Social Security: A Manufactured Dilemma

Out of all the things that are clearly unsustainable in our politics, like dependency on fossil fuels and the lack of true democracy, our politicians have focused on targeting Social Security (SS). The chained-CPI proposal, which would slow down increases in Social Security benefits by trimming cost-of-living projections, has “bipartisan support.” In other words, mainstream liberals and conservatives and their corporate patrons support the proposal, which may still be on the table (despite being excluded from Obama’s proposed budget).

Maybe the think tanks are right, that SS has no money left, and that it can’t fund the Baby Boomers. Maybe it’s just the American Association of Retired Persons, a “powerful lobby,” that’s preventing such “common-sense” proposals from gaining acceptance. You don’t need to be a member of AARP to understand the elementary common sense that SS won’t be going anywhere any time soon, and it should stay that way. Three crucial facts have been deliberately excluded from mainstream debate about SS: SS is not in financial trouble, there are powerful interests behind these SS “reforms,” and any SS shortfalls can easily be fixed.

Isn’t Social Security Near Insolvency?

No, it’s not even close. According to the Trustees’ report in 2013, the Social Security Trust Fund ran a $54 billion surplus. The accumulated surpluses of the fund, invested in US treasury bonds, are projected to increase from $2.7 trillion to $2.9 trillion by 2021, because “annual cost is less than total income for 2013 through 2020.” Even after 2033, which is when these reserves are projected to run out, the program would be able to pay out 77% of scheduled benefits. The surpluses aren’t invested in Treasuries because the government’s “raided” the Trust Fund, but because the Fund’s required by law to convert surpluses into Treasures.

Those who claim that there will be trouble as soon as SS runs a deficit presume that this will increase the national debt. Some say that SS already increases the deficit. These critics forget about the near-$3 trillion in Treasuries, which could be sold whenever needed. This would not increase the debt, but only shift the ownership of it from the SS Trust Fund to individuals. By law, SS cannot pay out more funds than it has accumulated; it must finance itself.

Then Why Is This a Recurring Theme?

As I said, there are powerful interests behind the calls to “reform” SS by partial or complete privatization. In 1983, Cato Institute (a libertarian think tank) released a paper explicit about the goals of this privatization movement: To benefit “the banks, insurance companies, and other institutions that will gain from” scrapping SS. Chile’s private pension system, hailed by libertarians, eats away as much as 15% of pension contributions (due to fees and commissions), according to a World Bank report. With privatized SS, even if we assume a smaller percentage of management fees, say 10%, that would mean that this year’s $840 billion in pension contributions would make Wall Street over $80 billion. It’s not surprising, then, that Wall Street has funded outfits that claim to be “liberal” or “centrist” but support privatizing social security.

Aside from purely economic motives, there is cultural and ideological opposition to SS. Noam Chomsky, the famous linguist and political philosopher, explains that “SS is based on an extremely dangerous principle: that you should care whether the disabled widow across town has food to eat.” Conservatives lament the “culture of dependency”  to undermine these government programs based on solidarity. Banks and other financial institutions with a vested interest in SS privatization spend millions funding talking heads who praise self-reliance, like Paul Ryan, to influence public opinion. They’ve succeeded; while SS is popular among Americans, 77% of Americans say the program is “facing a crisis” or “has major problems.”

Should There Be Any Changes to SS?

As with almost any government program, SS can be improved as well. Currently, the SS tax is capped at $117,000, meaning income above that isn’t subject to taxation. This is a regressive tax – if you make less than $117,000, you pay 12.4%. If you make $234,000, you pay 6.2%, and so on. Simply removing the cap on the payroll tax would not only make it a progressive tax, but it would keep SS solvent for at least the next 75 years, according to the Congressional Research Service.

Another way to make the tax more progressive would be to exempt the first $20,000 of income, which would only affect the bottom 20% of Americans. They receive 3.3% of US’ total income ($13.4 trillion). Losing their tax dollars (12.4% of the total income they control) would only cost SS $5.5 billion annually. The other 80% of workers (about 105 million workers), who would now have the first $20,000 of their income exempted, would only cost SS about $26 billion yearly. Removing the cap would more than compensate for this cost of $31.5 billion.

Unless we want to risk the security of seniors in a volatile stock market which left 75% of seniors with less than $30,000 left for retirement in 2010, privatization makes no sense. It only makes sense for the “banks, insurance companies, and other institutions that will gain from” privatization, the same corporations who fund think tanks to put out alarmist nonsense regarding the solvency of SS. SS faces no internal, intrinsic crisis; the choice between cutting SS (Obama’s proposal) and gutting it entirely (Paul Ryan’s 2012 proposal) is a manufactured dilemma.

 

Author: Edwin Jain

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2 Comments

  1. Well, as much as it is nice to say that it isn’t an issue, it isn’t a particularly good pension system either. Suggestions?

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    • Sorry for the late reply.

      There aren’t many better alternatives, in my opinion. The savings could be invested in riskier assets for higher returns, but that would mean that a 2008-like collapse would wipe out people’s Social Security. I think the system can stay as it is, because it is supplemented by private pension schemes (although fewer companies are offering them). If the cap on taxable income is raised, any shortfall will be filled, and Social Security can continue to function without issues. Some, like William Greider, say that public employees’ pensions should be invested in responsible and environmentally sustainable enterprises – these companies generally have higher returns, and other companies will be incentivized to improve their behavior. But I don’t really think that this scheme can be applied to Social Security very easily; US Treasuries remain the way to go for SS surpluses.

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