Arguably, the evolution of civilization has been marked by the emergence and advancement of systems of economic support designed for its members. Whether by preserving food in anticipation of harsher weather or constructing strong networks of kith and kin to rely on in times of need, the intent of safeguarding against uncertainty has been instinctive to human beings. Building upon our risk-averse predisposition, the recognition that anyone could succumb to economic downturns gave rise to a communal mechanism to insure individuals against unforeseen circumstances in the modern era defined by mechanization of work and wage labor. This mechanism of social insurance, generally managed by the governments in the present-day nation-states, developed with principles of equity often guiding the benefits distribution.
Following the devastating consequences of the Great Depression, which exposed the vulnerability of free market capitalism, President Roosevelt and the Congress enacted the Social Security program as part of the provisions of the Social Security Act of 1935, to introduce a system of support for struggling Americans. Creating a strong economic safety net in the face of dire uncertainties, the Social Security program was designed for retired workers to receive a continuing income in their old age (65 years and up). Since elderly people tend to be economically vulnerable, the Social Security program delivers valuable monetary assistance to those unable to save during their employment. As an additional amendment to the program, disability insurance was added to the Social Security program in 1956, to extend the umbrella of protection to another vulnerable group of citizens. Currently, the Social Security fund faces a serious solvency issue; the 2016 Trustees’ report predicts that the Social Security trust funds will be depleted by 2034 if the Congress and the President take no measure. The collapse of the program or even a reduction in the benefits due to the solvency issue would trigger a ripple effect of economic insecurity throughout the economy. Therefore, it behooves policymakers to consider various policy options and salvage this most expansive system of social insurance in the U.S.
One of the largest single items in the federal government budget, Social Security is also an equally extensive program. Almost all workers participate in the program through payroll taxes, and approximately nine out of ten elderly individuals receive Social Security benefits. Since close to 61 million Americans receive some Social Security benefits, this program assists many vulnerable populations. Old-age retired workers, their dependents, and survivors of deceased workers make up more than 3/4 of the program’s total beneficiaries; the rest of the benefits go to disabled workers and their dependents. As 33 percent of the U.S.’s elderly population relies on Social Security for more than 90 percent of their income, the program lifted 14.5 million elderly people out of poverty in 2015, even though the benefits are modest as compared to other OECD nations—the wage replacement rate of an average worker in the U.S. is only about 35 percent, which is lower than the OECD average of 53 percent. Even though the program was formulated for the elderly, it also provides assistance to about 6 million children who live in households receiving Social Security benefits. Moreover, Social Security benefits especially help elderly people who belong to racial and ethnic minority groups since, on average, African Americans and Latinos are more likely to engage in low paying jobs where they have fewer opportunities to save, relative to whites. Additionally, the progressive design of Social Security benefits is critical for women—they tend to earn and work less in formal paid labor force, which leads to smaller savings than those accumulated by men. While the rigid gender roles in the paid economy may be softening somewhat now, on average, women are still economically disenfranchised and the Social Security benefits provide a steady stream of financial support.
Since the Social Security program is so crucial for so many vulnerable population groups, any threat to its solvency poses a great concern for millions of Americans. The structure of the Social Security program is primarily pay-as-you-go, which means that current workers and their employers each contribute 6.2 percent of their wages as payroll taxes—up to earnings of $118,500—towards the system. The program has been running an over 30 years of consistent surplus—Social Security has collected more in taxes than it has had to pay out in benefits—and the surplus has been invested in U.S.-backed treasury bonds and securities and has been accruing interest to the Social Security trust funds (Old-Age and Survivors Insurance and Disability Insurance). As the baby boomer generation enters retirement age now, however, pressure on the trust funds is increasing, causing this spell of surplus to come to an end by the year 2020. At the same time, some fear that declining birth rates in the U.S. might lead to a smaller labor force and a smaller tax base, putting further strain on the trust funds. The 2016 Trustees’ report considers the next 75 years of the program, a period that will likely cover everyone currently in the labor force. The trustees expect that the interest accrued from the bonds and amount collected by retrieving the bonds will exhaust by 2034. Over this 75-year period, the report predicts a deficit equaling 2.66 percent of taxable payroll for the program. After 2034, the Social Security benefits will still be doled out according to an individual worker’s payroll-taxes alone; the benefits promised, already modest, will be shaved off by a fourth of what the workers expect to receive. The financial forecasting of the Social Security funds represents the precarious state of the social welfare system in the U.S. This prognosis should urge policymakers, who have access to a host of policy alternatives, into action.
Policymakers can keep the program afloat by using one or a combination of a few policy instruments such as raising revenues, altering the benefits, or privatizing the program. The Trustees’ report states that to keep the program solvent over the next 75 years, either the program’s revenues would have to be increased by permanently hiking the tax rate by 2.58 percent, or the benefits would have to be cut down by 16 percent for all current and future beneficiaries, or a combination of these policies would have to be implemented. In light of these facts, experts have called for privatization of the Social Security trust fund as it neither involves reduction in benefits nor tax increases. Under this option individuals will be able to manage their own retirement funds through private investments. However, opponents of this policy argue that transitioning from the current system to a privately-controlled retirement system would mean that the Congress would have to pay off all the liabilities the Social Security program currently owes to retired workers, which in a pay-as-you-go plan comes from current workers, putting an undue pressure on those workers. The transition would have to be accompanied by large-scale federal borrowing, which, according to experts, would offset the gains from individual private savings. Moreover, while the proponents of privatization may look optimistically towards the potential of higher returns from investing in the stock market, tying the sole source of livelihood for millions of Americans to the erratic markets is nothing short of gambling with the lives of the most economically sensitive of us. Thus, in terms of political viability, a policy prescription involving some combination of revenue increase and modifications to the benefits is more likely to garner both Congressional and Presidential approval, as such a combination would better avoid imposing excessive burdens on particular groups of beneficiaries.
Consider the revenue-expansion-based policy proposals. Although the Social Security Administration has put forward a number of highly nuanced policy suggestions to increase revenue, broadly, there are three options to consider: hike the payroll tax rate; alter or eliminate the cap on maximum taxable income; or modify the coverage of employment or earnings. For example, a policy to gradually increase payroll taxes, such that the rate is increased by 0.1 percentage point every year from 2022-2041 when it reaches the rate of 14.4 percent and then plateaus, would close the deficit by 55 percent over the 75-year period. An alternative that deals with the cap on taxable income suggests eliminating the taxable maximum from 2017 and on, so that all earnings are taxed at a 12.4 percent rate, and no benefit credits are provided; this plan would eliminate the shortfall by 89 percent. Finally, the tax base can be altered such that the contributions to voluntary salary reduction plans—agreements between employer and employee to withhold some pre-tax income as a contribution to a retirement plan—like the cafeteria 125 plans would be considered taxable starting 2017; this proposal would reduce the shortfall by 10 percent.
The Social Security Administration provides another policy instrument, which is benefit alteration. This can take the form of changing the cost-of-living adjustments (COLA), reducing benefits for newly eligible beneficiaries, increasing the retirement age, or modifying the coverage of family members, among others. Cutting benefits by 3 percent for new beneficiaries starting in 2017, for example, would decrease the gap by 14 percent. COLA represents an increase in benefits keeping up with the cost of living as measured by the Consumer Price Index (CPI). Therefore, starting in 2017, decreasing the COLA by 1 percentage point would decrease the shortfall by 66 percent over the next 75 years. An alternative to directly cutting benefits is to increase the retirement age, which would essentially amount to reducing benefits as individuals would receive their benefits later in life and would collect them for a shorter period of time. Accordingly, after the normal retirement age (NRA) becomes 67 years, the policy could increase the NRA by two months every year till the new NRA became 68 years; about 17 percent of the shortfall could be eliminated this way. Additionally, the coverage received by the family members of the workers could also be adjusted so that only the spouses of the 75th percentile career-average workers, starting in 2023, receive their share of benefits under the current law. This policy would close the gap by 4 percent over the next 75 years.
Noticeably, almost no singular policy suggestion presented by the Social Security Administration can close the deficit alone. Therefore, it is up to the policymakers to deliberate over the most effective and equitable combination of policy approaches. The sting of these policies can be alleviated if policymakers were to surface this issue in current debates and act now. Implementing some of these policies, as early as 2017, will allow for a more modest and gradual increase in tax rates and reduction in benefits. This will be in line with the tradition of foundational equity, where the goal of the policymakers should be to rescue the program while remaining cognizant of the income sensitivity of many of its beneficiaries. Policies that refrain from reducing benefits and instead rely on higher income earners to shoulder the burden of the program, by contributing more in taxes, should be enacted. Regardless, the adoption of any of these policy prescriptions will be accompanied by national introspection regarding the role of social insurance and, indeed, of social welfare in this country.