Social Security Primer

I wrote this e-mail today to a friend of mine who asked me about Social Security. She complimented me on the writing of it, and looking back, I thought it was pretty cogent for coming off the top of my head. So here it is (and tomorrow or something, I'll put up some stuff about the numbers I found on the SSA website about average wages and average benefits).

The way that the Social Security system works now is something like this: We pay 6.2% of our income into the Social Security system (and our employer kicks in the same amount, so 12.4% of our income goes into Social Security). That money goes to pay the current retirees who are collecting, and the leftovers go into the Social Security Trust Fund. Currently, that Trust Fund is valued at over $1.5 trillion, and it makes over $80 billion in interest every year.

But the Trust Fund is not filled with money. It's filled with United States Treasury Bills, or T-Bills, as they're affectionately known. They're considered the soundest investment in the world, and they've basically been the government's way of borrowing the money out of the Trust Fund to use on other programs. Opponents of the Social Security program will claim that because of this the Trust Fund is filled with worthless IOUs. If that's the case, then no T-Bills will retain their value, which would be disastrous to the economy (most of our national debt is held by Japan and China in the form of T-Bills).

In 1983, the Social Security system faced a real impending crisis. Not only had they been drawing off of the trust fund for some time, because payroll taxes were insufficient to cover benefits, it was two months from going completely bankrupt. This had happened for a number of reasons, the most prominent being what was called "stagflation" (high inflation, stagnant wages). As a result, Reagan brought a proposal before Congress that hiked the payroll tax up to a level that would be enough to build up the Trust Fund enough to provide a cushion for when the huge Baby Boomer generation retires (which is coming up before too long).

Also as a direct result of the crisis in 1983, the SSA (Social Security Administration) began making much more conservative and pessimistic projections. See, the SSA is required by law to put out a report every year (end of March, I think) that projects the state of Social Security for the next 75 years. They put out three projections: a pessimistic, middle-of-the-road, and optimistic projection. The middle-of-the-road projection is the one that everyone's been talking about, but the middle-of-the-road projections have been, for the last 10 or 15 years, too pessimistic in retrospect. They project a rate of growth of the economy that's typically been pretty far below the actual rate of growth.

Now you're exactly on the same wavelength as me about the civil/social responsibility aspect of Social Security. I read somewhere that they say about 48% of seniors who don't live in poverty would be living in poverty without Social Security. There are a hell of a lot of jobs that don't provide retirement investment options, or 401ks, and there are a hell of a lot of jobs that don't pay enough to allow people to save any substantial amount for their retirement anyway. It seems to me, anyway, that giving these people back their money that they pay in payroll taxes to Social Security wouldn't necessarily result in better retirements for them (particularly because of the employer kick-in).

But part of what opponents of the system don't like is its progressivity. What I mean by that is that if you were able to put less into the system, you get a bigger percentage back of what you gave. The theory behind such a thing is that the people who were able to put less into the system are the people who need a little more protection from poverty. Security from poverty, if you will. Mind you, people who put more in still get more out, but the percentages are skewed toward those who need it more.Social Security was never intended to be a main source of retirement income. It was planned to be a sort of social insurance against poverty in old age. You could look at it as welfare, I guess, but that would forget that the people receiving it are people who paid into the system to begin with. Welfare recipients are people just benefiting straight off of the government. But the other thing is that people who don't need it still do take it. I'm not saying that there's anything wrong with that, but that's how it is (making it even less of a "welfare" system).

As it stands right now, like I said, the payroll tax contribution is 12.4%, the retirement age is 65 and 8 (I believe) months, and the payroll tax cap is $90,000 or so. That means that any money you make above $90K is not subject to Social Securiity payroll taxes.

The thing about the supposed "crisis" being talked about right now is that it's just not true. Like I said, in 1983, the Trust Fund was 2 months from bankruptcy. Complete and total bankruptcy. Right now, in 2005, by the middle-of-the-road projections (which are historically unable to predict immigration growth, inflation rates specifically, etc. at any great length into the future), we're 37 years from the Trust Fund going bankrupt. Doesn't seem like a crisis to me.

The other thing is that these projections presume stagnation of the system as it stands. Like, they presume that the payroll tax level stays the same, the payroll tax cap only goes up with mean wage growth (which it always does), and that the retirement age slowly creeps up to 67 in a few years, as it's been scheduled to do. But in the 70 years that Social Security has existed, it's been a very very dynamic system. The amount of payroll tax has increased, the retirement age has increased, the benefits have been cut, etc. There have been many little maintenances along the way, and it seems silly to me to assume that it would stay exactly the same for the next 75 years.

Some proposed fixes include raising the retirement age, cutting benefits in some not-too-substantial way, raising the payroll tax cap, raising the payroll tax by a couple of tenths of a percent, etc.