October 9, 2010
Social Security: The New Class StruggleBy Dale Bandy
Social Security has taken on the all the dimensions of a class struggle between the "haves" and the "have-nots." In this case, the young "have-nots" struggle against the power, wealth, and influence of the older "haves." The Social Security struggle is between generations, but it is the older Americans who have the advantage. It is the older Americans who have the money, the power and the influence.
Just look at the money. According to the Federal Reserve, the median net worth for households headed by persons under aged 35 was $11,800 in 2007, while the median net worth for households headed by persons aged 64 through 74 was $239,400 (Survey of Consumer Finance). Younger families are paying Social Security taxes while trying to raise families. Those taxes go to pay benefits to older individuals who are, on average, twenty times wealthier.
Unlike younger Americans, who have seen their incomes decline during the current recession, seniors have seen their incomes increase by 7.1%. Now, households headed by individuals over age 65 have more income than households headed by individuals who are under age 25 (Census Bureau).
No wonder the younger generation is called the sandwich generation. It is younger Americans, not older Americans, who should be angry about the Social Security system. As our country grows older, a decreasing percentage of Americans pay into the system and more receive benefits. More than 50 million people now receive benefits. That is one person for every three workers who pay into the fund. As more baby-boomers retire, it is only going to get worse. The boomers will begin turning 65 next year.
In class struggles involving minorities, the so-called disadvantaged make up for their lack of power, influence, and money with organization and often sheer numbers. In this struggle, seniors not only have influence, money, and power, but they also have organization and numbers.
Social Security, which has been a nagging fiscal problem, is now a looming financial disaster. The Social Security Administration's Trustees Report projects that expenditures will exceed tax receipts this year. Yes, this year, not some distant future date.
The Social Security Trust Fund has nominally accumulated $2.3 trillion to make up the shortfall. The Social Security Administration estimates that it currently has an unfunded obligation of $15.3 trillion, which is more than the current reported national debt. The government does not count the Social Security obligation as debt when it reports its liabilities. The Social Security Administration projects that the nominal accumulation of $2.3 trillion will run out in 2037. That estimate does not factor in the continuation of the current economic slowdown. If the slowdown continues for several years, the money will be gone much sooner.
Some liberals and conservatives talk about raising the Social Security retirement age (now 66 and scheduled to increase to 67). That would help eventually. Just how far are we willing to go? There also is some discussion of tying benefits increases to wages instead of to the cost of living. That, too, would help.
Let's look at what businesses are doing. Retirement plans offered by businesses fall into two basic categories: defined benefit and defined contribution plans.
Defined benefit plans promise future retirement benefits relying on a formula based on years of service and average earnings. Businesses and employees pay into plans the amounts needed to accumulate money required to fund promised benefits. That sounds a little like Social Security. If a defined benefit fund falls short, employers must make up the shortfall. The Social Security system has no provision to deal with a shortfall other than cutting benefits.
With defined contribution plans, businesses and employees pay set amounts into retirement funds for each covered worker. Retiree benefits are based on the amount that accumulates in personal accounts over the years.
In recent decades, large numbers of businesses have moved away from defined benefit plans to defined contribution plans in part because government regulations for defined benefit plans are particularly complicated. Yet economic uncertainty has a lot more to do with it. An employer obligation to made additional contributions often becomes a reality when stock market prices drop and the value of fund assets fall. This is when the business itself faces its greatest financial challenges.
The Social Security system is a conflicting marriage of defined contribution and defined benefit rules. The Social Security tax rates define the amounts that are paid into the Social Security trust fund by workers and employers. The Social Security laws define the benefits that are promised to retirees. They bear little resemblance to fiscal reality. In the future, there simply will not be enough money coming in to pay promised benefits. Under current law, the Social Security fund is required to continue paying benefits at promised levels until it runs out of money. At that point in time, benefits, by law, must be reduced to the level of revenues. The Social Security Administration now projects that it will run out of funds in 2037, and that benefits will have to be reduced by 25%.
In aggregate, Social Security is a defined contribution plan. That is, benefits are limited to whatever funds are on hand because there is no one to make up the shortfall. Regardless, for the time being, it is paying benefits as though it were a defined benefits plan.
We can avoid a 25% reduction in benefits in 2037 by taking simple steps now. All we have to do is limit benefits paid out each out each year to the amount of Social Security tax being paid in by employers and workers plus the interest being received by the Social Security Trust Fund on amounts loaned to the federal government (currently $2.3 trillion). This is nothing more than an accelerated version of current law. It is the balanced budget amendment for Social Security. The Social Security Administration estimates that benefit payments will equal tax receipts and interest in 2024. If the economy does not recover, this day will come sooner. This plan would preserve the Social Security Trust Fund assets. Under this proposal, 2037 benefits would be 90% instead of 75% of expected amounts. That is because Social Security would have $167 billion of annual interest income to supplement tax revenues. Having that money is, of course, contingent on the trust fund retaining the accumulated amounts that it now has.
Most other ideas aimed at solving Social Security's fiscal problems are compatible with the concept of an aggregated defined contribution plan. The retirement age could be increased. Benefits could be tied to wages instead of the cost of living. Making those and other modest changes would reduce the Social Security obligation. The result could well be that there would be no decrease in benefits because of the limitation.
The one thing that the proposal does is prevent the Social Security trust fund from ever running out of money.
If you have looked at amortization schedules for home mortgages, you know that there isn't much difference in the monthly payments for a 15-year and a 30-year mortgage, and even less difference between a 30-year and an interest-only loan. A very small change in the amount the trust fund pays out in benefits can be the difference between a Social Security system that runs out of money and one that continues to pay substantial benefits indefinitely. That is why we need to fix Social Security now.
The tying of future Social Security benefits to available revenues would save the system without increasing the Social Security tax burden on the already overtaxed younger generation. The "have-nots" won't have to pay more taxes to benefit the "haves." And that idea is worthwhile.
Cited statistics are from four sources:
Trustees of the Social Security and Medicare Trust Funds, Summary of the 2010 Annual Reports
Trustees of the Social Security and Medicare Trust Funds, Single-Year Tables Consistent with 2010 OASDI Trustees Report
Federal Reserve Board, Survey of Consumer Finances
Census Bureau, Income, Poverty, and Health Insurance Coverage in the U. S. 2009