Social Security is your future. And that future could come sooner than you think.
Conversations about the program often pit younger workers against retirees, but Social Security is really an intergenerational compact that boosts the well-being of Americans of all ages — that’s one of the reasons the program is so cherished.
One in five Americans receives a Social Security benefit today, and about one in three of these aren’t retired. Social Security protects young workers and their families if they become disabled, and it provides benefits to the survivors of deceased workers, including their kids. Studies show that a 20-year-old worker has a one in three chance of qualifying for disability benefits before reaching retirement age.
Today’s seniors rely on Social Security for most of their income – and younger generations without traditional pensions will need the program even more. The situation is dire: we already know that the total wealth of Millennials is lower than that of their parents and grandparents at the same age. Social Security protects the health and dignity of younger folks down the road – it’s the only guaranteed source of retirement income that isn’t subject to the vagaries of investment risk or financial market fluctuations.
Yet threats to the program are coming fast and furious, from calls to cut benefits by changing how cost-of-living adjustments are calculated to schemes to raise the retirement age (which already happened in 1983 under Reagan).
There’s one threat that gets far less attention, which has been impacting American workers since the 1970s: wages that just don’t keep up, despite increased productivity. Social Security was designed for wages that rise with inflation – but that’s not happening. In an interview with the Institute for New Economic Thinking, Eric Laursen, author of The People’s Pension: The Struggle to Defend Social Security Since Reagan, breaks down how the program works, why wage stagnation represents a mounting threat, and what can be done to strengthen and update the program for the 21stcentury.
Lynn Parramore: Social Security has been America’s most successful retirement program for the last 87 years. Yet the public is constantly hearing that the program is going to “run out of money.” Is that actually true? Can Social Security actually go bankrupt?
Eric Laursen: No, and the word bankrupt is just about a complete misnomer when it comes to Social Security. The program is funded by contributions that participants and their employers make through their paychecks. It’s also backed by a Trust Fund which is accumulated over time.
That Trust Fund is dwindling now, and it’s expected to run out of money in the early 2030s. But Social Security can’t actually go bankrupt. If the situation arises where there is not enough money either in the Trust Fund or coming through from contributions to fund current benefits, then those benefits can’t be paid, perhaps as much as 25%. In that case, Congress would be faced with a choice to either cut benefits or increase contributions.
There’s a lot of pressure from people who want to cut Social Security to do it now rather than waiting for that point in the future, because at that point, Congress would be under a lot of pressure to make good on what people have been promised.
LP: About these predictions that the Trust Fund will run out of money — does anybody really know what will be happening in 2030? Economists, after all, are actually very bad at making predictions (most didn’t see the 2007-8 crash coming, for example). We don’t actually know for certain there will be a shortfall, do we?
EL: That’s absolutely correct. Although you’d be surprised how much certainty economists assume when they make their predictions!
LP: Can you explain how the payroll tax works and how the amount of earnings that are subject to this tax makes a big difference in the whole equation? The press often doesn’t do a very good job of making it clear.
EL. Sure. The payroll tax is a 6.2 percent tax on employees and 6.2 percent for employers that is used to fund Social Security. The way the system works is a little bit convoluted, but essentially, that money goes to purchase Treasury bills, which go into the Trust Fund. Those Treasury bills are liquidated in order to pay benefits. The result is that Social Security is not like any other social benefit program in that it’s completely self-funded. It belongs to the people who put the money in. The Treasury can use the money it gets from those Treasury bills to do other things, but ultimately, those are obligations to the people who contribute to the program.
There are definitely alternatives to cutting Social Security if the Trust Fund runs out of money. For example, you could simply raise the payroll tax to some extent. This is used to scare people by critics of the system because people think “wait, raising taxes is always bad.” But the fact is that Social Security taxes have been raised repeatedly in the decades when the system was being expanded and improved in the ‘50s and ‘60s, for example, with no complaint about it. In fact, people polled consistently answer yes to the question, “Would you be willing to pay more in payroll taxes in order to keep your present Social Security level?”
It’s a myth that taxes are the third rail somehow. The importance of Social Security to people today is huge. It’s the one part of the old age benefit picture that has remained stable over the last 40 years. Employer-based pension systems have disintegrated and 401(k) plans have proved to be inadequate. People depend on Social Security more and more. Raising the payroll tax is a viable thing if it’s done in a gradual way.
LP: Isn’t that how the program was intended to work in the first place?
EL: Yes. The way the system works is that the contributions you make to Social Security only go up to a certain level of income. So if you’re making $147,000 a year—going up to $162,200 in 2023—up to that amount you pay payroll tax on your income. One of the reasons that the Trust Fund money is dwindling is that so much income of upper-income people is now above that amount. There’s a lot of income in this country that doesn’t get taxed for payroll. Some of the proposals we’ve seen from people on the Democratic side would address that.
The real reason for the shortfall doesn’t have to do with lower birth rates or life expectancies, which is what is usually discussed in the media and on the right as being the culprits. Those changes were actually pretty well understood and anticipated 40 years ago, which is the last time the program was updated in a major way. The real culprit is wage stagnation. Wages have not kept up at all with the pace they had prior to the early 1980s. This was not anticipated. The result is a system that is not bringing in money the way it formerly had.
LP: There are reports that President Biden is suggesting not only raising the cap but changing the measure of inflation to something called the CPI-E. Why is the program’s inflationary tether important and which measure do you think should be used?
EL: The CPI is what’s used to calculate increases in benefits every year. This past year we had a very big increase in benefits because the CPI jumped a lot. That was important to protect retirees from the impact of inflation.
The CPI-E is a measure developed back in the ‘80s, I believe, and it is geared particularly towards the basket of goods and services that the elderly – people over the age of 62 – use to a greater extent, like medical care and housing. The idea is to apply that to Social Security rather than the standard CPI.
On the right, there is another measure called the chained CPI, which they have been pushing. The chained CPI is designed to provide a more accurate read of inflation by more aggressively applying substitutions to the basket of goods and services. So if the price of beef is going up, the idea is that people will switch to eating chicken, so you factor that into the CPI. That slows the growth of the CPI, so it slows the growth of benefits in terms of how inflation is seen to impact elder benefits. There’s been a tug of war. The right wants chained CPI, which would slow the growth of Social Security benefits, while people on the progressive side want the CPI-E.
I’m in favor of the CPI-E. It’s a more accurate reflection of how inflation impacts the elderly. If we want to have a Social Security benefit that addresses their needs, that’s the most direct way to do it.
LP: I’m a Gen Xer born in 1970, which means that when Ronald Reagan was in office, two years of my Social Security benefits were taken away on the advice of the Greenspan Commission before I was old enough to vote. The age at which Social Security benefits could be collected was raised on people born after 1960 from 65 to 67. What’s your assessment of the economic and political aspects of that move? Was it necessary?
EL: I address this in my book, The People’s Pension. There’s a lot of murkiness surrounding it because not everyone’s motives were 100% clear when the Social Security amendments of 1983 were passed, which were proposed initially by the Greenspan Commission and then enacted by Congress.
The reality is that it was not necessary to institute this sort of phased raising of the retirement age at the time. It resulted in Social Security building up a larger Trust Fund, but it wasn’t the thing that saved the system back in 1983, a time when it really was in trouble. The truth is that as a result of the raising of the retirement age, the lifetime benefits which people will receive were eroded. Put simply, the change in the retirement age lowers the amount of money you’re going to get from Social Security after you retire. In the early ‘80s, Social Security, on average, replaced about 42% of the final salary or compensation for workers who were retiring. That’s down to about 32%.
LP: That’s a big difference.
EL: A very big difference. Social Security was never designed to be a total pension for everybody, although there’s a strong argument now for turning it into one. It was supposed to give you a critical mass so that you could supplement that with a private pension and private savings and come up with something comparable to what you were making before you retired. It doesn’t do that anymore, and the increase in the retirement age is one of the things that has created that situation, so it would be a very good thing if that could be reversed or simply held in place.
I understand your frustration, that this is not something you were able to weigh in on even though you were alive at the time. It also affects people who are retired now. It was done as a way to assuage major critics of the system of the time. It really isn’t something that had to be done.
LP: How worried should younger generations today be that something like this could happen again? What can they do to protect their futures?
EL: I have to come down on the side of saying they should be worried. The reason has nothing to do with the economics or fiscal viability of the system. It has to do with politics.
Social Security is in need of being improved and updated for the 21st century. It has been 40 years since any significant improvements or tweaks were made to the program. But the fact that there has been this constant pressure from the right, from the Republican Party and some Democrats, to cut benefits and to “save the program” – which really means cutting it back to the point where it would not be very useful at all – has kept people who support the system in Washington on the defensive for a good 40 years now. So the whole political energy has been around trying to play defense against these efforts to cut it, rather than to try to improve it. That’s the real danger for people in their 20s and 30s.
The reality is that it’s the stagnation in wages that has been the real problem for the program.
We’re going through a period right now in which there is a tight labor market and wages have been going up in some sectors, but that’s very much tied to the pandemic and the economic repercussions from that, and it’s not going to last unless there are changes made to some of the conditions in which the labor market operates – there we’re talking about offshoring of industries, the conditions for labor organizing, and so on.
If you really wanted to save Social Security and make sure that it was around for you, the thing to do is not to worry about the structure of the program, but to push for an economy that provides good jobs, good pay, that increases over time. That’s what we really need. So this is not a problem that younger people should think of as something happening down the road. It’s closely tied to the problem they have right now – that this economy doesn’t produce well-paying jobs. That’s something that arguably was engineered back in the ‘70s and ‘80s, right around the time that Social Security started to be neglected. That’s the real threat to younger people.
The interesting thing about this is that when people on the right and the center-right of the Democratic Party try and sell Social Security “reform,” which generally means cutting it, one of the tricks they have is to say, well, of course, we’re not going to touch the benefits of current retirees – they’ll be protected. The problem is that current retirees still do fairly well under the program, despite the erosion in benefits. It’s younger people who are really going to depend on Social Security. They are the ones that need the program to be improved.
LP: Dare we use the word “expanded”?
LP: Many people may assume that the threats to Social Security come from the right and the Republican Party. How do you assess Biden’s history on this issue?
EL: You have to remember that Biden and most of the other leaders in Washington think like politicians. They’re concerned first and foremost to get themselves reelected and they’re very sensitive to how far they can push things. Biden, in the ‘80s and ‘90s, was a vociferous supporter of “reforming” Social Security – freezing entitlements, cutting back on benefits in order to “save the system.” Many people in the Democratic leadership at the time thought the same way. That was the popular thing. “Reforming” Social Security has always been a peculiarly Washington obsession. The trick has always been to come up with a critical mass of Republicans plus enough center-right Democrats to push it through.
These days it’s not as popular a thing. Mitch McConnell, for example, has so far ruled out doing anything to Social Security over the next couple of years because he knows it’s a political loser. It won’t fly right now. But it’s always there in the background. And I should point out that this last election was very revealing. It’s sometimes thought that the real Trump-y members of Congress and the Republicans from that side of the party are less enthusiastic about cutting Social Security – that they’re friendlier towards entitlements as long as they go to their kind of people. But in fact, some of the most radical proposals for Social Security in this past election came from some of the most far-right people in the party – the ones who are closest to Trump.
LP: The ones who claim to be populists.
EL: Exactly. You’ve got people like Senator Ron Johnson [R-WI] who is literally saying Social Security should not be self-financed anymore. He says it should be thrown into the pot along with every other federal expenditure and hashed out every single year. Now, you can’t run a retirement program that way because there’s no certainty. But that doesn’t seem to make any difference to him.
LP: So Sen. Ron Johnson wants to remove the very aspect of the program that makes it work so well – the part that guarantees people can depend on that check coming year after year.
EL: Yes. And that’s why the fact that it’s a self-financing program is so important. There is an element of mutual aid to Social Security that is in its DNA. It’s people of a wide range of generations supporting each other because they know that at a certain point they will be the recipient rather than the payer. Once you destroy that element of social solidarity, the program is just like any other welfare program. And of course, the history of those over the last 40 or 50 years in this country is that they get cut.
LP: How do you rate the Biden Administration on Social Security now?
EL: It’s fairly positive. This goes back to 2016 when the election was looming, and Bernie Sanders was pushing very, very hard, and a number of progressives in Congress were pushing very hard for a platform that would improve the program. Obama, in his last year as president, got behind them. Hillary Clinton got behind them. That was a big opportunity that was lost when Trump won the presidency because there would have been some momentum for that. That all died under Trump. This year there are proposals again in Congress to improve Social Security. It won’t be easy to do in the Congress that’s about to take its seat, but the Biden administration has been, at least in a general way, positive towards it. But we’re not going to see a lot of progress tomorrow.
LP: What would you do to make sure that Social Security is protected and remains strong? Does it need to be modernized in some ways to keep it effective?
EL: There are a number of things that can be done. One is to raise the cap. More of income beyond the $147,000 threshold needs to be taxed for payroll tax purposes. Another thing that can be done is passing the Social Security Expansion Act that Sanders, Elizabeth Warren, and others have backed. There is a special minimum benefit for Social Security recipients that’s aimed at keeping people who have really low incomes during their lifetimes above the poverty level, and that needs to be improved. That’s not asking a lot. It should be done.
You can also change the rules for wealthy people. One of the differences between now and 40 years ago is that people in the really high income brackets get much more of their income from investments, stock options, and other business holdings than they do from salaries and wages. We need to figure out a formula for applying the payroll tax to at least some of that investment income – like capital gains and so forth. Definitely, the CPI-E needs to be instituted. There should be an expansion of benefits across the board for Social Security benefits. We need the CPI-E at a base level that’s more reasonable. Another thing I think is important: one of the changes that happened in ’83 that was really bad was that Social Security survivor benefits were ended for children of deceased or disabled workers above the age of 18. It used to be that you could get those until 22 and they would help you to go to college. That was abolished. It would be a very good thing if that could be reinstated so that more people have some level of security to pursue higher education.
LP: If there’s one thing you could get the public to understand right now about Social Security, what would it be?
EL: I’ll make it two things. First, Social Security is not something you can consider in isolation. It gets back to what I said about how if you have good pay with steady increases, then you can have a healthy Social Security system in a fiscal sense. Without that, you can make all the cuts you want, you can tweak it any way you want to make benefits more moderate, and the system will still deteriorate. You must have a good economy, and that includes everything from encouraging the development of industries that generate those kinds of jobs. It means not making it harder for unions to organize so they can push for higher wages. Social Security is closely tied up in that aspect of the economy.
Second, keep in mind that Social Security belongs to you as a working person who is contributing to it. It doesn’t belong to the politicians, although they make decisions about it. It belongs to you and I think that there needs to be a sort of consciousness among people of this so that when they discuss it or make their views known to politicians, the politicians understand in Washington that this is something that is not theirs to play with.