Tuesday, March 12, 2013

Social Security Sustainable: Productivity Improvements Enlarge the Pie, Facilitate Funding Boomer Benefits and Beyond


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Social Security Sustainable: Productivity Improvements Enlarge the Pie, Facilitate Funding Boomer Benefits and Beyond


Attempts to undo or diminish Social Security began upon the program's enactment; they continue unabated. Early charges of unconstitutionality foundered when the Supreme Court upheld the law. The Bush push for "privatization" shocked but did not awe. Participants and the public know that work and contributions earn the program's benefits. The recession tailspin of 401(k)s and Individual Retirement Accounts (IRAs) demonstrated anew the unreliability of private, individual accounts; emerging news of their hidden fees further weakened their reputation.

The latest bumper-sticker slogan that "Social Security is unsustainable" doesn't stand up under scrutiny. "The Moment of Truth," the 2010 report of banker Erskine Bowles and long-time program detractor Sen. Alan Simpson, co-chairs of the Commission on Fiscal Responsibility, summarized it this way:
In 1950, there were 16 workers per [Social Security] beneficiary; in 1960 there were 5 workers per beneficiary. Today [December 2010] the ratio is 3:1 - and by 2025 there will be just 2.3 workers "paying in" per beneficiary Unless we act, these immense demographic changes will bring the Social Security program to its knees" ("Moment of Truth," Part V. "Social Security")
Although labeled "Report of the National Commission on Fiscal Responsibility and Reform," it was the draft proposal by the commission co-chairs and did not receive the number of votes required to forward it to Congress for an up-or-down vote.

This "analysis" led them to urge significant benefits cuts, chiefly by raising the statutory "retirement age," and watering down the cost-of-living adjustment (COLA) formula. Some attempt to use the projected ratios to persuade young people that, when their time comes, Social Security will not be there for them.
Although many find the ratios alarming, they prove nothing. Nineteen-fifty does not provide any significant benchmark; by then, the program had barely begun.  During World War II, millions of the usual work force were in the armed services, then not covered by Social Security. By war's end, comparatively few people had worked under Social Security long enough to qualify for benefits. Naturally, with the passage of time, the ratio of beneficiaries to those at work (called the "dependency ratio") changes, with more and more people in beneficiary status -- as expected and planned. The current ratio has been essentially the case for the last 40 years. It had generated huge surpluses. That tells us that it is more than ample. Its changes do not foretell bad times ahead but, rather, how much leeway it has. Drawing down the surplus does not indicate weakness but, rather, that the program is being used its planned reserve as it was meant to be used.

Technological Change Makes the Employed More Productive, Offsetting the Relatively Reduced Size of the Working Population

The claimed inexorable failure of funding depends on two unwarranted assumptions: First, that the "dependency ratio" of working people to beneficiaries determines the sufficiency of program revenue. But many other powerful variables, such as how much they work and earn, the formula for contributions, other sources of program income and the benefit formula determine whether income and outgo match. So, looking solely at the assumed size of the work force grossly oversimplifies the adequacy of program funding. Monique Morrisey, the Economic Policy Institute economist, cautions that the worker: beneficiary ratio is the pertinent metric rather than the "aged dependency ratio," which does not measure the relationship of beneficiaries to actual or even estimated working people to beneficiaries.

The claimed adverse impact of a relatively smaller working population on Social Security funding results only if people working after 1950 produce no more goods and services than their predecessors and earn no more. Nobel Laureate Robert M. Solow notes that improved productivity "offsets the reduction in living standards' resulting from" a lower [employee] participation rate." See "On Golden Pond," his review of Peter G. Peterson's Gray Dawn (The New York Review of Books, May 6, 1999)

After World War II, the economy grew as never before. Productivity entered a new phase of expansion -- no, explosion. Dramatic improvements in per capita productivity resulted in larger quantities of goods and services to share. Earnings grew and, in consequence, so did Social Security program revenues. Bottom line, as reported in the 2005 Commonwealth Fund study "Demography Is NOT Destiny":
Since 1960, the population aged 65 and older has doubled while the overall population has only grown 57 percent. However, since 1960 the nation's income (as measured by gross domestic product) has nearly quadrupled. (Page 2)
As the 2012 Statistical Abstract of the United States shows, productivity just about doubled from 1980 to 2010 (Table 642) and average per capita employee compensation grew from $47,059 in 2000 to $64,552 in 2009. (These dates were those offered in the table, not cherry-picked by us.)

Bottom line: Despite a dependency ratio that earlier had been 15 to one and had become three working people to one beneficiary, the economy prospered. Indeed, from 1984 onward, Social Security generated a huge surplus. So, the claim that the projected dependency ratio changes are deadly simply doesn't hold up. Productivity gains can trump and have trumped such changes. See also OECD: "Looking to 2060: Long-term global growth prospects" (2012). It found that aging of the work force would dampen economic growth, but that improved education will sustain growth and that technological advances will enhance productivity making it "the most powerful driver of growth."

Future improvements will likely flow powerfully in the emerging era of nano-technology and advances in quantum mechanics. So, policy should be directed at bolstering productivity and translating its gains fairly into work income subject to FICA. But market forces will push in that direction. If there is a labor shortage for producing products for which there is demand, entrepreneurs will increase their investment in capital to counter the shortage.

Bowles and Simpson Claim, Falsely, That Program Outlays Exceed Revenues

The co-chairs seek to buttress their fallacious assertion about the import of the worker: beneficiary ratio with the false statement that "Today [2010] the program is spending more on beneficiaries than it is collecting in revenues." But that is untrue. The trustees' 2010 annual report clearly shows that income substantially exceeded expenditures -- income: $807.5 billion; expenditures $685.8. The 2011 annual report shows a similar surplus of income over expenditures: $805.1 billion income; $736 billion expenditures.

By law, Social Security has three streams of income: Federal Insurance Contributions Act (FICA) contributions, interest on the trust funds (composed of the surplus of revenues over outlays) lent to the U.S. Treasury and used for other governmental activities (such as the Iraq and Afghanistan wars) and income tax on a portion of Social Security benefits received by high earners. The Bowles-Simpson statement ignores the interest income credited to the Social Security trust funds. In all, the trust funds then totaled more than $2.6 trillion and are projected to exceed $3 trillion.

Bowles and Simpson assert: "[Social Security] will begin running deficits again in 2015 if interest from the trust fund is excluded." But, there is no reason to exclude interest payable to the Social Security trust funds. They hold U.S. Treasury obligations that are highly valued by the financial community throughout the world and are a staple of public and private trust funds. After the recent alleged debt "crises," investors bought massive amounts of U.S. Treasury obligations. They will continue to do so because of the United States government's stability and because it is unthinkable that our government will not pay whatever we owe. Such a default would wreck our economy.

Baby Boom Beneficiary Bulge Was Anticipated and Planned For

The Social Security surplus that began to accumulate in 1984 was planned and designed to be drawn down as needed to supplement FICA revenues and high-earner taxes to meet the boomers' projected benefits. So, that expected program development is not a sign of prospective collapse. We are fully capable of winning the battle of the baby boom bulge.

Earnings Growth Above FICA Cap Unexpected But Readily Accommodated

However, it was not expected that so large a portion of improved earnings would occur above the "cap" on earnings subject to FICA. Raising the cap would fix that development. In 2008, candidate Obama proposed doing that. Bowles and Simpson also recommend such a move -- although in different form. Others advocate differing versions. The problem is widely recognized and raising the cap to again cover the percentage of earnings that it did in 1983 is widely supported. Doing so is simply getting program revenues to where they were intended to be. That is hardly what anyone could validly call a tax increase.

Technological Growth; Productivity Expansion

Since World War II, the U.S. economy has grown fabulously due in substantial measure to burgeoning technology. Computers have been just one development, no, a cascade of advances that feed upon one another, not just increasing per capita output, but exploding it. The rule of thumb has been that computer chip capacity doubles every two years. As a result, for example, analysts and engineers now perform computations that used to be impossible. Nor is the end of such progress in sight, as we begin the era of nanotechnology and stunning scientific advances.

No Social Security Crisis; No Sweat To Assure Long-Term Solvency

The 2012 Social Security trustees' report projects that Social Security can pay promised benefits in full until 2033. Thereafter, anticipated program income will suffice to pay about 75 percent of benefits. The amount needed after 2032 to pay full benefits is modest: less than 2.7 percent of payroll. The trustees and program actuaries project that doing so would require adding only 1.4 percent of payroll for both employee and employer. That would not be a net reduction from employee earnings because the same projections show improved employee compensation of 140 percent over the 75 years used to assay the sufficiency of program funding. Those additional earnings would exceed the increased FICA collections, thereby increasing employee real net income.

Growth of Older Population Likely to Increase Social Security's Support

The expected faster growth of the older population probably will increase political support for preserving Social Security benefits, not least because so many older citizens vote. Indeed, support for more adequate benefits is quite likely. So, the demographic changes that cause Bowles and Simpson such apprehension will increase the number of Social Security participants and thus strengthen its political support.

Bowles and Simpson Abandoned Claim That Social Security Causes Deficits

Unreported in stories on the Bowles-Simpson report was their abandonment of the inaccurate claim that Social Security is responsible for federal deficits and debt. Rather, Bowles and Simpson declare in their "Moment," albeit very quietly (and outside the Social Security section), that we should "reform Social Security for its own sake, and not for deficit reduction."

Benefits Are An Entitlement Because They Have Been Earned and Paid For

No term has been more bent out of shape than "entitlement." It is the opposite of "subject to discretion" where the decider has the authority to grant or withhold, a power easily abused. Social Security and Medicare benefits are entitlements because the law specifies that they are legally due when the requisite work and contributions have been made. Those attacking the program seek to inject the quite different notion of "a sense of entitlement." Beneficiaries do not qualify for Social Security or Medicare by lolling about.

Proven Unreliability of Defined Benefit Pension Plans, 401(k)s and IRAs Makes Social Security Benefits More Vital Than Ever

Bowles-Simpson ignore the erosion and demonstrated unreliability of other programs that are supposed to help take the place of lost earnings. Defined pension benefit plans are a disappearing breed and many large employers are hurrying them off the scene. The Pension Benefit/Guaranty Corporation, created to insure a large portion of their promised benefits, is itself seriously underfunded. When the markets catch cold, private pensions, 401(k)s and IRAs (Individual Retirement Accounts) too often contract pneumonia. This article makes clear that there's no "may" about it.

Social Security has proven to be the sole dependable survivor. So the suggested reductions in Social Security benefits provide the wrong prescription. Benefits need strengthening, not reduction and paying for improvements does not require any heavy lifting.

Lincoln's Formula: "The Proper Role of Government Is To Do for People What They Cannot Do or Cannot Do So Well For Themselves"

Private and state and local retirement arrangements have demonstrated their inadequacy and unreliability repeatedly since the 1930s. Social Security and Medicare came into being because of their shortcomings or absence. Social Security and Medicare fit Lincoln's principle. The private enterprise system has many strengths and great utility. But periodically it also has jagged edges. We need social insurance programs like unemployment insurance, Social Security and Medicare to protect all of us against its hazards because none of us is immune.


By Nancy J. Altman and Merton C. Bernstein served as senior staff to the 1982-1983 National Commission on Social Security Reform. Both have written major books and articles on Social Security and pension plans.
 

Follow Nancy Altman on Twitter: www.twitter.com/NoSocSecCuts


Top Five Republican Social Security Lies



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Top Five Republican Social Security Lies



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Have you heard that Social Security is going bankrupt? Driving up the deficit? In crisis? Well none of that is true. These are all myths that Republican opponents of Social Security have been spreading to scare people into accepting benefit cuts this fall. But the myths are taking hold — so here's a list of the top five Republican lies about Social Security, along with the real story. Can you check out the list and then share it with your friends, family, and coworkers.

Lie #1: Social Security is going broke.

Reality: There is no Social Security crisis. By 2023, Social Security will have a $4.6 trillion surplus (yes, trillion with a 'T'). It can pay out all scheduled benefits for the next quarter-century with no changes whatsoever.

1. After 2037, it'll still be able to pay out 75% of scheduled benefits—and again, that's without any changes. The program started preparing for the Baby Boomers' retirement decades ago.
2. Anyone who insists Social Security is broke probably wants to break it themselves.

Lie #2: We have to raise the retirement age because people are living longer.

Reality: This is a red-herring to trick you into agreeing to benefit cuts. Retirees are living about the same amount of time as they were in the 1930s. The reason average life expectancy is higher is mostly because many fewer people die as children than they did 70 years ago. What's more, what gains there have been are distributed very unevenly—since 1972, life expectancy increased by 6.5 years for workers in the top half of the income brackets, but by less than 2 years for those in the bottom half. But those intent on cutting Social Security love this argument because raising the retirement age is the same as an across-the-board benefit cut. 

Lie #3: Benefit cuts are the only way to fix Social Security.

Reality: Social Security doesn't need to be fixed. But if we want to strengthen it, here's a better way: Make the rich pay their fair share. If the very rich paid taxes on all of their income, Social Security would be sustainable for decades to come. Right now, high earners only pay Social Security taxes on the first $106,000 of their income. But conservatives insist benefit cuts are the only way because they want to protect the super-rich from paying their fair share.

Lie #4: The Social Security Trust Fund has been raided and is full of IOUs

Reality: Not even close to true. The Social Security Trust Fund isn't full of IOUs, it's full of U.S. Treasury Bonds. And those bonds are backed by the full faith and credit of the United States.  The reason Social Security holds only treasury bonds is the same reason many Americans do: The federal government has never missed a single interest payment on its debts. President Bush wanted to put Social Security funds in the stock market—which would have been disastrous—but luckily, he failed. So the trillions of dollars in the Social Security Trust Fund, which are separate from the regular budget, are as safe as can be.
Lie #5: Social Security adds to the deficit

Reality: It's not just wrong—it's impossible! By law, Social Security's funds are separate from the budget, and it must pay its own way. That means that Social Security can't add one penny to the deficit.

Sources:

1."To Deficit Hawks: We the People Know Best on Social Security," New Deal 2.0, June 14, 2010 , www.moveon.org/r?r=89703&id=22136-299027-CGOz1Kx&t=4
2. "The Straight Facts on Social Security," Economic Opportunity Institute, September 2009 www.moveon.org/r?r=89704&id=22136-299027-CGOz1Kx&t=5
3. "Social Security and the Age of Retirement," Center for Economic and Policy Research, June 2010 www.moveon.org/r?r=89705&id=22136-299027-CGOz1Kx&t=6
4. "More on raising the retirement age," Washington Post, July 8, 2010 http://www.moveon.org/r?r=89706&id=22136-299027-CGOz1Kx&t=7
5. "Social Security is sustainable," Economic and Policy Institute, May 27, 2010 www.moveon.org/r?r=89707&id=22136-299027-CGOz1Kx&t=8
6. "Maximum wage contribution and the amount for a credit in 2010," Social Security Administration, April 23, 2010 ssa-custhelp.ssa.gov/app/answers/detail/a_id/240
7. "Trust Fund FAQs," Social Security Administration, February 18, 2010 www.ssa.gov/OACT/ProgData/fundFAQ.html

Social Security is sustainable


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Research and Ideas for Shared Prosperity


Social Security is sustainable


On May 26, 2010, economist Monique Morrissey attested to the sustainability of Social Security at the House Democratic Caucus’ Seniors Task Force Roundtable.  Her full prepared remarks are below.


Thank you, Congresswomen Schakowsky and Matsui, and the Seniors Task Force, for inviting me here today.

Thanks also to the other participants on this panel, who share with me the belief that we should be strengthening, not cutting, efficient and effective retirement programs like Social Security.

The focus of my remarks will be on whether Social Security in its current form is unsustainable, as has become the conventional wisdom in Washington.

As Nobel prizewinning economist Paul Krugman has observed, “Inside the Beltway, doom-saying about Social Security — declaring that the program as we know it can’t survive the onslaught of retiring baby boomers—is regarded as a sort of badge of seriousness, a way of showing how statesmanlike and tough-minded you are.”

But is it true that Social Security is facing a crisis, and that benefit cuts in some form are unavoidable?

The short answer is: No.

Social Security is currently running a surplus, and the two and a half trillion dollar trust fund is projected to keep growing for at least another decade.
This enormous trust fund isn’t there by accident—it’s the result of changes enacted by Congress in 1983 in anticipation of the Baby Boomer retirement. The savings in the trust fund are sufficient to meet this demographic challenge, so Congress should be proud of its foresight.

The other supposed villain in this story is rising life expectancy, which has led many to call for raising Social Security’s normal retirement age to 70, or even indexing it to longevity.

Contrary to popular belief, life expectancy in retirement has been growing relatively slowly in recent years, and, like the Baby Boomer retirement, the increase was fully anticipated by the Social Security actuaries.

Because of population growth, rising life expectancy does not create a Malthusian dilemma. In fact, the ratio of beneficiaries to covered workers is projected to level off after the Baby Boomer retirement.

Similarly, Social Security outlays are projected to level off — not spiral upward like health care costs.

This isn’t to say that Social Security costs won’t increase, but this increase is manageable—on the order of 1.5% of GDP.  And because Social Security is currently running a surplus, the 75-year shortfall is much smaller—around 0.7% of GDP according to the Social Security actuaries, and even less according to the Congressional Budget Office.

The Center on Budget and Policy Priorities points out that this is about the same as the cost of extending the Bush tax cuts for people making over $250,000 a year.

This projected shortfall can easily be closed through modest payroll tax increases supported by voters across the political spectrum. As Senator Kohl recently noted, “modest tweaks” are enough to ensure solvency and even strengthen benefits for the most vulnerable.

This isn’t a case of voters wanting to have their cake and eat it too. When it comes to Social Security, Americans overwhelmingly prefer tax increases to benefit cuts–even stealth cuts like raising the normal retirement age.

Poll after poll has shown that voters are willing to pay higher taxes to preserve and strengthen Social Security. But most of the gap can be closed without raising taxes on ordinary workers—just those with earnings above the taxable earnings cap of $106,800.

For example, gradually restoring the cap to again cover 90% of earnings for workers, and eliminating it altogether on employer side, would be enough to shrink the long-term deficit by 69%, while still preserving the link between these workers’ contributions and the benefits they receive.

Raising or eliminating the cap on taxable earnings is appropriate because almost all the earnings growth (and the growth in life expectancy) in recent years has been at the top.

Meanwhile, ordinary workers, especially younger workers who will bear the brunt of any benefit cuts, cannot afford further reductions in benefits. Younger workers already face a higher normal retirement age of 67, and therefore a lower replacement rate than previous generations. As a result of this, and a shift from traditional pensions to 401(k) plans, younger workers are much more likely to face a sharp drop in living standards at retirement.

These workers would be much better off if we closed Social Security’s modest shortfall by shoring up revenues rather than cutting benefits. In other words, to paraphrase former Senator Alan Simpson, “we owe it to our grandchildren.”

Strengthening Social Security for all

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Strengthening Social Security for all


Monique Morrissey 






Americans need Social Security more than ever, and they’re willing to pay for it. Rather than more cuts, we need higher benefits across the board.

This was the gist of my presentation at the National Academy of Social Insurance conference last month, whose theme was “Social Security and Medicare in a Time of Budget Austerity” (emphasis added). I wasn’t expecting it to go over very well.

Though my colleague Josh Bivens likes to point out that deficit reduction doesn’t necessarily imply spending cuts, and though Republicans don’t hesitate to call for tax cuts in the same context, there’s a general sense that expanding social insurance programs is out of the question and the best we can hope for is targeted measures to protect the most vulnerable.[1]

Even many progressives have trimmed their sails. Though most reject the need for additional cuts, few call for fully reversing cuts enacted in 1983, notably the gradual increase in the retirement age that is still taking effect. Progressives have also been divided about raising the payroll tax rate, the only way to pay for significant benefit increases while preserving the program’s contributory structure. Though almost all agree we should “scrap the cap” on taxable earnings, this only gets you part of the way to closing the projected shortfall in the aftermath of the Great Recession.


This seems to be changing, if the mood at the NASI conference is any indication. Rather than being contrarian, my presentation was almost redundant. At the conference, NASI released the results of a poll showing strong support for Social Security by the American people, a consensus that benefits are inadequate, and a willingness to pay higher taxes to strengthen the program (I discussed these results in an earlier blog post). The poll made it harder to dismiss calls for expanding Social Security, though Wall Street Journal economics editor David Wessel tried. Among the other conference participants who made a strong case for expanding Social Security were blogger-economist Duncan Black (a.k.a. Atrios) and Wilhelmina Leigh, a participant in the 2011 Commission to Modernize Social Security, which led the way in calling for higher contributions and benefits across the board.

Admittedly, NASI poll respondents were lukewarm about specific across-the-board benefit increases, though they strongly supported packages that closed the shortfall and included these measures. People might be more supportive if such measures were presented as a way to reverse earlier cuts, since these cuts are news to many people.

What about concerns that the payroll tax is regressive and contractionary? The tax would be less regressive if we got rid of the cap on taxable earnings.[2] And a gradual increase in the tax rate could be postponed in a weak economy. The version I proposed, which roughly offsets projected growth in life expectancy, calls for a more gradual increase than that proposed by the Commission to Modernize Social Security, which focused on people of color, and a similar initiative last year focusing on women, which was also the version included in the NASI poll. (Both initiatives called for a combination of across-the-board and targeted increases.)

At the Center for American Progress last week, Senator Tom Harkin renewed his push for expanding Social Security as part of a comprehensive reform of our retirement system, saying this would be his top priority before he retires in 2014. It looks like the movement to expand Social Security is picking up steam.


[1] Social Security has dedicated financing and is required by law to operate in long-term balance. But the program gets dragged into deficit discussions because changes will be required to eliminate a projected shortfall and there are competing priorities for any revenues that can be generated by raising taxes. However, Strengthen Social Security coalition co-chair Nancy Altman likes to remind us that the program’s popularity expands the political room for tax increases of any kind.

[2] High-income taxpayers would still have more unearned income, which makes payroll taxes regressive even if all earnings are taxed. However, the system as a whole is progressive when benefits are taken into account.