Social Security will be 80 years old on August 14. If there has been a better program for Americans, at the moment I can’t think of what it is. Of course, since it’s a government program that works, Republicans hate it. Always have, always will. In recent months, some Republicans have renewed their attacks on the program, under the guise of “fixing” it for the long term. It’s no secret that Social Security will have issues with paying out full benefits not too far down the line, but there are some simple ways of dealing with that problem, and some things that we absolutely should not do in the name of “saving” Social Security.
In an August 8 article, Stephen Ohlemacher of the Associated Press lays out some of the options that have been discussed for keeping the Social Security program afloat long term. He observes that “modest” changes will protect the program for years to come. Here’s “The Good, The Bad, and The Ugly” among the proposals for solving Social Security’s long term funding problem.
Everybody agrees that the worst thing that could happen to Social Security recipients is a cut in benefits. However, there are several ways that benefits can be cut, without appearing to be cut. The worst of these ways is by the use of something known as a “chained CPI.”
Cost of living increases for Social Security recipients are based on increases in the Consumer Price Index (CPI). The idea behind a “chained CPI” is that when prices go up, people buy less expensive things. For example, when steak becomes too expensive for a pensioner to afford, he or she switches to chicken. This would slow cost of living increases by 0.3 percent, on average, and, according to Ohlemacher, would result in the elimination of 19 percent of the projected shortfall.
AARP points out that 0.3 percent doesn’t sound like a lot. But the cut grows over time. If someone who retires at 62 lives until 92, they will be losing a full month’s Social Security every year, thanks to chained CPI.
This is a sneaky cut in benefits that, unfortunately, even some Democrats support.
Republicans are hung up on the idea of raising the retirement age. Jeb Bush is one of the latest to suggest this, but he’s far from the only one. There are probably more false claims about life expectancy and the retirement age than about any other aspect of Social Security.
First of all, it’s very easy to talk about raising the retirement age if you are a Bush, considering that, like most people in their economic position, they have done very little physical labor over the course of their lives. But consider the plight of someone like delivery driver Scott Quenneville, who told the Wall Street Journal:
I’ve already had two knee surgeries after going up and down these trucks all day. I don’t even know if I can make it to 57 and there’s no way I can make it to 65.
As people who have spent a lifetime doing manual labor age, they find that their bodies simply won’t take the abuse that labor subjects them to. Quenneville is the perfect example of someone for whom an increase in the retirement age is pretty much out of the question.
Another issue with raising the retirement age is life expectancy. This is one statistic that almost everyone involved in the Social Security debate gets wrong. How many times have you heard someone say, “People are living a lot longer now than they used to?” They base that statement on something called “life expectancy at birth.” When you look at life expectancy at birth, it does indeed look as if people live much longer now than they did 100 years ago. The reason for that is infant and childhood mortality is much lower now than it was in the early 1900’s. But life expectancy at birth is of ZERO importance for Social Security. What matters is “life expectancy at retirement age.”
If you look at the following table, from the Social Security Administration, you will see that life expectancy at age 65 increased very little over the 50 year period between 1940 and 1990.
Okay, you say, so people are now living 4-5 years longer than they used to. We can increase the retirement age by 4-5 years, and it’s no big deal. In addition to what has already been mentioned about those who do physical labor, here’s something else that most people don’t realize: on average, current workers do not get back everything they put into Social Security.
This chart from the Associated Press shows what percentage of contributions workers can expect to get back from Social Security. Notice that in 1985, retirees were getting back considerably more than they put in. That began to change in 1995. Now, and for the foreseeable future, most retirees will not live long enough to have all of their contributions returned. Raising the retirement age will mean that workers will contribute even more, and get back even less of their contributions.
There’s a simple way to help Social Security, and that is to change who pays the FICA (Social Security) tax, and on what income. If those changes are made, they will fix most of Social Security’s funding problems.
Currently, the cap on earnings that are subject to the FICA is $118,500. That makes the tax the most regressive tax that most Americans pay. You, and your employer, pay a combined 12.4 percent on every dollar you make, from the first one, up to the cap. Those who make more than $118,500 therefore are paying the FICA tax at a lower effective rate than everyone else.
But here’s something that’s even worse. If you make your money through things like stock dividends, as many rich people do, your earnings are not subject to FICA tax at all. Let’s go over that again. If you have a white collar job, and make $118,500 a year, your individual share of FICA tax is 6.2 percent of your income, which is matched by your employer. If you are, say, a doctor, and you make $237,000 a year, your effective FICA tax rate is 3.1 percent, because you only had to pay the tax on half of your income. And, if you’re Jeb Bush, and you make most of your money from your family fortune, your effective FICA tax rate is somewhere around zero.
The Associated Press’s interactive tool shows that if you remove the cap, without increasing benefits for those who would be paying the extra tax, you solve 82 percent of Social Security’s shortfall. Making so-called “unearned income” such as interest and dividends subject to the tax, at least above a certain level, would likely solve the problem completely.
This isn’t rocket science. But unless we make plenty of noise, it is likely that we might get hit with the “ugly” option of a chained CPI, or the “bad” option of an increased retirement age. Put Republicans in power, and those chances go up exponentially.
Featured image via Wikimedia