An Honest Look at Social Security

In the first of a three-part series on that 'third rail' of American politics, our Tom Jacobs examines the history of the program.
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Miller-McCune.com presented a three-part look at what's ailing Social Security in February 2008. This is the first part in the series. Read Part II here. Part III is here.

In a message to Congress on June 8, 1934, President Franklin D. Roosevelt laid out his case for a Social Security system. In agrarian times, he noted, family and community members cared for one another as needed. Interdependence was an accepted and deeply valued fact of life.

But as industrialization uprooted workers and lured them to cities, this traditional support system broke down. Our natural proclivity to take care of one another needed to find a new form.

Thus, the proposed system of federally guaranteed retirement benefits “does not indicate a change in values,” he stated. “It is rather a return to values lost in the course of our economic development and expansion.”

With those words, FDR created the framework through which we still see the Social Security system: as a practical expression of traditional American ideals. By creating a more equitable society without penalizing success, it has become, in the words of historian Edward Berkowitz, “the American way of achieving social-welfare objectives.”

As it nears its 75th anniversary, the Social Security system is at the center of an ongoing debate over its viability. Some commentators claim it is approaching a “crisis,” while others call that baseless fear-mongering. In this article and two more to follow, Miller-McCune.com will sketch Social Security’s history, examine the current challenges it faces and explore some creative ideas for its future.

Of course, in the politically charged world of Social Security, even reporting the past can be fraught. As Berkowitz told NPR’s Terry Gross during 2005’s privatization drive, “People are trying to touch base with historians because they’re trying to maneuver the past to make it look as good as possible to their view of the present. They want to maneuver the past for political purposes.”

Dual Nature

Nearly 51 million retired or disabled workers, their families and their survivors receive monthly Social Security benefits, according to the May 2009 annual report on the trust fund's financial health. Approximately $615 billion was paid out in 2008, representing about 40 percent of all income received by individuals age 65 and over.

That 40 percent “replacement rate” is relatively low compared to other industrialized nations, according to economist Ron Lee of the University of California, Berkeley. He notes that many European nations have substantially more generous retirement programs, replacing 60 or 80 percent of income. What’s more, Europeans tend to retire earlier and have fewer children than Americans — both problematic trends.

“We’re definitely headed for trouble, but not nearly so much as other countries,” he said.

To look closely at the U.S. Social Security system is to be repeatedly struck by its dual nature. It is both an insurance program and an anti-poverty program. It is based on a concept, social insurance, which originated in 19th-century Germany; but with its limited scope and emphasis on earnings, it feels entirely compatible with our country’s capitalist character.

It’s inherently conservative, in that it rewards work and provides greater benefits to those who have contributed more to the economy. But it’s also liberal, in that it spreads around the nation’s wealth, in the process lifting millions of people out of poverty.

A 1999 study found that 11.9 percent of elderly Americans had income below the poverty line — a number that would shoot up to 47.6 percent if Social Security did not exist. And senior citizens are not the only beneficiaries: 16 percent of Social Security recipients receive disability payments.

“It is the most important anti-poverty program, without a doubt,” said Berkowitz, a professor of history at George Washington University who has written extensively about the Social Security system. “It has a very conservative look to it, but it is the most important income-redistribution program we have.”

Like many New Deal programs, Social Security was created as an alternative to more radical ideas that were floating around during the desperate years of the Depression. The Townsend Plan, proposed in 1933 and publicly supported by more than 2 million people by 1935, would have provided a $200-per-month pension ($3,067.30 in 2007 dollars) to every American over age 60, funded by a 2 percent national sales tax.

The Social Security Act, once it was passed by Congress and signed into law on Aug. 14, 1935, fell far short of that universal vision. The retirement age was set at 65; the level of benefits would be based on the payroll tax contributions the worker made during his or her years of employment.

Only about one-half of American workers were eligible to participate — essentially, employees in the industrial or commercial sectors. “If you owned a shop that sold lawn mowers, or if you were a doctor or a minister or a farmer, you wouldn’t have been covered,” Berkowitz noted.

The system expanded incrementally to cover 96 percent of American workers today. In 1939, one year before the first monthly retirement check was issued to Ida May Fuller of Ludlow, Vt. (in the amount of $22.54), amendments were passed introducing survivors’ benefits, as well as payments to the spouse and minor children of retired workers.

Cost-of-living increases were instituted in 1950 and made automatic in 1972 (meaning Social Security payments increase in line with the annual rise in consumer prices). Disability insurance was added in 1954; an early-retirement option (with reduced benefits) was instituted for women in 1956 and for men five years later. The Supplemental Security Income system, which provides cash stipends to very poor aged and disabled people, was established in 1972; it is a separate program paid for out of general tax revenues.

Shoals Averted, Shoals Ahead
A genuine Social Security crisis arose in August 1982. The Congressional Budget Office reported that, without an influx of at least $14 billion, Social Security checks would stop going out on time beginning the following July. Not wishing to incur the wrath of retirees, who faced the very real threat of receiving their checks later and later each month, President Ronald Reagan and leaders of Congress set up a bipartisan commission to look for ways to shore up the system.

In April 1983, with just three months to spare, Reagan signed into law a series of far-reaching changes recommended by the commission. These included taxing Social Security benefits for the first time, bringing federal employees into the system and gradually increasing the retirement age to 67 (for those born in 1960 or later). These changes, put into place to accommodate the old-age needs of the baby boom generation (the 79 million Americans born between 1946 and 1964), created the surplus the system currently enjoys.

However, the projections used in 1983 proved imperfect. According to the Treasury Department, the surplus generated each year will reach its peak in 2009 (at $99 billion) and gradually shrink, exhausting itself completely around the year 2016. At that point, with fewer tax dollars coming in than benefits going out, the system will start to tap the savings it has accumulated.

Those savings will run out somewhere around the year 2037 (four years earlier than previous predictions). At that point, we will return to Social Security’s traditional pay-as-you-go plan. The system will revert to its normal state, with active workers supporting retirees — which presents a problem, given the smaller size of the post-baby-boom generation and the fact retirees are living longer.

According to economist Eugene Steuerle of the nonpartisan Urban Institute, today there are approximately 3.2 workers for every retiree receiving Social Security checks. That number is projected to fall to around 1.9 workers per retiree once the bulk of baby boomers retire.

The Treasury Department spells out what that would mean:

“If no action is taken, current projections imply that all beneficiaries will have their benefits reduced in 2041, compared to what is promised. The share of scheduled benefits that would be payable would then slowly decline from 75 percent in 2041 to 70 percent in 2081.”

That calculation — which comes directly from the source — clearly contradicts former President Bush’s 2005 assertion that the system is headed for “bankruptcy.” If absolutely nothing is done, Social Security will live on into the final decades of the century, albeit paying less-generous benefits (in inflation-adjusted terms) than current retirees receive.

Then again, these pessimistic projections could be wrong.

“It’s possible Americans will have more children, and/or there will be increased immigration (meaning more workers paying into the system),” said Fay Lomax Cook, director of the Institute for Policy Research at Northwestern University. “How well the economy performs has a great deal to do with it as well. The forecast could become more positive if certain things happen.”

This uncertainty has provoked a range of responses from across the ideological spectrum. On the left, New York Times columnist Paul Krugman regularly mocks the “doomsaying about Social Security,” insisting that “the whole Beltway obsession with the fiscal burden of an aging population is misguided.”

On the right, the Heritage Foundation insists we need a radical restructuring of our retirement system, replacing Social Security with a far more limited system in which the government “protects people against unexpected and potentially devastating occurrences rather than providing subsidized retirement income.”

The scholars interviewed for this series reject both those extremes. They make two basic arguments regarding entitlements and the elderly: First, with health care costs increasing dramatically, reforming that system — which includes the Medicare program for seniors — should be a top priority of the new president. Second, while Social Security’s problems are clearly less urgent, it would be wise to address the projected shortfall soon.

“If we deal with it now rather than wait, there is more time to gather the money for when it is needed,” said Berkowitz. “It’s like flying a plane from New York to Tokyo: A very small change (early) in your course will have a huge effect on your ultimate destination.”

In our next installment, we will examine some competing flight plans. But before concluding, it is worth recalling that, since the late 1940s, a different metaphor has dominated discussions of Social Security. The system, Americans were told countless times, is one leg of a “three-legged stool” that will provide firm support for retirement years. The other two legs are pension plans and savings.

Given the shaky state of our pension system and the nation’s extremely low savings rate (which has only recently begun to improve), it’s fair to ask whether we’re focusing our fears on the wrong leg of the stool.

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