Zuckerman: Social Security Has Reached a Tipping Point
Backed by pollsters, commentators have been busy consigning Texas Gov. Rick Perry to the also-rans in the contest for the Republican presidential nomination. Perry may have shot himself in the foot on his debut by being so eager to criticize Social Security as a "Ponzi scheme." In his 2010 book Fed Up! Our Fight to Save America from Washington, he referred to Social Security as "a crumbling monument to the failure of the New Deal," so it is clear that Perry thinks it needs reform. But how? Clearly he hadn't done his debate homework, as he wasn't able to repulse former Gov. Mitt Romney's questions on how he would unravel the long-established national program or get states to create 50 separate programs, or how a worker could transfer his benefits when moving state to state, or how much the complexity of all this would delay any kind of sensible national reform.
[Read Mort Zuckerman and other columnists in U.S. News Weekly, now available on iPad.]
And the Social Security system does need reform. It is very popular with Americans. Indeed, the polls consistently show they accord protecting Social Security a higher priority than reducing the deficit. But, as I've argued before about Medicare, demographics and delay are undermining the long-term viability of desirable social schemes. The Social Security system has reached a tipping point in terms of its long-run viability.
[Scott Galupo: Republicans Are Best Hope for Entitlement Reform]
With the baby boomers starting to retire, every year of delay in reconstituting the system makes retirement pensions more insecure. As America struggles to emerge from a recovery that never really was, we face the prospect that the conditions that existed before the Great Recession of 2007-08 may not be adequate to restore the widely shared prosperity of earlier years. If the projections of deficits and debt prove accurate--debt increasing to as much as 200 percent of GDP over the next 30 years--we will have an unsustainable burden on working America. We risk going the way of all once-great nations into an irreversible decline.
Social Security was born amid the harsh times of the Great Depression, a period marked by unemployment, homelessness, even starvation. We then made a deal with the American worker that no one who paid into the Social Security system would retire bereft of support in their retirement years. To this was added Medicare health insurance in the mid-1960s and the protection against inflation in the 1970s. These initiatives changed the economics of old age. Before Social Security, poverty rates among the elderly were three or four times those of the general population. Afterward, they fell below the rates for younger Americans.
[See a collection of political cartoons on the budget and deficit.]
To this day, Social Security still means the difference between poverty and economic security for millions of retirees, disabled people, children, and many American workers hurt by our very own Great Recession. Today Social Security is not only the primary source of income for two thirds of older Americans, it is also the single most important anti-poverty program for children, millions of whom live in households supported by disability, survivor, or retiree benefits. It provides basic support to about one in every six people, including disability and survivor protection for many workers and their families. It creates intergenerational benefits, as parents and grandparents can live independently of their working children and often become the childcare providers for those working parents.
Social Security is a "pay as you go" program. The current beneficiary is not receiving the money he or she paid in years ago; those funds were distributed to the system's earlier entrants and are gone. The money in the Social Security check today is coming from new entrants into the system. When young people are plentiful, Social Security produces a surplus. Now, as the overall population is set to age for decades to come, the Social Security deficit will grow to the point where the solvency of the trust fund is an issue. As one former comptroller general of the United States has put it about the trust funds: "You can't trust them [and] they're not funded."
[Read: Great Recession Means a Diminished American Dream for Young Adults]
These growing structural deficits are driven inexorably by the facts of life in the 21st century. When Social Security began making monthly payments, back in 1940, there were 160 workers for every beneficiary. In 1950, there were 16.5 workers. Now there are three, and 20 years from now there will be two.
Life expectancy today is almost 80; when Social Security was established under President Franklin Roosevelt, it was only 62. Demographics are destiny. Fortunately, the grandchildren of baby boomers are more numerous than their parents, so demographic relief for Social Security might arrive in about 18 years (for Medicare, about 20 years).
Social Security needs fixing as a national scheme. It has been repaired before. Social Security taxes have been raised about 40 times since its inception. The initial Social Security tax was 2 percent, split between the employer and employee, and capped at $3,000 of earnings, which made for a maximum tax of $60. Today the tax is normally 12.4 percent, capped at $106,800 for a maximum tax of $13,243. (For 2011, the employee share was cut by 2 percentage points to 4.2 percent.)
The last major adjustment was in 1983 and came about when Congress and President Ronald Reagan increased payroll taxes and raised the retirement age. That enabled the Social Security trust fund to build up its surplus from about $25 billion to $2.6 trillion today. That should grow to a peak surplus of $3.1 trillion in 2020. After that, demographic trends will cause outgoing retirement benefits to increase faster than incoming payroll taxes; the surplus in the trust fund reserve is estimated to evaporate in 2037.
[See a collection of political cartoons on the economy.]
What is to be done? Broadly cutting benefits should not be an option. This would undermine the program's fundamental promise of meaningful support for working Americans, especially at a time when jobs and incomes have become much more problematic. We have a real unemployment rate of 19 percent, with 25 million people unemployed or underemployed, and a poverty rate of 15.1 percent. That's 46 million Americans in poverty!
So the promise of Social Security as a backstop against poverty is more important than ever. But for the program to endure, as it must, we must not avoid the financial implications of ensuring that anyone who has worked hard and paid into the system will have the basic sustenance they need once their working days are behind them.
Here are some options to cure the problem:
--Gradually raise the retirement age to reflect the longevity increases that have already taken place. Men born in 2004 can expect to live almost 10 years longer than those born in 1950, while women can expect to live nine years longer. In the future, this should be indexed to rise automatically.
--Increase employer and employee payroll taxes by up to 1 percent each.
--Eliminate or gradually raise the cap on taxable payroll income to reflect the fact that the pay of higher-income workers has been rising faster than the threshold for Social Security taxable earnings. The share of pay overall that is not taxed has increased from 9 percent to 17 percent today.
--Increase the earliest eligibility age from 62 to 65. By some estimates, this would extend the trust fund's solvency by about five years. Current retirees would be unaffected. Exceptions would have to be made for Americans who cannot work longer due to injury, ill health, or other causes.
--Make modest reductions in benefits for wealthier recipients.
Perhaps the competing Republican candidates, suitably goaded by the moderators, will drill down on these issues--they're worth as much attention as the flamboyant Herman Cain's 9-9-9! We must address the challenges soon or we face a more painful crisis, as grandma's welfare will certainly undermine the quality of life for her grandchildren.
