Economic Justice and the Future of Social Security

Vol. 32 No. 2

By

Thomas D. Sutton is a partner in Leventhal Sutton & Gornstein in Trevose, Pennsylvania. He has represented thousands of disability claimants at all levels of administrative and judicial review. Mr. Sutton currently serves as president of the National Organization of Social Security Claimants’ Representatives, but the views expressed herein are his alone.

For seven decades, Social Security has been the bedrock of economic security for American workers and their families. The scope of Social Security benefits is enormous. In 2004, approximately 40,000,000 Americans received old age and survivors insurance benefits totaling $415 billion. Another 8,000,000 received disability insurance benefits totaling $78 billion. For the average senior citizen, Social Security accounts for nearly 40 percent of income, and for about 20 percent of seniors, it is their only income. Social Security has long enjoyed more political support than any other program, and that is no accident. It has heretofore been regarded as the “third rail” of American politics precisely because virtuallyall workers contribute to the program, and all are entitled to receive benefits from it. As an intergenerational compact arising out of the depths of the Great Depression, Social Security has been the cornerstone of America’s commitment to economic justice for the aged and infirm.

Universality is hardly Social Security’s only political virtue, however. By any measure, it is the most successful and efficient program ever devised by American government. Even its most ardent critics have to concede that Social Security has completely transformed the lives of America’s elderly. When it was conceived, most seniors were poor and dependent on their children. Their poverty rate was higher than that of any other age group. By the late 1990s, the elderly poverty rate had been reduced to 10 percent. Similar results have been achieved for disabled workers since they were included during the Eisenhower administration. And all of this has been accomplished with remarkable efficiency. With administrative overhead costs of less than 2 percent, Social Security compares favorably with many private insurance plans.

In the Social Security system, each American worker has social insurance to cover not only retirement but the very real chance that disability or death will occur. Some 30 percent of men and 25 percent of women become disabled before reaching retirement age, but many are never aware until then that they have a public disability insurance program that is equal to a private disability policy of $353,000. Similarly, the survivors of workers who die prematurely receive benefits equal to a $400,000 life insurance policy’s proceeds. In effect, Social Security is a social insurance program in which the responsibility to provide a modicum of income security to everyone who can no longer work to support his or her family is shared by all Americans who pay into the trust fund.

With such an enviable record, one is left to wonder why Social Security has recently become such a focus of negative attention. Part of the reason is that, over the very long term, Social Security faces challenges to its solvency because of anticipated demographic changes in American society. However, objective economic analyses demonstrate that those challenges can be met with rather modest adjustments to revenues and benefits over time. In fact, even under the Government Accountability Office (GAO) assumptions of future economic growth averaging under 2 percent a year, the shortfall in funding Social Security over the next seventy-five years amounts to just 1.8 percent of taxable payroll. Thus, while there is undoubtedly a long-term problem, it is not such an enormous problem as to defy solution and certainly does not constitute a crisis threatening the very existence of the program. Several proposals could ensure solvency over the long term without changing the essential nature of the program.

Some of those involved, however, are most interested not in restoring solvency but in achieving a radical restructuring of Social Security. Advocates of partial privatization would divert one-third of Federal Insurance Contributions Act taxes (which most of us know as FICA) into private accounts, which would be made available to younger workers who chose this option. For those younger workers who did not choose private accounts, as well as older workers over age fifty-five, Social Security would continue to provide traditional benefits. The unanswered question is how those benefits would be funded.

As President Bush has conceded, private accounts funded by Social Security payroll taxes are not a solution to the solvency issue. Indeed, diversion of payroll taxes to these accounts will hasten the date on which Social Security will be unable to pay all of the benefits currently scheduled. Without changes, the GAO estimates that Social Security will be able to pay all promised benefits until 2041—as opposed to the Congressional Budget Office’s estimate of 2052—and then will be able to pay 74 percent of promised benefits. This is an important point that has been lost in light of comments that Social Security will go “flat bust” or that benefits “won’t be there” for today’s younger workers. To the contrary, the GAO has confirmed that Social Security will not go bankrupt even if no changes are made in current law. Rather, it will be able to continue paying benefits beyond the date of trust fund exhaustion because of ongoing payroll tax revenues. Diverting a third of payroll taxes to private accounts, however, would certainly worsen the solvency problem.

Privatization advocates claim that private accounts would capture investment returns that would make up for the decrease in traditional Social Security benefits caused by the diversion of payroll taxes. However, there are three serious problems with this rosy scenario. First, starting private accounts while older Americans are still entitled to receive full traditional benefits will create huge transition costs, estimated at over $1 trillion by the GAO. The costs of borrowing these amounts will have to be repaid by current and future generations, who already face debt service on over $7 trillion of preexisting national debt. Second, if the same pessimistic projections of future economic growth used by the GAO in predicting Social Security insolvency are applied to the stock market, the rate of long-term return on private accounts cannot be expected to match the market’s returns over the past fifty years. Finally, even for those who invest their private accounts wisely and generate a positive return after deducting the inevitable investment expenses and fees, there will be a rude awakening at retirement. The government will deduct an amount equal to 3 percent above the inflation rate for the life of the account, not from the account itself, but from the worker’s traditional Social Security benefits. Those benefits will already have been reduced by the president’s plan to reduce benefits for all but the poorest workers by linking future cost-of-living increases to prices rather than wages, thus depriving them of future productivity gains. This has been called progressive indexing, but its burden would fall on far more than just the wealthiest Americans. For many workers, the combination of changes to the benefits formula and deduction of private account investment returns will result in negligible benefits payable from Social Security, particularly after Medicare premiums are deducted from benefit checks. Once the middle class stops receiving significant benefits from Social Security, political support for the program will decline. This should not be the goal of anyone who believes that Social Security is crucial for future generations of Americans.

The problems faced by disabled workers and the survivors of deceased workers are even more onerous under the privatization plan. Workers who leave the labor force early due to disability or death cannot obtain much benefit from private accounts that will not be in existence long enough to generate significant returns on investment. Moreover, while some people have at least some small measure of control over when they retire, disability and death can strike at any time. Given the inevitable short-term fluctuations of the markets, those unlucky enough to have to cash out their accounts during a downdraft will receive reduced benefits for the rest of their lives. While President Bush has claimed that privatization will not affect the disability or survivors programs, it is very difficult to see how disabled workers and dependents and survivors of deceased workers will not be hurt by a combination of the proposed changes in future benefit calculations and their inability to obtain the putative benefits of private accounts. Indeed, Bush’s reform commission was unable to separate the programs and concluded that disability and survivors benefits would have to be reduced along with retirement benefits. Economic justice demands that these most vulnerable members of society be spared any changes in Social Security benefits.

Privatization proponents would do well to examine two real-life examples of the interaction of large numbers of small retirement investors with the markets. Economist Alicia Munnell has pointed out that the 401(k) experience shows that getting workers to understand even the most basic investing principles is difficult. Over a quarter of eligible workers fail to participate and miss out on company matching contributions, and many of the rest overinvest in risky company stock or low-return money market funds, leaving them with minuscule account balances at retirement. Even more disturbing has been the experience of the British, who privatized their retirement pension system under Margaret Thatcher. More and more of the elderly have since fallen into poverty as a result of meager returns and punishing fees exacted by the financial industry. The results have been so abysmal that the British now view our Social Security system with envy.

We should carefully evaluate all proposals for “reform” in light of principles that reflect our shared values as Americans. Any changes in Social Security should recognize that it is not an investment portfolio to be exposed to the risk of markets. Rather, it is a program of social insurance that must continue to meet the needs of Americans who can no longer work, as well as their dependents. Any changes should maintain the universal character of Social Security as a program that benefits all Americans, not a means-tested welfare program that only benefits the poor. Finally, any changes should not require Social Security to sow the seeds of its own destruction by diverting payroll taxes to private accounts that will only worsen the long-term solvency problem. That problem is manageable through modest adjustments to the existing program. While there will always be winners and losers in the stock market, America must continue to ensure that all of its citizens receive fair benefits when they are unable to work and that those benefits not be subject to the uncertainty and volatility of the market. If Americans insist that their leaders adhere to these fundamental principles, then Social Security will continue to be the bulwark of economic justice for American workers for the next seventy years and beyond.

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