Conservatives in Washington have their knives out for Social Security. Soon after being named co-chair of President Barack Obama's deficit commission, former Sen. Alan Simpson -- who recently described Social Security as "a milk cow with 310 million tits" -- said unequivocally that Social Security has to be cut. He boasted, "It'll be a bloodbath." Simpson's co-chair, former chief of staff for Bill Clinton, Erskine Bowles, has been equally blunt: "We are going to mess with Medicare, Medicaid, and Social Security." Commission member and retiring Sen. Judd Gregg jocularly defended cutting Social Security by quoting Willie Sutton who, when asked why he robbed banks, replied, "because that's where the money is."
If one looks at the federal budget only as a unified whole, Social Security does indeed appear to be where the money is. Examining the budget that way is useful for analyzing broad fiscal policy, but it is a simplified, distorting view. It disregards the fact that Social Security is a defined benefit pension plan sponsored by the federal government, financed primarily with dedicated contributions of workers matched by their employers. Social Security has no borrowing authority and so does not and cannot contribute to the federal deficit. And it will be in balance for the next 26 years, even with no policy changes.
Just as private employers are required to keep company pension-plan assets in trust, segregated from general operating funds, so too are Social Security's assets held in trust. If a CEO talked about the company pension plan the way that today's deficit hawks refer to Social Security, he or she would appropriately be accused of seeking to raid the plan. So the analogy to Sutton takes on an unintended but revealing meaning -- deficit hawks, like bank robbers, are eager to steal the money that hardworking Americans hand over every payday to a trusted pension plan.
To ensure that Social Security will always be able to meet all of its obligations, its board of trustees employs more than 40 actuaries whose job it is to project the program's income and outgo for the subsequent 75 years and to report those findings annually to Congress. Despite the hysterical claims of "crisis" and "bankruptcy" that conservatives assert with every annual report, recent reports show quite the opposite.
The latest report, released Aug. 5, states that Social Security ran a surplus of $122 billion last year and had accumulated a reserve of $2.54 trillion, which will grow to $4.2 trillion by 2024. For the entire 75-year valuation period, the actuaries project that Social Security will most likely face a shortfall of just 0.6 percent of gross domestic product, about the same as extending the Bush tax cuts for the top 2 percent of the income scale. With no congressional action whatsoever, Social Security can pay all benefits on time and in full until 2037 and at least three-quarters of scheduled benefits through 2084, the full 75-year valuation period.
The projection of a manageable deficit, still decades away, should provide Americans with a sense of confidence that Social Security is closely monitored and fully affordable. In light of the program's current surpluses and accumulated reserve, there is no justification for closed-door deliberations or hasty action. Congress should eliminate the projected shortfall sooner rather than later, but only by enacting changes that are good policy in and of themselves.
A number of such proposals exist, but cutting benefits is not among them. Social Security's benefits are modest, averaging less than $13,000 a year, but are vitally important to almost all who receive them. Two-thirds of the elderly receive half or more of their income from Social Security. About 6.5 million children, nearly 9 percent of the nation's children, receive Social Security themselves or live in households supported by another Social Security beneficiary. About 8 million disabled workers receive benefits, without which more than half would have incomes below the poverty line.
Social Security's modest benefits are already being cut under current law. Under legislation enacted in 1983, the statutory "retirement age" is already being increased from age 65 to age 67. Because of the manner in which benefits are calculated, this two-year increase translates to about a 13 percent cut in monthly benefits, even for those who work to age 70.
Cutting benefits further would expose millions of Americans to needless economic hardship. Increasing Social Security's retirement age to 70, as House Minority Leader John Boehner has proposed, would constitute another 19 percent cut in benefits, for a total of around 30 percent. Workers in physically demanding jobs who do not qualify for disability benefits and older workers who are laid off may have no alternative to claiming Social Security at age 62, resulting in permanently lower benefits, adjusted only for inflation.
Scaling back or eliminating benefits for higher-income workers is also poor policy. Not only would cutting benefits for the better-off erode support for the program but those benefits are an important part of retirement income to everyone but the richest among us. Cutting the benefits of the wealthiest would make no appreciable difference in the forecasts.
The best policy to improve Social Security's finances is to employ workers at well-paying jobs that keep pace with productivity growth. A primary reason for the projected shortfall is that the wages of all but the highest paid have largely stagnated over the last few decades. Although many erroneously blame the aging of the population for the shortfall, the retirement of the baby boom was fully taken into account in 1983, when Congress last addressed Social Security's solvency. Indeed, if median wages had continued to track rising productivity in the past three decades, as they had in the 25 years of the postwar boom, Social Security's current projected shortfall might have never materialized.
The shortfall caused by the unequal wage growth between the wealthy and everyone else can be addressed somewhat by increasing the maximum wage base on which Social Security's contributions are assessed and benefits calculated. Congress set the maximum -- $106,800 in 2010 -- so that all but the top 10 percent of wages earned nationwide would be insured by Social Security against loss in the event of disability, death, or old age. Today, because of the inequality of wage growth among the top and the average, the percentage of covered wages has slipped to 84 percent, resulting in billions of foregone Social Security contributions every year. Gradually raising the maximum so the program once again covers 90 percent of all wages could, depending on how fast the increase were phased in, eliminate more than one-third of Social Security's projected shortfall.
Other sound policy approaches exist: From Social Security's inception, many experts advocated for eventually funding Social Security in small part from progressive sources. A tax on large estates is consistent with American ideals and recognizes that the accumulation of large estates depends in part on the general productivity of the American economy and its infrastructure. As the estate tax was structured in 2009, the estates of the top 5 percent of Americans paid 99.6 percent of the tax. Reinstating it at that level and earmarking its proceeds for Social Security would eliminate about one-quarter of the projected shortfall -- about the same amount as increasing the retirement age to 70.
Another tax that is good policy is the 0.5 percent fee the United Kingdom has imposed since the 1970s on stock transfers. If the United States imposed an identical tax on stock, credit swaps, and other exotic financial transactions, it would serve the public goal of discouraging stock-market speculation, churning, and other unproductive activities. Dedicating the proceeds to Social Security not only would put the program in surplus for the next 75 years and beyond but enough revenue would be generated to raise benefits by about 5 percent.
Yet another effective strategy would be to allow Social Security to diversify its portfolio and invest in equities as well as bonds, just as virtually every other pension plan does. This is very different from individuals investing personal accounts. Individual accounts concentrate the entire risk on the individual, who might have to withdraw investments when the market is down. In contrast, an adequately financed Social Security fund would never have to reduce net assets at any particular time and so could ride out the market's ups and downs. Investment risks would be spread over the entire population. Retirement income would continue to be based on earnings records, not the vagaries of the stock market. Gradually investing 40 percent of the reserve in broad-based, indexed stock funds could eliminate about one-third of the projected shortfall.
All these alternatives are smart politics, as well. Poll after poll has found that Democrats, independents, Republicans, young and old, Tea Partiers and union households alike overwhelmingly believe Social Security's benefits, if anything, are too low and want the program's projected deficit closed by increasing revenue, ideally progressively, not by cutting benefits. Americans overwhelmingly value Social Security, which embodies basic American values, including reward for work, self-help, shared responsibility and risk, and protection of families against economic loss. They want it addressed outside the deficit context. On the matter of Social Security, politicians would do well to put away their green eyeshades and start listening to the will and wisdom of the people, whom they have been elected to represent.