Keeping Social Security Alive

Most American voters today were not alive for the enactment of Social Security in 1935. The 81-year-old bill may not be known in all its intricacies and history especially to young people who probably are not thinking about retirement yet. However, most people know at least somewhat about the massive social welfare program.

The legislation was passed under President Franklin Delano Roosevelt’s administration within the New Deal with one distinct goal: reduce poverty for the elderly. Based on the data, the results are clear.

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It seems quite obvious and intuitive that as per capita spending on Social Security has increased, poverty within the elderly has been significantly reduced. The poverty rate is at historic lows of under 10%, whereas prior to Social Security’s existence, more than 1 in 3 elderly Americans were poor.

Now, most people do support the social welfare program continuing into the future. However, 37% of Americans would rather see benefits cut than the program sustained through taxes. These people and others may argue that if not for the government taking money from our paychecks, Americans would instead save that money in their own private accounts. That is the reasoning behind some politicians’ calls for Social Security to be privatized. According to their argument, Americans would have greater liberty in controlling their own retirement funds.

However, many people personally know that they would not save money unless forced to do so. The graph above arguably shows just how effective forced saving has been due to the passage of Social Security. If all Americans were saving on their own beforehand, there would not have been such rampant poverty. Without Social Security, four times as many elderly Americans would be in poverty.

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Of course, one could hypothesize that while these facts may be true, the mandating of all Americans to contribute to Social Security has possibly increased poverty for younger people, reduced incomes, or created a Robin Hood system of taking money from the rich and giving it to the poor. There is not a clear cut way to determine if the mandated Social Security contribution has held down incomes from the level they could have been, but the data we do have show that since 1935, poverty for all Americans has been reduced, real incomes have increased, and income inequality has actually increased rather than decreased.

Additionally, if Social Security were privatized, accounts would potentially function like 401(k)’s. These accounts invest in the stock market and ride its ebbing and flowing. Allowing for all of a person’s savings to ride the risk of the stock market could result in a great loss of value. For example, if someone who is planning to retire at the age of 65 could reach that age in the middle of an economic recession, such would likely mean a stock market that is severely devalued with private retirement accounts following the same path. On the other hand, Social Security funds do not ride the stock market. While those funds are not able to ride the occasional gains of the stock market and return a higher value to retirees, those funds also do not run the risk of being lost in a stock market crash.

The fact of the matter is that while the United States is the richest country in the world, most Americans have little to no savings at all. The Center on Budget and Policy Priorities finds, “For 61 percent of elderly beneficiaries, Social Security provides the majority of their cash income.  For 33 percent of them, it provides 90 percent or more of their income. Reliance on Social Security increases with age, as older people — especially older women — outlive their spouses and savings.  Among those aged 80 or older, Social Security provides the majority of income for 72 percent of beneficiaries and nearly all of the income for 42 percent of beneficiaries.” Thus, we see that Social Security is instrumental in fighting poverty among our nation’s elderly.

Some opponents to this belief could counter that we should instead invest in creating an economy that offers more opportunity for Americans to achieve higher incomes, thereby, allowing them to be able to save more for retirement on their own. Under this mentality, there is no need for a government welfare program that mandates savings. However, it is not as though the government would obtain this funding from out of the blue. It would still have to tax American paychecks to raise equal revenue to invest in the economy. As we saw earlier, having no requirement to save leaves Americans in poverty. Additionally, taxing Americans to instead spend money on economic programs could deliver results that raise future incomes but there is no guarantee that the elderly would be protected with a livable income. If not held within that Social Security “lockbox,” the tax revenue could potentially be spent on less effective programs that end up not raising incomes as high as what Social Security would guarantee. We cannot thoroughly analyze this hypothesis with data, but it certainly seems like a riskier bet to take than having Social Security.

Thus, if we are in agreement that Social Security is a necessary foundation to preventing poverty among the elderly, it should continue to exist for future generations. The problems with this, though, is the very funding we have been discussing. Social Security does not function as though the money that an individual contributes from their paycheck is the exact same money they will receive upon retirement. Instead, money deposited into the Social Security Trust Fund is used to pay beneficiaries right now. The working class’ tax contributions currently fund the payments that are made to the current elderly population. This has all been copacetic for decades since the program’s inception. However, now that a greater share of the American population is nearing retirement, there will be more retiring Americans expecting their benefits checks. The problem with this reality is that there are not enough working Americans to fund all those beneficiaries. This is draining the Trust Fund and will lead to unfunded payments by 2035.

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After 2035, legislation would have to change the direction that the program is headed. Important to note, though, is that while the Trust Fund would be depleted, tax contributions would still continue to fund benefits up to an extent. If no legislation is changed, beneficiaries would still receive 75% of what current retirees receive. Thus, while some people in the media and the government talk as though Social Security will no longer exist soon, this is not the reality. This alarmist talk has convinced 34% of Americans that the program is already in crisis. 75% payments would still be quite effective in reducing elderly poverty, yet of course not to the degree that 100% payments do currently.

However, 63% of Americans do not want to see their future benefits reduced. They likely feel as though they have contributed to the program all their adult lives and not to see them not receive the full value of what they deserve. To put U.S. benefits into context, Social Security actually delivers far less in payments than do most other developed nations.

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Of course, these other nations may tax their workers more in order to fund these greater benefits. This begs the question of what legislation would look like in order to fund Social Security payments after 2035. If benefits are not going to be cut, taxes would have to be raised in order to keep the program solvent. That option is intuitively still not too popular with just 51% of Americans supporting that alternative.

The reality, though, is that either benefits will have to be reduced, taxes will have to be raised, the retirement age will have to be raised, or the government will have to take on more debt to fund Social Security. None of these options are particularly attractive. That is likely why no politician has seriously proposed a comprehensive plan to reform the program. Older voters would revolt over a fear of reduced benefits, and younger voters would despise paying more in taxes.

Some Americans believe that raising the retirement age could be a sensible solution. They believe that since Americans are living longer, delaying the age that they receive benefits payments would make sense. The problem with this proposal is that not all Americans are living equally as long. Wealthier Americans have seen their life expectancy increase greater than poor Americans.

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Due to this fact, it would be unfair to the poorest Americans to raise the retirement age too high. Perhaps an individual year or so would be more fair that an increase of five years or more since all Americans are still living longer regardless of whether the gains have been equal. Nevertheless, 63% of Americans disapprove of any raising of the age.

One of the only proposals that is actually favored by a majority of Americans is the raising of taxes–but only on the wealthiest Americans. Americans favor both reducing benefits for just the wealthy and also taxing all of their income. Currently, Social Security taxes apply to only the first $118,500 of income. Politicians like Hillary Clinton propose raising this cap on taxable income in order to fund Social Security for longer.

At least until Social Security’s insolvency becomes more imminent, the only solutions that will likely be enacted by legislators are those that are popular with the public. These proposals would of course be unpopular with the wealthy and may result in subsequent pushback from wealthy campaign donors. Thus, it is unclear what the future of reform will be.

In order to truly reform Social Security, unpopular decisions will have to be made. None of the listed proposals are perfect, but any of them could potentially fix the insolvency that is approaching in less than twenty years. 

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