year, “the late 20th century saw a great shift in risk, in which uncertainty that had been borne by employers and the government was shunted onto individuals…. Shifting risk is not the same as eliminating it, and sometimes can even add to it." Modern public policy has made retirement more tenuous and fraught than it used to be. In a rational, informed public-policy climate, it would be clear that chipping away at the economic security of older Americans solves nothing, and risks great hardship.

Larry Polivka serves as Scholar in Residence of the Claude Pepper Foundation at Florida State University, focusing his efforts on issues relating to long-term care and retirement security.

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