Social Security Dilemma: Americans Are Living Too Long

Among non-politicians, there's remarkable unanimity on what areas of the Social Security system need fixing and what techniques are likely to work best. Second in a three-part series.
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Miller-McCune.com presented a three-part look at what's ailing Social Security in February 2008. This the second of three parts. Read part I here and part III here.

Certain startling statistics stick in the public’s mind, even long after they have been discredited. Newsweek’s assertion that a single woman over 40 is more likely to be killed by a terrorist than get married is one memorable example. Another is the belief perpetuated by pundits and politicians that people in their 20s think it’s more likely they’ll see a UFO than collect Social Security benefits.

That statistic — which has been cited by, among others, Bill Clinton and John McCain — came from a flawed 1994 survey, which was definitively discredited three years later. Asked directly, young Americans by a two-to-one margin said they are more likely to collect Social Security in their twilight years than to meet a creature from the Twilight Zone.

“But that first finding was so sexy, and so memorable, you’ll find critics of Social Security still using it,” complained Fay Lomax Cook of Northwestern University.

And why not?

If, like a number of conservative think tanks, you find the idea of government-mandated social insurance wasteful or distasteful, distrust of the system is a useful tool — even if it’s mythical, or manufactured.

A decade later, public opinion regarding the future of Social Security is more nuanced. A 2005 New York Times/CBS News poll found that 70 percent of respondents under age 45 believe the system will not have the money to pay them the benefits they expect when they retire.

Their fear is well founded — but only if (a) current projections are accurate, which is far from certain, and (b) nothing is done to close the coming gap between income and expenses. “There is not a lot of uncertainty about the nature of the problem — or what policies would fix it,” said economist Stephen Haider of Michigan State University. “The uncertainty is: Do we have the gumption to make the needed changes?”

Hardly Brain Surgery

While the issue is complicated, “It’s not brain surgery,” insists historian Edward Berkowitz of George Washington University, who has studied the system for many years. “There is a certain amount of money coming in and a certain amount of money being paid out.

“The amount of money that comes in depends on the number of people who are employed, and the level of their wages. The amount of money going out is dependent on the size of the population, disability rates, the state of the economy (which plays a role in how many people can take early retirement) and so on.

“We have a situation now where there is a surplus: More money is being collected than is being spent. At some point — perhaps in 2041, although no one is sure of that date because there are a lot of different variables — the surplus will be exhausted, meaning the system will be dependent upon the money it gets in from taxes in a particular year. That will be enough to pay 75 percent of the promised benefits — which will be bigger than they are today, since they will rise with inflation.

“The question is what to do about that.”

Cutting the rate of benefits (which are “relatively stingy” compared to many other countries’ retirement plans, according to UC Berkeley economist Ron Lee), and means-testing (which could discourage savings and decrease public support for the now-universal program) are essentially off the table. There are some incremental suggestions, too, such as reducing the rate of yearly increases by linking it to price increases rather than wages.

Three other variables could be adjusted: The payroll tax rate, the ceiling on payroll taxes and the retirement age.

In 1935, the initial payroll tax rate was set at 1 percent, and it applied only to the first $3,000 of a worker’s wages. That has increased over the years to a current rate of 12.4 percent — half taken from employees and the other half from their employers — up to $102,000 in earnings for 2008.

Lee estimates that an increase of 2 percentage points in the payroll tax will keep the system solvent for 75 years, and a 4 percentage point increase will keep it secure for the indefinite future. “I think the tax we would end up with — a 16.4 or 16.5 percent payroll tax — is politically feasible,” he said. “That’s what I would suggest doing myself.”

While his numbers are correct, his reading of the public mood may not be. According to the 2005 New York Times/CBS News poll, only 41 percent of Americans approved increasing the payroll tax. However, 63 percent approved of the increasing the amount of income — up from that $102,000 cap — that is subject to Social Security taxes.

Only 30 percent approved of the idea of raising the retirement age, currently 67 for people born in 1960 and since. This may be the issue where public opinion collides with economic reality: All of the experts contacted for this series spoke of the importance of getting Americans to work longer into their senior-citizen years.

“I’d take off the payroll max and have (higher-income) people pay on all of our income,” Haider said. “I would also increase the normal retirement age from 67 to 69. That would come pretty close to bringing the system into balance.”

“The early-retirement age (where people can start getting Social Security benefits at a reduced level) has never been raised,” noted Cook. “We could raise that from 62 to 64.”

“A lot of people retire for an extraordinarily greater number of years than they did in the past,” noted economist Eugene Steuerle of the nonpartisan Urban Institute. “From 1940 to 1950, the average retirement age was 68. The average retirement age today is 63. If people were to retire today for the same number of years they retired in the 1940s, they’d be retiring at age 74! If life expectancy (continues to increase), in 40 years, they’d be retiring at 78.

“When we retire at age 62 or 63, we do two things. We become dependent upon other taxpayers. And we are contributing less revenue ourselves. Part of the issue is: Are we willing to work longer as we live longer?”

Steuerle added that he isn’t necessarily talking about full-time jobs. He would like employers to think creatively and institute “bridge jobs” — part-time or consultant positions where seniors could share their years of expertise. “The physical requirement of jobs has become much less (as we have moved from a manufacturing to an information-based economy),” he noted.

Steuerle suspects the baby boomers, unlike their parents, will be more willing to keep working — perhaps finding a second career in late adulthood. Berkowitz finds support for that concept within his own household: “My wife is retiring, and she expects to do something else.”

Politics Meets Policy

During the 2008 presidential campaign Barack Obama was the only major candidate to offer a concrete proposal regarding Social Security; he argued that a higher level of income should be subject to the payroll tax. In February, The New York Times reported the new president was in favor of dealing with the issue quickly, but was running into resistance from Congressional Democrats.

The Social Security surplus was an issue in the 2000 presidential campaign, when Democratic nominee Al Gore proposed putting it into a “lockbox” rather than intermingling with other federal revenue. That concept, which was also endorsed by McCain in 2000, was not embraced by President Bush; rather, he has consistently borrowed against the surplus, which critics note allows the budget deficit to seem smaller.

This practice bothers Steuerle. “It’s like saying to your kids, ‘I’m going to put $10 a year in a savings account. I’m also going to borrow $20 extra every year and leave you that debt. Now that I’m retiring, I’m saying, ‘Kids, you owe me all this money! I left it in the savings account!’ ”

“I’m very concerned about the deficits we’re running up,” Haider agreed. “The (Obama) administration has to be much more diligent on having revenues match expenses. But if the government starts to default on any debt, Social Security will be the least of our problems.”

“George Bush tried to make the point that the Social Security surplus is not real; it only exists in the form of bonds (which the federal government must, by law, repay),” Berkowitz added. “But Savings Bonds are real, and this is as good as they are, if not better. As long as they have a commitment to pay the money (back to the Social Security system), I’m not worried.”

Berkowitz is open to a number of possible solutions, including increased payroll taxes and raising the retirement age. But he is adamant that, in an era where individuals are being forced to assume more and more risks, Social Security, in its traditional form of providing guaranteed, defined benefits, needs to be preserved.

“Very few government programs actually work,” he said. “This is one of them.”

Read part one here and part three here.

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