Social Security should be expanded, not cut
LA Times, 6/5/13
Social Security is still the best retirement program we have. Benefits should be increased, paid for by raising or eliminating the payroll tax cap.
By Michael Hiltzik
June 5, 2013
Fear-mongers and other critics of Social Security were silenced — momentarily — by the release last week of the annual trustees' report for the programs. The report showed not only that it's looking pretty good in the near term, but in the long term it's more important to the sustenance of millions of Americans than ever before.
But policymakers and pundits have taken the wrong lesson from these findings. The argument they most often put forward is that Social Security is so important it must be "saved," typically by cutting benefits to bring its outflow in line with its income.
But the right conclusion is that it should be expanded. This is the proper moment to do so, because the shortcomings of the rest of our retirement system have never been so obvious.
Social Security is still recording a surplus of income over expenses, and even looking ahead 75 years, its projected actuarial deficit is manageable within a growing economy. In fact, its trustees say the program's share of national wealth will stabilize as the baby boom generation moves into and — what's a polite way of saying this? — out of retirement.
Let's not forget Medicare. Its trustees found that its fiscal health has been measurably improved by the Affordable Care Act and secular trends pointing to a plateau in U.S. healthcare cost increases.
So there was a notable dearth of declarations from Capitol Hill and media pundits after the reports' release that our social insurance structure is going "bankrupt" or that the rise in costs is "unsustainable."
Chalk that up to the triumph — rare enough these days — of facts over flapdoodle. What the latest figures show is that Social Security is still the best retirement program we have. It's the safest, the most dependable and by far the most important source of income to the vast majority of retired Americans: Two-thirds of them get more than half their income from Social Security.
The biggest problem is that most retirement funds outside Social Security are at risk in the financial markets. Among workers with any employer-provided retirement plans, the fraction covered solely by a defined-benefit plan — the traditional kind, where your retirement check was based on your longevity and salary history with your company — declined by more than 80% between 1980 and 2003, according to the Center for Retirement Research at Boston College. Even firms that still offer these plans typically exclude new employees.
Over the same period, the percentage of workers covered solely by defined contribution plans tripled. Since the retirement benefits generated by these 401(k)-type plans are based on how much their owners save during their working lives and how well those nest eggs perform in the financial markets, the exposure to financial downturns is severe.
The consequences of this shift are borne out in the retirement center's national retirement risk index. The survey's most recent update last October estimated the share of U.S. households at risk of being unable to maintain their pre-retirement living standards after age 65 at 53% in 2010, up from 44% in 2007.
That period, of course, encompassed the financial market collapse of 2008 and its long-tailed aftermath. As it happens, the smallest decline in retirement security was experienced by low-income workers. The survey attributed the outcome to that group's relatively high reliance on Social Security, the one pillar of retirement unaffected by the collapse in home and stock prices. Middle- and high-income workers, whose retirement plans teetered on the knife edge of their home equity and 401(k) balances, suffered sharper drops. And that's not even counting 401(k) fees that can cost hundreds of thousands of dollars in value out of an account over a career span.
Still, those in the more affluent categories did better overall. In 2010, the percentage of high-income households at risk was 44%, for middle-income families it was 54% and for low-income families 53%. That points to the basic inadequacy of Social Security as a safety net. That's a category in which the U.S. consistently lags behind the rest of the developed world.
According to a 2006 World Bank survey, the U.S. then spent 8% of its gross domestic product on all safety net programs, including the old age, survivors and disability programs represented by Social Security. In the European Community, the figure was 19%. (The statistics don't include healthcare.) Think about that the next time you hear a pundit complain that Social Security is on an "unsustainable" course.
There's no trick to making Social Security more relevant to more Americans. Benefits should be increased, especially for those whose lifetime annual earnings have averaged $50,000 or so (roughly two-thirds of all beneficiaries). The benefits for women who have spent most of their working-age lives as caregivers by raising a family or tending to aged parents should be augmented through a "caregiver credit" that recognizes their contribution. You know all those politicians who go on the stump or on TV to praise family and motherhood? This is a chance to put their votes where their mouths are.
How to pay for that? No trick to that, either: Raise the payroll tax cap, or even better, scrap it. The most common objection to this solution to Social Security's fiscal issues is that it would raise taxes on the wealthiest Americans to, well, "unsustainable" levels.
That's the case made by Third Way, a self-described moderate think tank that's guided by civic-minded representatives of Wall Street and big business. Eliminating the earnings cap without countervailing benefit cuts is a solution that "will never happen and should never happen," the group said in an "idea brief" last month.
The brief explained that the payroll tax increase would drive the top marginal tax rate for taxpayers earning more than $400,000 to nearly 50%. But that's mistaken; it doesn't reflect that a large portion of wealthy taxpayers' earnings come from non-wage income, which isn't taxed for Social Security at all. Non-wage income makes up nearly a quarter of the average earnings of those in the $250,000-$500,000 range. For those in the $2 million-$5 million range, it's more than half.
The alternative to eliminating the cap is weakening benefits. Congress and the Obama administration seem all too willing to do this, whether by cutting cost-of-living increases for retirees through the "chained CPI" or raising the retirement age.
Solutions like these don't always come free. They have a tendency to cause other problems for Social Security. For instance, increasing the normal retirement age will force more people onto the disability rolls, exacerbating the one major near-term problem for Social Security — a disability fund expected to run out in 2016.
Experience shows that nothing has worked better to shore up the average American's retirement prospects than Social Security, and nothing has kept the elderly healthy better than Medicare. With the trustees suggesting that the dire projections of the recent past may not be so dire, truly fresh thinking would say that the moment has come to invest more in these programs, not less. Why are we still talking about cuts?
Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at email@example.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.
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