Social Security “Fix” Would Leave Low-Wage Workers Broke

Social Security celebrated its 25th birthday last month. The milestone probably got more attention than it would have otherwise because the system is reportedly in the bulls-eye of the President’s fiscal commission.

Why it should even be on the table isn’t altogether clear. By law, benefits must be self-sustaining, i.e., funded by payroll taxes, plus the interest on Treasury bonds in which excess revenues are invested.

Perhaps the answer is that benefits owed are projected to consistently exceed annual payroll revenues, beginning long about 2015. So the federal government will lose funds it’s been using for other purposes. Thus, as New York Times columnist Paul Krugman says, the system’s costs “could prove unsupportable for the federal budget as a whole.”

This year is a foretaste of what could happen because for recession-related and accounting reasons the system is short on current tax revenues. The trustees project a $41 billion deficit, excluding interest income. Alarm bells from the far right notwithstanding, this doesn’t mean the system is broke.

The trustees project a reversal in 2012. But they say the trust fund, i.e., the bonds and accumulated interest, will be exhausted in 2037. At that point, payroll taxes will still cover about 78% of benefits, plus administrative costs (now less than 1% of the total). But what about the missing 22%?

Virtually all the experts agree that the federal government shouldn’t wait till the system gets to this point. People who’ve retired and those near retirement age will have counted on Social Security for a good part, if not all of their income for the rest of their lives. It will be too late for them to prepare for a drastic drop in benefits — assuming they could have if they’d known in advance.

Hence the many views we’re seeing now on what should be done to keep the system solvent. One that’s getting a lot of play is to prospectively raise the eligibility age for Social Security retirement benefits.

The government already did this to prepare for the bulge in claims by aging baby boomers. If you were born after 1942, you’ve got to be at least 66 to retire with full benefits. The age continues to rise until to reaches 67.

House Minority Leader John Boehner recently got a good bit of heat for suggesting the age be raised to 70. House Majority Leader Steny Hoyer has also spoken of some mix of reforms that could include a higher retirement age or “one pegged to lifespan,” which probably means a retirement age indexed to life expectancy.

I’m with those who think this is the wrong way to go. A couple of major reasons.

First, low-income workers have jobs that are physically demanding, e.g., construction, waiting tables, home health care. They may not be able to keep up with these demands in their mid-60’s or later.

Second, both they and other older workers who lose or have to quit their jobs will have a hard time finding alternative employment. We’re already seeing this in the experience of older workers laid off because of the recession.

In fact, one of the reasons Social Security is technically in the red this year is that far more older workers are claiming benefits before they reach full retirement age. This means their monthly benefits will be permanently reduced.

By how much depends on how far short of 66 they are. The cut could be as much as 25%. The National Committee to Preserve Social Security and Medicare says that workers who retire at 62 when the full retirement age reaches 67 will lose 30%.

Now, this may not matter a whole lot for older workers who’d held high-paying jobs. They’re likely to have 401(k) accounts and possibly other investments that will have regained their value by the time the proposed age increase went into effect.

But it’s going to cut the rug out from under low-income workers. The Center on Budget and Policy Priorities recently issued a Social Security fact sheet that gives us some indicators.

Today, more than a quarter of post-retirement beneficiaries rely on Social Security for more than 90% of their income. Surely the vast majority of them were low-wage workers. Obviously any benefits reduction would have a major impact on their financial situation.

Looking toward the future, the amount of pre-retirement income Social Security replaces will fall because more will be deducted for Medicare premiums — unless health care costs miraculously level off to the overall inflation rate. By the time the retirement age reaches 67, it will probably be, on average, about 31%.

It will, of course, be less for workers constrained to retire earlier. There will be more of them in this group if the full retirement age is raised. And if their earnings were low during their work years, they’ll be in dire straits.

Some have suggested that the higher eligibility age could include a carve-out for low-wage workers. Or maybe the Supplemental Social Insurance rules could be changed so that benefits would be available to those with less than debilitating conditions.

This, however, would still leave a very large number of older workers between the rock and the hard place unless they could continue working full time until well into what are supposed to be our golden years. Much more likely for professors, lawyers, financial managers, etc. than for factory workers.

Seems to me there ought to be a better way to shore up Social Security — and I don’t mean Congressman Paul Ryan’s new/old plan to privatize it.

2 Responses to Social Security “Fix” Would Leave Low-Wage Workers Broke

  1. […] don’t think anyone would quarrel with that. As I earlier wrote, the latest report from the system’s trustees projects a long-term shortfall in the Trust […]

  2. […] you’ve got solid grounds for bigger annual increases — thus greater stress on the Social Security Trust Fund we’re supposed to be so worried […]

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