What’s in Store for Social Security?

November 14, 2016

Trying to figure out how to keep blogging on progressive solutions to social and economic problems that affect low-income people. Seems kind of hopeless, unless I focus solely on what’s going on in the District of Columbia. Not ready to do that, however.

So here’s a national issue that should mean a lot to the white, blue-collar working class whose votes, we’re told, largely account for Trump’s victory — the future of Social Security retirement benefits.

For somewhat over a year now, we’ve had promises and proposals to expand Social Security. Doubt we’ll see anything like them reach the President’s desk. Probably wouldn’t have, even if Clinton were sitting there.

But the problems they sought to address will continue to make old age insecure for millions of former workers and their families. In fact, without one form of expansion, they’ll be in worse shape than they already are.

Why Social Security Needs Fixes

As everyone, I think, knows, the Trust Fund that helps pay for Social Security retirement benefits will run out of money long about 2034. Ongoing payroll taxes won’t fully cover them. So unless the Trust Fund gets more, retirees will receive only about three-quarters of what they’re entitled to.

Social Security is, by far and away, the most effective anti-poverty program we have. Last year, the benefits it paid out lifted 22 million people over the applicable poverty threshold, including about 15 million seniors. But they fall far short of living costs for many.

So far short that about 6.5 million seniors lived in poverty last year, according to the Census Bureau’s better poverty measure, which factors in the cash value of major safety net benefits like food stamps and subsidized housing.

Most received Social Security benefits. But those who lived alone had less than $11,370 to pay for all their living expenses. Nearly 43% of all seniors were either poor or nearly so, i.e., had incomes below twice that threshold or one that’s only about $3,000 higher for couples.

The main reason they’re far from financially secure with Social Security is that the formula used to calculate benefits is based on the per-year average of what people earned during their highest-paid 35 years.

This keeps benefits low not only for retired low-wage workers, but others who didn’t work consistently or chose to work part-time for awhile — to care for children or an aging parent, for example.

It also depresses benefits for surviving spouses, who may receive only a portion of what the breadwinner was entitled to, and for other dependents, who always do.

How to Prevent the Shortfall

Basically, we’ve got two types of solutions to the impending shortfall — increase the funds Social Security receives through payroll taxes or preemptively cut benefits.

The Democratic party platform embraced the former, staunchly promising to “fight every effort to cut, privatize, or weaken Social Security.” Clinton did likewise, of course.

Both pledged to collect more in payroll taxes from high-income Americans. The platform defined them as those with annual incomes over $250,000. Clinton presumably meant the same, since she’d promised not to raise taxes on anyone who had less.

She mentioned two options, perhaps not mutually exclusive — tax some form or forms of income not subject to payroll taxes now and/or lift the cap on wage income. That’s now $118,500 and will get bumped up a tad each year that Social Security’s average wage index rises.

Lifting the cap — or scrapping it altogether — is hardly a new solution to the shortfall. Nor one supported only by left-leaning experts and politicians.

A majority of President Obama’s bipartisan commission on fiscal responsibility recommended a phased-in lifting of the cap until payroll taxes covered 90% of wage income, as they did in the early 1980s.

On the other hand, the Republican party platform says that all options to preserve and “modernize” Social Security should be considered, then swiftly reiterates the party’s opposition to tax increases.

House Speaker Paul Ryan refers vaguely — and ominously — to reforming Social Security. This, in the past, meant large benefits cuts, albeit postponed, and a further, perhaps ongoing increase in the eligibility age, which also translates into cuts.

His budget plan also included an option that would have allowed workers to divert a portion of their payroll taxes from the Trust Fund into private retirement accounts. The structure of the accounts would have benefited only high earners, the Center on Budget and Policy Priorities said.

And the additional payroll taxes the plan provided for wouldn’t have kept Social Security solvent over the long term because the Trust Fund would have insured against any losses, including merely from inflation.

Ryan has since withheld such specifics. But I see no reason to believe that the House will move on a plan to preserve Social Security benefits for the long term — let alone expand them for seniors who can’t significantly supplement them from their own retirement accounts and other savings.

So far as our incoming President is concerned, we’ve no idea what he intends for Social Security. He’s said he wouldn’t cut benefits. But one of the advisors close to him implied he might — as, in fact, did his running mate.

He’s also said that the yuge economic growth his other initiatives will fuel is the key to preserving Social Security. Economists, not all left-leaning, beg to differ. And he himself hinted that future generations might face “changes.”

Well, the program does need changing — and not only to ensure that future retirees don’t have to try living on less than the benefits they’d receive if the shortfall’s averted.

To be continued.

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Why We Should Care About Payroll Tax Holidays for High Earners

February 19, 2015

Last week, the top 1% of American workers finished paying their Social Security taxes for the year — an inflection point flagged and flogged by the Center for Economic and Policy Research. On the very same day, the Senate Budget Committee held a hearing on the impending depletion of the Social Security Disability Insurance trust fund.

These two events are related because the first provides a fresh perspective on the second, as well as a solution that’s not fresh, but seems sensible anyway.

As I’ve written before, the so-called DI trust fund will run out of reserves in 2016, unless Congress and the President agree on a solution. If they don’t, former workers with severe disabilities will receive only about 80% of their benefits — an average loss of nearly $244 per month.

That’s a real dent in the household budget. Average benefits now are $1,165 a month for disabled workers themselves and only $811 more for those with qualifying spouses and children.

The shortfall has been predicted for a long time, based mainly on demographic changes in the workforce, e.g., the aging of the baby boomer cohort, the large increase in the number of women working — and working long enough to qualify for SSDI.

Federal policy choices have contributed as well — specifically, the decision to take some pressure off the Old Age and Survivors trust fund by raising the eligibility age for full retirement benefits. But for that, many disabled baby boomers wouldn’t be receiving SSDI benefits any more.

All these factors explain why money is going out of the DI trust fund. The beginning of the payroll tax holiday for the very highest earners — and upcoming tax holidays for others who are doing quite well — explains why not as much money is flowing in.

As I’m sure you know, all of us who get paid for our work owe payroll taxes. If we’re employees, we pay 6.2% for Social Security. Our employers deduct it from our checks and pay the same amount. If we’re self-employed, we owe the whole 12.4%.

But the income subject to Social Security payroll taxes is capped — and always has been. For more than 30 years, the cap has been adjusted annually based on the average national wage index.

The index almost always rises, though rarely by a lot. The cap this year is $118,500 — up by $1,500 from last year.

But as everyone who hasn’t been living in a cave knows, more and more income is flowing to very high earners — those making a million or more a year. There were already six times as many of them in 2013 as in 1989, according to the Center for American Progress.

So more and more income escapes the Social Security tax. And it’s not only wage income enjoyed by the millionaires and billionaires, as this year’s cap indicates.

Class warfare alert! Not really. The point is that income inequality helps explain why the DI trust fund could soon run dry — and why the OASI trust fund will long about 2034 — unless our federal policymakers come up with a way to preserve the benefits that most workers and their families need.

A stopgap solution we already have — a relatively small increase in the share of payroll taxes going to the DI trust fund. But as I recently wrote, House Republicans have passed a rule to block any such shift, precedents notwithstanding.

They say they want a long-term solution to the whole solvency problem. Thus far, however, the most we can glimpse of what they have in mind comes from Senate Budget Committee Chairman Mike Enzi, who opened last week’s hearing.

He trashed on the President, of course — in part, for proposing the payroll tax shift. But he also suggested that more workers with disabilities severe enough to meet SSDI’s strict standards could actually work because technology enables people to work from home, start their own businesses, etc.

Michael Hiltzik at the Los Angeles Times perceives a move to distinguish deserving from undeserving SSDI recipients. Perhaps. Or perhaps it means something that one of Enzi’s friendly witnesses advocated “early intervention,” i.e., rehabilitation and other services to keep people with “work-limiting conditions” in the labor force.

Bottom line, however, is that enabling some additional workers with disabilities to remain gainfully employed won’t do a whole heck of a lot to keep the DI trust fund solvent — and nothing at all to preserve full benefits for retirees.

Uncapping the payroll tax cap would. If Congress had simply scrapped the cap four years ago, it could have closed about 90% of the projected funding gap for 75 years.

Other cap-scrapping scenarios could have closed roughly 70-80%. These, which seem more politically realistic, would have boosted benefits for higher earners, as well as capturing more of their income. We’ve had cap-lifting, as well as cap-scrapping proposals too.

So there’s more than one way to minimize the projected shortfall. But any solution that leaves the cap alone is bound to severely reduce retirement benefits — perhaps deny some severely disabled workers and their families any benefits at all.

Not much of a worry for those folks whose tax holiday has already begun. But for the rest of us ….


Chained CPI and Social Security: Some Questions and Answers

April 22, 2013

Back in January I said I’d delve into the impacts of using the chained CPI (Consumer Price Index) to adjust Social Security benefits.

Then the President delivered a strong defense of “the commitments we make to each other,” including Social Security. So I put my draft post aside, figuring the chained CPI was off the bargaining table.

The more fool I. As you’ve probably read, it’s among the entitlement “reforms” in the President’s proposed budget.

The White House has taken great care to package it with other changes that would supposedly protect very elderly retirees and others who’ve relied on Social Security benefits for a long time. Also to shield programs that base eligibility on income.

But as economist/blogger Jared Bernstein said some time ago, the danger is that protections like these will all get swept aside, leaving only the benefits cuts.

Here then are some of the basic issues, as I see them. More to follow in a second post.

Why Do Anything About Social Security?

Our federal policymakers must do something about the Social Security retirement and disability insurance programs — and the sooner the better.

The Trust Fund will run out of money long about 2033. If nothing is done before then, the Social Security Administration will have to rely solely on what it continuously receives from payroll taxes.

That would be enough to pay about 75% of the benefits retirees would get if the Trust Fund still had reserves — a devastating loss for the nearly two-thirds who rely mainly or entirely on those benefits.

What Could Prevent the Shortfall?

At the risk of over-simplifying, our policymakers have two choices, not counting just letting the Trust Fund dry up. They could change the system to take in more or pay out less.

A switch to the chained CPI represents the latter approach because it rises more slowly than the currently-used index — the CPI-W. So, therefore, would the benefits that seniors, severely disabled former workers and eligible survivors receive.

Policymakers could instead “scrap the cap” on the amount of wage income subject to the tax that feeds the Social Security programs.

Or they could raise it enough to cover all but the top 10% of income, as it did in 1982 after Congress stepped in to shore up the program — not for the last time, incidentally.

High earners wouldn’t like this, of course. Nor perhaps would employers, since they’re responsible for half the payroll tax.

The National Federation of Independent Business has already said that its small business members “would violently oppose” it. These, as you know, are the “job creators” that our President and Congressional leaders are so fond of.

Is the Chained CPI More Accurate for Cost-of-Living Adjustments

Proponents of the chained CPI claim that it’s simply a more accurate cost-of-living measure because it reflects consumer responses to price increases. If the price of beef goes up, they buy less of it and more chicken. Etc.

Opponents argue that the index isn’t more accurate for seniors because they spend far higher portions of their income on items that aren’t amenable to switches, especially health care.

Even the CPI-W apparently understates their cost-of-living increases.

For some time now, the Bureau of Labor Statistics has maintained an experimental cost-of-living index specifically for the elderly. Over the long haul, it has risen somewhat faster than the CPI-W. And Social Security’s chief actuary expects it will in the future.

We’d probably see similar results from a cost-of-living measure for people with severe disabilities, since many of them also have disproportionately high health care costs.

So if accuracy were the real issue, Congress would give BLS the funds to fully develop its experimental index, as The New York Times, among others, has suggested.

What Other Objections Have Opponents Raised?

The over-riding objection to the chained CPI switch is that it would effectively cut benefits. The loss in any one year would be small. But losses would mount up over time because the base for each cost-of-living adjustment, as well as the COLA itself, would be lower.

The average earner, says the Strengthen Social Security Campaign, would lose a total of $4,631 by age 75 — more than three months of benefits. Another 10 years and the loss would mount to nearly a year’s worth of benefits.

We need to recall that retired workers now get, on average, only $1,261 a month — and former workers in the Social Security Disability Insurance program somewhat less.

For 36% of seniors, Social Security provides at least 90% of income — not surprising, given what we know about retirement savings. It’s the sole source of income for 29% of the most elderly.

As I mentioned earlier, the President’s budget includes a “benefit enhancement” — popularly known as a bump up. It’s supposed to restore the cumulative losses for people who live long enough to benefit.

Most who do would still get less, according to the SSS Campaign.

Those who don’t are just out of luck, of course. And they’re disproportionately lower-income people, for whom every Social Security dollar counts.

UPDATE: After I published this, the Center on Budget and Policy Priorities issued a brief that provides more detail on the impacts of the chained CPI on Social Security retirement benefits.