How Not to Fix Social Security

By Mark Weisbrot

This article is from the March/April 1997 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/archives/1997/0397weisbrot.html

This article is from the March/April 1997 issue of Dollars & Sense magazine.

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Social Security has been in the front pages lately, with the release of the Social Security Advisory Council's report on January 6. Most coverage focused on the failure of the Council to reach a consensus, and particularly on the sharp disagreement over whether the system should be partially privatized.

Privatization is indeed a serious threat to the social insurance that the system provides. The main privatization proposal put forth by a large faction of the council would replace the guaranteed benefit of the current system with one that would depend on the individual employee's luck in the financial markets.

But some of the most important recommendations to come out of the report—as well as the profound issues they raise—didn't get the coverage they deserved.

First, the good news. The Council unanimously rejected the idea of cutting the Cost of Living Allowance by using a lower version of the Consumer Price Index. By this action the Council continued to protect Social Security recipients from future inflation.

Now for the bad news: One of the proposals supported by the entire Council would include three more work years in the calculation that determines benefits—the average of the best 38 years instead of 35. This would cut benefits for new retirees, since three years of lower or zero income would be included in their benefit calculation.

This cut would hit women much harder than men, since they spend more years outside of the labor force. Low income workers would also lose much more than high income workers. A typical female retiree whose benefits are $425 per month or less would face a cut of 7.9%, or nearly a month per year of benefits. By contrast, someone who made the maximum taxable earnings ($62,700 in 1996) throughout their entire working life would lose about 1.2%.

A majority of the Council also recommended increasing the retirement age. This is also a regressive benefit cut, and hits African-American men the hardest because their life expectancy is lower than that of white men. A Black man who is 40 years old today can expect about five and a half years of retirement after age 65, or half of the eleven years that a white male could expect. Although most people are as yet unaware of it, Congress has already raised the retirement age for people in this age group to 67. This means that they have already cut the expected retirement years by 36% for Black men, and by 18% for white men.

The proposal for continued increases in the retirement age would practically prevent Black men from making any progress toward a decent span of retirement. And the same is true for low income retirees generally, since the differences in life expectancy between low and high income groups are similar to the differences across racial lines.

These benefit cuts are not only unfair, they are also unnecessary. If no changes were made at all, the system would continue to pay benefits as scheduled for the next 35 years. To make the system secure indefinitely beyond 35 years is not too difficult. A few of the non-regressive changes recommended by the Council—for example, bringing non-covered state and local employees into the system—will close a large part of the financing gap. The rest could be covered with a payroll tax increase phased in at one-tenth of one-percent each year, split between employee and employer, for the years 2011-2032. In other words, a total tax increase of 1.1 percentage points each for the employer and employee.

Even this is necessary only because the Advisory Council assumes that the next 75 years will have the slowest growth in American economic history—1.5% a year, far worse than the relatively poor 2.7% of the past 20 years. If things turn out better, we may not have any financial gap to close at all.

Some people think that the possibility of a small tax increase as the baby boomers retire is a kind of intergenerational highway robbery. But these people have an unusual concept of justice, considering that the average income in 2030 is projected to be 36% higher than today, and nearly twice as high in 2070, after adjusting for inflation.

Social Security is doing its job, keeping 16 million senior citizens out of poverty every year. The major threat to its effectiveness is not from any demographic change, but from advocates of "reform." So the best news of all was captured by the headlines: the Advisory Council couldn't agree on any changes.

Mark Weisbrot is Research Director at the Preamble Center for Public Policy, Washington, DC, and author of "Unequal Sacrifice: The Impact of Changes Proposed by the Advisory Council on Social Security."

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