EconoBytes - Tuesday, August 21, 2012
Today: Social Security’s problems are relatively small and there are ways to eliminate its shortfall without reducing benefits for future retirees.
Social Security cannot, by law, contribute to the deficit. EPI Economists Mishel, Morrissey, and Ballantyne: “Social Security can only spend what it receives in tax revenues and has accumulated in its trust fund from past surpluses and interest earnings. It cannot add to the deficit if the trust fund is exhausted because the law prohibits it from borrowing”. Via EPI.
Unlike Medicare, Social Security costs will rise slowly and level off—the two cannot be conflated. Healthcare spending is projected to reach 20 percent of GDP by 2021, whereas Social Security “costs are rising from around 5 to 6 percent of GDP before leveling off after the Baby Boomer retirement, with costs at the end of the period slightly lower as a share of GDP than in the peak Boomer retirement years.” Via EPI.
The shortfall is a very small percentage of GDP. Citing the number of absolute dollars can be misleading, as Dean Baker explains, because most readers don’t have“any idea of how large the economy will be over the next 75 years”. The shortfall expressed as a fraction of GDP is more informative: “The Social Security trustees’ projection of the size of the shortfall is equal to approximately 0.9 percent of GDP over the 75-year planning horizon. The Congressional Budget Office's projection of the shortfall is equal to approximately 0.5 percent of GDP.” Via CEPR.
Even with the shortfall and without any remedy, Social Security will still pay out benefits greater than the system pays current recipients. PaulKrugman: “…even if the trust fund is exhausted and no other financing provided, Social Security will be able to pay about three-quarters of scheduled benefits, which would mean real benefits higher than it pays now. I don’t want to see that happen, but it’s worth keeping in perspective — especially when you look at the solutions ‘reformers’ propose, which all seem to involve reducing future benefits relative to those currently scheduled.” Via NYT.
Reducing benefits is not the solution. The average retiree now receives a check for $1,234/month. A new MIT study finds that “46 percent of senior citizens in the United States have less than $10,000 in financial assets when they die. Most of these people rely almost totally on Social Security payments as their only formal means of support”. And since the average monthly benefit from Social Security is around $1,200, those who rely on Social Security exclusively are living just slightly above the federal poverty line. Via MIT.
The rise in life expectancy is not the cause of the gap. Economist Monique Morrissey of the Economic Policy Institute explains why: “[G]ains in life expectancy represent only a small part of the fiscal challenge facing Social Security. The increase in the normal retirement age from 65 to 67, currently underway, already offsets gains in life expectancy for workers born before 1960, and longevity gains for younger generations account for only a fifth of the projected Social Security shortfall.” Via EPI.
Solutions aimed at offsetting longer life expectancy disproportionately benefit whites and the highly educated because those Americans live significantly longer. According to a new study, “in 2008 white US men and women with 16 years or more of schooling had life expectancies far greater than black Americans with fewer than 12 years of education—14.2 years more for white men than black men, and 10.3 years more for white women than black women.” Via Health Affairs.
An important cause of the projected depletion of Social Security’s trust fund is wealth inequality. Robert Reich: “Back in 1983, the ceiling was set so the Social Security payroll tax would hit 90 percent of total income covered by Social Security. Today, though, the Social Security payroll tax hits only about 84 percent of total income. It went from 90 percent to 84 percent because income inequality has widened. Now a much larger portion of total income goes to the top -- almost twice the share they got back then. If we want to return to 90 percent, the ceiling on income subject to the Social Security tax would need to be raised to $180,000.” Via Marketplace.
Monique Morrisey (EPI) provides a chart showing “…slow and unequal wage growth, which has increased corporate profits and pushed a growing share of earnings above the cap, eroding Social Security’s tax base.”
Three solutions for Social Security’s future financing gap: Jeff Madrick, Roosevelt Institute Fellow, proposes three viable options for addressing the future financing gap:
1. “The cap can be eliminated. This would close almost the entire gap if high-end earners do not receive higher benefits. It will still close four-fifths of the gap if they do.”
2. “Raise payroll taxes by 1.1 percentage points, from 6.3 percent to 7.6 percent. This would entirely close the solvency gap. Or the tax could be raised by a little more than 1 percentage point in 2020 and another percentage point in 2052, also eliminating the solvency gap.”
3. “A combination would also work. If the cap were raised to cover 90 percent of all workers, for example, it would close about 25 percent of the gap. Thus, a tax increase to close the rest would be smaller. Alternatively, the payroll cap on employees could be limited to 90 percent and eliminated altogether for employers. This would just about eliminate the gap.”
For questions or interviews, please contact Ira Arlook (202.258.5437) or Sharon Rose Goldtzvik (202.789.7753).