By Steven Hill
Social Security is bankrupting us. It’s outdated. It’s a Ponzi scheme. It’s socialism. It’s stealing from young people. The opponents and pundits determined to roll back the United States to the “good old days” before the New Deal regularly trot out a number of bogeymen and bigfoots to scare Americans into not supporting their own retirement well-being. That hasn’t worked too well. Americans of all political stripes remain strongly supportive of Social Security and other so-called “entitlements” like Medicare. But the other reason for plastering the media waves with a chorus of myths and lies is to stir up a political climate that causes politicians of both parties to cease looking for better alternatives other than to cut, cut, cut, or even to maintain the inadequate status quo. Below are rebuttals to some of the biggest whoppers regularly told about one of the most popular and successful federal programs in our nation’s history.
1. Social Security is going broke and will bankrupt the country.
Social Security is not going broke, not by a long shot. The Social Security Board of Trustees released its annual report to Congress in July 2015, and among all the tables, charts, and graphs in that big fat report, it would be easy to miss the most important take-home message: Social Security is one of the best-funded federal programs in U.S. history. That’s because it has its own dedicated revenue stream, which is composed of the insurance premiums paid by every worker (deducted from our paychecks by what is called “payroll contributions”), which are automatically banked into the Trust Fund. Even the Pentagon and the defense budget do not have their own dedicated revenue stream.
In fact, Social Security has not one dedicated revenue stream, but three. Besides the payroll contributions, Social Security is also funded by income generated from investing all those set-aside wages into U.S. treasuries. That money earns a sizable return on the investment. And Social Security is also funded by revenue that comes from levying income tax on Social Security recipients (yes, your Social Security check and that of other Americans is treated as income and taxed—and it brought in $756 billion to the Trust Fund in 2014). Those three revenue streams combined have banked $2.8 trillion in the Trust Fund and resulted in a $25 billion surplus in 2014.
Bankrupt? That charge does not even pass a good laugh test.
Indeed, because Social Security has its own funding source, and by law is not allowed to spend any money it does not have, it is actually impossible for Social Security to add to annual operating deficits or the national debt. Moreover, the Social Security Board of Trustees is required by law to report to Congress every year about the financial fitness of the program. The annual trustees report projects its revenues and payouts, not just for the next five, ten, or twenty years, but for the next seventy-five years. It’s one of the few programs anyone can identify that has had the wisdom to plan for the future, rather than planning around short-term political calculations and the next election cycle.
Over the next twenty years, as more and more of the huge population bloom known as the baby boomers continues to retire, Social Security is projecting a modest shortfall of just 0.51 percent of gross domestic product (GDP). If nothing is done to plug that gap, sometime in the 2030s the Trust Fund will have enough to cover only 75 percent of benefits. But there are so many budgetary ways to cover that shortfall, it becomes clear that the problem is not the finances of finding the money but the politics of partisanship and paralysis. No other government program can claim that it is fully funded for almost the next quarter century. What government critics ever say that the Defense Department or the Departments of Energy or Education are going bankrupt? Yet those programs don’t have dedicated revenue streams, and certainly no one plans or projects costs for those programs over the next seventy-five years.
For example, simply removing the payroll cap and taxing all income brackets equally would not only be fairer to all Americans, it would also raise all of the money and then some to plug any Social Security funding shortfalls twenty years from now. Opinion polls have demonstrated that most Americans—even 70 percent of Republicans—think if they pay Social Security tax on their full salary, others should as well. That’s just one example of the many adjustments we can enact that would make the U.S. retirement system more fair, robust, and stable, and better adapted to the realities of today’s economy.
2. Social Security is unsustainable because we have fewer workers for every retiree, even as our society is “greying” and people are living longer.
Another charge leveled by critics is that the number of workers compared to the number of non-workers—what is known as the dependency ratio—is declining, and so as a result Social Security is unsustainable. President George W. Bush really pushed hard on this point in his bid to gut the program and turn it into private accounts. In his 2005 State of the Union address, President Bush said:
“Social Security was created decades ago, for a very different era...A half-century ago, about 16 workers paid into the system for each person drawing benefits...Instead of 16 workers paying in for every beneficiary, right now it’s only about three workers. And over the next few decades, that number will fall to just two workers per beneficiary...With each passing year, fewer workers are paying ever-higher benefits to an ever-larger number of retirees.”
President Bush’s key strategist, Karl Rove, had the president tour the country to promote his privatization plan for Social Security, and he repeated his talking points everywhere he went, in state after state. President Bush must have set some kind of record: rarely has anyone been so wrong so often about Social Security as the president was during his “privatization or bust” tour.
Yet this claim by not only President Bush but key Republican and even some Democratic leaders reflects a deep misunderstanding. The “dependency ratio” is not just a factor of the number of workers compared to the number of retirees. It has to be configured according to the number of total dependents, including children. A different picture emerges when children are included.
The fact is, declining birthrates have resulted in a fall in dependent children, so the rise in the number of retired will be partly offset by a decline in the number of dependent children. According to Gary Burtless, an economist and demographic expert at the Brookings Institution, when the decline in children is factored in, total dependency ratios in many countries in 2050 will look more favorable than the ratios were in the 1960s. In the United States, for example, the dependency ratio peaked in 1965, when there were ninety-five dependents (both children and retirees) for every one hundred working adults. By 2050 the figure will be eighty dependents for every hundred workers, which, while much higher than the highly favorable figure of forty-nine dependents in 2000, will still be markedly lower than the number of dependents in 1965.
How did we as a society manage to get wealthier in the 1960s and ’70s despite a much higher dependency ratio? The answer, in a word, is “productivity.” Labor productivity is a measure of the amount of goods and services produced by each worker, which in a well-functioning economy increases over time due to the implementation of technology, greater education and job skills training, as well as more efficient business practices. If our labor productivity continues to increase, and the political system passes on the economic gains in the form of a broadly shared prosperity, then the rising tide will float all boats. Political analyst Michael Lind has argued that “productivity growth can solve much or all of the pension funding problem,” and as proof of that he points out that if the ratio of workers to retirees goes from 3 to 1 today to the expected 2 to 1 in the future, that is quite a minor shift compared to a change from a ratio of 16 workers to 1 retiree in 1950, or even 8 workers to 1 in 1960, to 3 to 1 today—a shift made relatively smooth and painless by education, training, and technology-driven productivity growth over the past half century.
That doesn’t mean that we can ignore factors like dependency ratios, but the fact is that as long as our economy is healthy, robust, and growing, creating jobs and increasing productivity, and the political system is inclusive and passes on the increased prosperity to the general public in the form of higher wages and a robust safety net, there is no reason that the greying of society or the ratio of workers to dependents should hamper the nation’s economic future.
3. IRA s and 401(k)s have replaced private pensions and Social Security. Americans want to be self-reliant on their own private retirement accounts, because you can do better investing on your own.
One would think that the volatility and havoc wreaked by the stock market in recent years would have laid to rest the notion that “self-reliant” Americans can invest and save on their own. It’s really not that easy to build up a private nest egg in savings that an individual will need to cover their needs during their post-work years. The fact that three-quarters of Americans nearing retirement have less than $30,000 in their private savings—less than 5 percent of what they will need—shows what a bust of an idea this really is.
For years, advocates for deregulation and entitlements have pushed for privatized retirement accounts—401(k)s, IRAs, and other private savings vehicles managed by Wall Street’s financial managers, which skims off the top their own lucrative fees. At the same time, businesses have pushed to shut down their “defined-benefit” pensions, which have long provided a guaranteed monthly payout for life, just like Social Security’s lifetime annuity. Now that we have nearly three decades of experience with replacing pensions with 401(k)s and IRAs, and of Americans trying so hard to stuff their retirement piñatas, it’s clear that most American retirees are no more secure than before. In fact, they are much less secure.
The 401(k) system that was positioned in the 1980s to replace pensions was sold to American workers as the new and improved successors to the guaranteed payout of a defined-benefit pension. Business leaders and the politicians took away what worked and replaced it with an experiment. But that experiment has failed, and proven to be more fragile and inefficient than the system it replaced. Besides having failed to produce enough retirement savings for the vast majority of Americans, the 401(k) system has forced everyday Americans to face a number of significant risks, the most obvious being that you can lose your personal savings to unpredictable stock market gyrations or a housing-market downturn, especially since most people have little expertise in how to navigate the ups and downs. But there is also the uncomfortable fact that, with wages flat over the last few decades, millions of individual workers have been unable to save enough. Consequently, as we have seen, 80 percent of the federal subsidy for individual retirement savings goes to the top 20 percent of income earners—the people who need it the least.
4. Social Security is stealing from young people and saddling them with a level of overwhelming debt.
Billionaire Peter G. Peterson has been one of the pioneers of this kind of intergenerational doom-saying. Headlines about the old stealing from the young certainly grab the media spotlight. But this one is an old, old trope that never made any sense. Peterson first raised it back in 1982, in the midst of the deliberations of the Greenspan Commission. Social Security, Peterson wrote, “threatens the entire economy...The Social Security system will run huge deficits...these deficits will push our children into a situation of economic stagnation and social conflict and create a potentially disastrous situation for the elderly of the future.”
But Peterson hasn’t been the only Cassandra prophesying a generational war between young and old. More recently, the Washington Post’s Robert J. Samuelson took up the cause. “We need to stop coddling the elderly,” he wrote in a 2013 column, calling Social Security and Medicare “a growing transfer from the young, who are increasingly disadvantaged, to the elderly, who are increasingly advantaged.” In a 2014 column, Samuelson continued his anti-elderly and antigovernment debt diatribe, writing, “Giving the elderly as a class special treatment heaps the costs of deficit reduction on workers and children.”
Pitting the elderly against children makes little sense for many reasons, but one obvious one is that today’s children will one day be seniors themselves. And they will need the retirement benefits that people like Peterson and Samuelson are trying to cut from retirees. Robbing Peter to pay Paul might make sense from a maniacally focused budget buster’s perspective, but it makes little sense from a public policy perspective. If that makes sense, then why not cut funding from cancer research, or diabetes treatment, since those ailments mostly affect older people and not the young. But obviously the young today could be attacked by those ailments tomorrow. Society benefits as a whole when it tries to address conditions that affect humanity as a whole.
5. We have to raise the retirement age because people are living longer and the nation can’t afford to pay for all these aging retirees.
Wrong. We do not have to raise the retirement age. There are common-sense changes we can make to Social Security that would not only safeguard it financially for the future, but would actually allow us to double the monthly benefits for retirees. For example, we could increase tax fairness by lifting the cap on the payroll tax so that wealthy Americans make the same percentage contribution as every other American. At the same time, the payroll contribution base could be extended to profits from investment income, such as capital gains. This would raise additional revenues in a progressive fashion that could be used to enhance the program for all Americans.
6. Social Security is un-American and too “socialistic” for most people in the United States.
Un-American? Too socialist? Social Security remains one of the most popular and successful government programs in history—opinion polls show nearly 70 percent of Republicans don’t want it to be cut or hurt. So if Social Security is too “socialist,” Americans must all be a bunch of closet socialists. Millions of Americans from all political persuasions now depend on Social Security, and no amount of divisive rhetoric, or even Pete Peterson’s billions of dollars, can change that fact.
7. The United States already has the world’s highest living standard, with an overly generous retirement system for seniors. We must be more realistic.
The United States is quite a bit less generous to its retirees than other developed nations. The Organisation for Economic Co-operation and Development (OECD) tracks and compares features like national pension systems. According to its numbers, the U.S. pension “replacement rate” for the average earner—the share of gross income the pension is expected to replace—is 38.3 percent, which is below the OECD average of 54.4 percent and 58 percent for countries in the European Union. For low-income workers—defined as earning 50 percent of the average wage—the United States was even more stingy, with a replacement rate of 49.5 percent compared to the OECD average of 71 percent and 73.9 percent for EU countries. Like in the United States, retirement pensions in most of these other nations are funded by regular payroll deductions from both workers and employers.
On other replacement metrics like “transfers in retirement income,” which measures the share of retirement income made up by both public pensions and social welfare assistance, the United States also looks stingy. The OECD average is 58.6 percent while the U.S. average is only 37.6 percent, barely half the average of the EU countries at 70.6 percent and just above Mexico and South Korea. Consequently, the poverty rate for seniors in the United States is substantially higher than in most other OECD countries, nearly 20 percent compared to 12.8 percent in the OECD and 8.9 percent among EU countries in the OECD. The U.S. rate is even higher than in Chile and Turkey.
My proposal for Social Security Plus shows how to greatly expand the retirement payout for America’s retirees, as well as how to pay for this expansion. This proposal would not only double the current payout, it would also make our retirement system fully portable. That’s the type of bold step that our country needs. Our American nation is heading into an anxious era driven by a new, high-tech economy in which more workers will have to gain access to a portable safety net without the benefit of a single employer or a regular workplace. Many workers will have multiple employers, none of whom would be expected to provide much of a safety net under the current, antiquated model. If we are going to provide adequate resources for our retired seniors, we have to update, upgrade, and modernize our retirement system.
About the Author
Steven Hill is a Senior Fellow with the New America Foundation and a Holtzbrinck Fellow at the American Academy in Berlin. He is the author of six books, including Raw Deal: How the “Uber Economy” and Runaway Capitalism Are Screwing American Workers, which was selected by The Globalist as one of the Top Ten Books of 2015. His op-ed’s, articles and media interviews have appeared in the New York Times, Washington Post, Wall Street Journal, The Atlantic, Politico, CNN, C-SPAN, BBC, Financial Times,Guardian, Bloomberg News, Fox News,National Public Radio, The Nation, Salon, Slate,Observer, Fast Company, Business Insider, HuffingtonPost, Le Monde, Die Zeit, Al Jazeera and many others. His other books include Europe’s Promise: Why the European Way Is the Best Hope in an Insecure Age and 10 Steps to Repair American Democracy. He is a co-founder of FairVote/Center for Voting and Democracy. Follow him on Twitter at @ and visit his website.