Social Security Reform

Because of current budget deficits many Republicans suggest that Social Security needs to be reformed. The reality is that Social Security is currently running a surplus, and in fact the surplus is credited toward the general revenue, so the annual budget deficit generally looks better than it actually is. [See] But according to actuaries, Social Security is not taking in enough revenue, and will soon begin running a deficit, so there is a long term need to deal with the issue.

The main problem with social security funding is that when social security was created there were lots of workers for every retiree. In 1950, for example, there were 16 workers per retiree, but now there are just over 3. Social security benefits are paid from the money received from current workers, and not from an account that former workers paid into. So there needs to be more workers than retirees. This means that, if these trends continue, and there is no reason they won’t, the system is not sustainable in the long term. []

Everyone agrees that at some point social security must be fixed. Some liberals say that because it is running a surplus now it doesn’t need to be dealt with immediately, but even they agree that it must be dealt with at some point in the future.

As we discuss possible changes or fixes to Social Security there are a couple of general concepts to keep in mind. The first thing to understand is the original purpose of social security. Social Security was created in the 1930’s as one of a number of programs to deal with the extreme economic turmoil of the Great Depression. One of the issues that needed to be addressed was that many people were too old to work, but had no means of support. Some were able to rely on children or relatives, but far too many were left without money or any type of support. Social Security was devised as a way to prevent those too old to work from becoming destitute. It’s important to point out that the original purpose of Social Security was not to create a general retirement program to ensure seniors lived out their “golden years” in comfort. The original purpose was to ensure that there were not legions of desperately poor and destitute old people begging on the streets. It’s also important to remember that the original social welfare programs (including Social Security) were not intended to simply help the poor, but were designed to protect society, because history taught that large numbers of desperately poor people can destabilize a country. Various welfare programs were essentially a bribe to placate the poor. The primary purpose was to protect society: directly helping people was only an indirect purpose. As such, questions about dependency were secondary.

I wrote about this in my first published essay: Welfare Protects Society, not the Poor. (It revolves around the discussion of welfare reform in the 1990’s, but the history is still relevant. I also discuss it in A Brief History of Economic Insecurity.

The original retirement age was set at 65, which was older than the average life expectancy at the time. In the nearly 80 years since Social Security was created, the average life expectancy has increased to over 78. This means that Social Security now has to last for many more years, and has to cover many more people for far longer periods. The population growth of the nation has also changed as people are having fewer children, and we now have an older population. The result is that we now have barely three workers for every retiree.

Over the years Social Security payments have also increased. When Social Security was originally created Congress set the payment level, and determined when these payments should increase. I’m old enough to remember the bruising political battles that occurred every few years as seniors lobbied Congress to raise Social Security payments. When inflation started to climb to double digits in the mid to late 1970’s, the battles got nastier and nastier. Eventually Congress decided to get out of the way, and they established the automatic Cost of Living Adjustment (COLA) in 1978. Now Social Security payments increase with the rate of inflation, which only seems fair for seniors because costs rise with inflation. The problem is that Social Security is paid for by employee and employer contributions based on wages, and wages have never increased at the same rate as inflation. So payouts grew with inflation, but income grew slower than inflation based on lower wage increases. And so the program began to run a deficit. Congress fixed the problem over the years by raising the contribution rate. It was initially set at 1% of wages, and all of it paid by the employer. It was raised a number of times over the years, and it is now 6.2% of wages, with the employer paying one half and the employee paying the other half.

Life expectancy continued to increase, the population continued to age (and so the ratio of worker to retiree continued to shrink) and payouts continued to rise faster than contributions. So the program imbalance has continued to be skewed. So, while there still is a surplus, the program must be fixed. But that doesn’t mean that it should be changed root and branch.

Conservatives have long opposed Social Security, because they argue that it makes people dependent upon the government, or they suggest that individuals should be responsible for saving for their own retirement, or they say that private enterprise would do a better job running the system than the government. It is difficult, therefore, to separate conservative’s long standing opposition with their current calls for “reform.” It is difficult to imagine, based on previous experience, that these calls for reform are not just another attempt to eliminate the program.

This raises one other important point to consider when discussing ways to fix the system.

Conservatives may hate the program, but there is no denying that Social Security contributed to the growth of the American middle class. A government run retirement system freed individuals from having to spend effort and money planning for retirement. It also freed people from the burden – financial and otherwise – of taking care of elderly relatives. This left people with extra money, which they spent on consumer goods. And since we have an economy that is highly dependent upon the purchasing power of consumers, social security freed a large segment of the consuming public to consume. So, to a very real extent, social security is a key component of our consumer culture. Without social security, or with a privatized system where people are largely responsible for funding their own retirement, people will be less able to spend money on consumer goods. This will mean less money pumped into the economy, which will mean a weaker economy.

With that background in mind, here is how I would fix Social Security.

First, I would incrementally raise the retirement age. It is currently set at 65, but slowly rises for people born after 1938, and will eventually settle at 67. It is, however, still possible to take Social Security starting at age 62, though the benefits are reduced. I think that the age should slowly increase along with the average life expectancy, which is currently around 78. There clearly is an age at which people are too old and frail to work, and I’m not suggesting that the retirement age should be raised to, or even near, that. But I don’t think that gradually raising the retirement age to 70 would be unreasonable. Remember the original purpose of Social Security, and recall that the original retirement age was set above the age of the average life expectancy at the time. Social Security should be there to ensure the elderly don’t become despondent, or have to live under bridges and beg to eat. It was not designed, and should not be use, to finance a retirees “golden years.” People should be largely responsible for their own retirement, but the government should provide a safety net.

Second, the Cost Of Living Adjustment should be altered. In my opinion Congress wimped out in the late 1970’s when they got out of the business of setting the Social Security benefits. They made an informed choice when they chose the CPI, or the Consumer Price Index, as the measure of inflation used for the Cost Of Living Adjustment. But it was a poor measure, as noted above, and should be revised. Personally I would base the increase in benefit payments on the year to year increase in the Average Wage Index, which measures the average wage in the nation. This is because social security benefits are benefits earned from wages, and it only seems fair (and makes actuarial sense) for benefits to rise at the same rate as wages. But no one else in the nation agrees with me, so the idea is a non-starter, so we need to look at other plans.

Republicans in Congress have proposed using what is known as the “chained” CPI, which adjusts the “core” CPI based on a number of statistical and economic measures. It is widely considered by economists to be a better measure of actual inflation, but results in lower increases in most years. I think that this is a better measure than the current CPI, and I support this plan.

Third, raise the wage income cap. Believe it or not (and most people don’t believe it) you only pay into Social Security up to $118,500 in income. If you make more money that this, it is not “taxed” for Social Security. This means that people making more than $118,500 pay a lower percentage of their income in Social Security withdrawals than the poor. And remember, FICA, even though it is called a “payroll tax” it is not really a tax, it is your contribution to Social Security. And since it is not a tax, it is not subject to the normal tax credits and deductions. So a person who may be making too little to pay income tax still pays the FICA withholding. This increases the social security burden on the working poor, which seems unfair. I would eliminate this cap entirely and subject all income to social security withdrawal.

According to actuarial measures, these three fixes should keep Social Security solvent for many years, if not for every. And I should note that Republicans support the first two of these ideas, so this is hardly some liberal outlier idea.

One other fix that can help the system is to incorporate state and local workers in the Social Security system. Currently many state and local workers contribute to their own retirement plans. As anyone who reads the papers knows, many states and localities are on the verge of bankruptcy because they failed to properly fund their retirement plans. Moving these workers to social security would possibly reduce the benefits for these workers, but it would eliminate the possibility that state and local plans might go bankrupt (see Detroit), and it would also increase the number of workers in the system, which would increase the ratio of workers to retirees, and would help stabilize the system.
There are many intractable financial problems facing the nation, but the reality is that Social Security is a fairly simple problem to fix.

The best web site with fair and unbiased information on fixing social security is the American Academy of Actuaries at They have a web page devoted to fixing social security: Try Your Hand at Social Security Reform.