How to Guarantee Social Security's Future
March 23, 2011
By Rekindling Reform
What is Social Security?
Social Security is social insurance managed by government to guarantee an income to the retired elderly, the disabled, and family members of a worker who has died or become permanently disabled.
Why is Social Security so important?
Nearly every American will, at some point in life, depend on Social Security. Whether you retire, become disabled, are widowed, or are a child who loses a parent, Social Security will be there to help you.
Social Security has kept the poverty rate for the elderly below 10%, well below that for the rest of the population. Without it, 44% of the elderly would be poor. Of the 53 million people who receive Social Security benefits today, 9 million are workers with disabilities, another 6½ million are children who have lost a parent, and more than half are widows and other elderly women. Older single Hispanic, Asian American, and African American women rely on it for 90% of their income.
Social Security benefits are increased annually through automatic cost-of-living adjustments (COLAs) tied to the Consumer Price Index. Apart from its retirement benefit, Social Security protections include life and disability insurance providing coverage estimated at more than $400,000 for the average worker.
How is Social Security paid for?
Social Security is built on the idea that, if you pay into the system, you earn the claim to its benefits. It is funded by dedicated payroll taxes paid by employers and employees (usually referred to as FICA taxes, for the Federal Insurance Contributions Act under which they are levied) and by the interest earned on these funds when they are invested in US Treasury bonds. These are recognized everywhere as the world’s safest investment. They will be redeemed in later years when the Social Security system needs the money.
How much of the government’s deficit is due to Social Security?
None. Not even a penny. By law, Social Security cannot spend money that is not in its Trust Fund. It cannot draw on other government funding. In fact, for decades it has run a surplus and has loaned it to the Treasury to help cover the government’s budget shortfall.
What, then, has caused today’s huge Federal deficit? The real sources are President Bush’s tax cuts in 2001 and 2003, the unfunded Medicare drug benefit enacted in 2003, the costs of the Iraq and Afghanistan wars, the skyrocketing costs of an inefficient health care system, and the Great Recession which has reduced tax revenues sharply and increased demands on safety net programs.
Why is Social Security under attack?
Social Security has had bitter enemies from its beginning. These are people who don’t believe government should provide the kind of broad floor of support under the entire population that Social Security, unemployment insurance, and Medicare do today. They are pressing for deep cuts in Social Security benefits, a rise in the retirement age, and conversion of the program to a private, for-profit operation while replacing Social Security’s guaranteed benefits with a gamble on the stock market.
What are Social Security’s prospects?
Social Security has more than $2.6 trillion in its reserves right now. It will continue to run a surplus, with growing reserves, for the next ten years. But then the expanding population of retiring baby boomers will cause its expenses to exceed its income. It will continue to pay full benefits for the next quarter century, until about 2037. Around that time, it will have depleted its Trust Fund and will be depending on current FICA tax receipts alone. If nothing is changed by 2037, benefits will have to be reduced by about 25 percent.
How can Social Security’s future be secured?
There are ways to do this, so there is no reason to be rushed into hasty action. The underlying problem is that the proportion of the nation’s personal income taxed under FICA has shrunk.
Right now, the FICA tax is not levied on wages above $106,800 per year. If we "scrap the cap," the lifetime of the trust fund would be extended to 2083. Or, if the FICA tax were raised, say, by 1% (0.5% for employers, 0.5% for employees), this would suffice to ensure the long-term solvency of Social Security. However, this second way would be regressive, increasing the burden on those least able to pay.
Congress could change FICA in yet another way: tax those with higher incomes at a higher rate, as was done in the health care reform legislation passed last year. It could set rates that would ensure Social Security’s solvency for the long term and even allow for increasing the benefits, thus making up for some of the losses many older Americans’ retirement funds suffered in the recession.
How can you help?
Write or call the White House, your Senators, and your Member of the House and give them this message: NO cuts in Social Security benefits, NO increase in the age of retirement, NO cuts in the COLA, and YES to increasing FICA revenues from those with higher incomes.