Seventy years ago, the United States Congress enacted the Social Security Act.  The original legislation plus amendments that were added to the Medicare and Medicaid programs in 1965, have created the foundation of health and social welfare protection for citizens of this country.  The cornerstone of this social policy is Title II of the legislation, which covers social insurance for retired workers, disabled workers, and survivors of deceased workers (OADSI).  This program is now commonly called social security.

Today, one of the most important policy issues facing the nation is the viability of OASDI.  The debate is largely over the long-term solvency of the program that provides retirement benefits to former workers.  It is motivated by the demands that will be placed on the social security system by the large cohort of “baby boomers,” who will soon be at retirement age.  While full retirement benefits can be provided at least until the year 2040, under current financing provisions, a change in the ratio of workers to retirees means that some changes will be required to assure full benefits for not only the baby boomers, but also generations X and Y and others to come.

The current debate about social security has two dimensions.  In addition to the solvency issue, much of the discussion has centered around President Bush’s proposal to allow workers to set up private accounts with part of the taxes currently paid into the Social Security Trust Fund.  Under this proposal, retired workers would receive less pension money from social security and rely more on the proceeds of their private accounts, which could be invested in stocks and bonds.  Even though this privatization proposal has been put forward as an answer to social security’s fiscal problems, we shall see that it is really an issue that is separate from solvency.

Before addressing the issues of privatization and solvency, it is important to be clear about the provisions of Old Age, Survivors and Disability Insurance.  It provides a blanket of protection against three of the contingencies of modern life facing the American worker.  These are Old Age Insurance for retirement from the labor market, Survivors Insurance in the event of a worker’s death, and Disability Insurance for permanently disabled workers.  The Survivors Insurance coverage is equivalent to that of a $300,000 life insurance policy, and the Disability Insurance is equivalent to a $200,000 insurance policy.  Only 62% of social security recipients are retired workers.  The remaining 38% are spouses and children, survivors of deceased workers, and disabled workers of all ages and their dependents.

Social security is, thus, a social insurance program that protects workers and their families in a number of ways.  In fact, it is the most successful anti-poverty policy ever enacted in the United States.  Currently, less than 10% of older Americans live in poverty.  Without social security, the poverty rate for citizens over 65 years of age would be close to 50%.  This poverty prevention accomplishment can be easily understood by looking at the income of retirees.  Forty percent of pensioners receiving social security live within 200% of the poverty level, and 83% of their income comes from social security.  Protection against poverty is also a major function of the survivors and disability insurance programs.

The focus of the current debate is on the Old Age Insurance program.  Clearly, as the aging population creates challenges, policy adjustments are required.  In the U.S., the 65+ population is currently growing by 317,000 people a year.  This figure will increase rapidly after the first baby boomers reach 65 in the year 2011.  In addition to more people in the 65+ cohort, there is a lengthening life expectancy in the 65+ population.  Thus, more people will be receiving social security benefits for a longer period of time.

On the other side of the revenue-expenditure formula, there will be proportionally fewer workers paying the FICA tax in the future.  This is because of the decreased size of post baby boomer generations.  Decreased fertility rates, coupled with increased post-65 longevity, result in a demographic challenge.  While the realities of an aging society have not yet resulted in a policy crisis, debate and some changes in social security are needed in the near future.

Privatization for Social Security

Most of the attention during the past two years has been given to the proposal by President Bush, which would allow workers under age 55 to set up private accounts with part of the 6.2% of wages currently paid into the social security trust fund by the payroll (FICA) tax.

The President’s proposal would allow the individual to invest these funds in stocks and bonds, which theoretically would produce more retirement income at the time of retirement, rather than relying totally on social security.  This would produce a partially funded system rather than a pay-as-you-go system, where workers of one generation pay for retirees of another generation.

According to the non-partisan National Academy of Social Insurance, this privatization proposal by itself would make no independent contribution to the long-term solvency of social security.  In fact, it would rapidly deplete the trust fund, which pays benefits to today’s beneficiaries as well as future beneficiaries.

Social security privatization proposals argue for an ideological shift in the nature of social security.  Social security today is based on the concept of a social contract between the citizens of the country and their government.  The program was established under President Franklin Delano Roosevelt as part of a bond between the government and the governed, guaranteeing every working person and his/her family a base of income not only at retirement, but also in the event of death and disability.  Privatization would, instead, be part of President George Bush’s ownership society in which workers would be largely responsible for their own economic survival in retirement, regardless of their socio-economic situation.

Fortunately, lessons from abroad can inform us in the privatization debate.  Several other countries have already incorporated private accounts into their pension programs.  All have had major problems.  For example, in 1986, Britain passed legislation providing workers with the opportunity to divert part of their social security insurance taxes into private accounts.  Even in the 1990s, when the stock market was booming, one-third of these private accounts lost money.  This was largely because of up-front charges and commissions plus annual administrative fees, which reduced the value of the accounts by an average of 25%.  With the onset of the recession at the beginning of the 21^st century, the losses mounted, and in 2004, 500,000 workers left their private accounts and returned to the government system.

The British attempt at privatization has been judged a disaster by pundits as well as pensioners.  The costs and risks of running private investment accounts have resulted in a major movement back into a public program that is currently less adequate than Social Security in the United States.  In fact, a British government commission recently reviewing the program concluded that these changes in the pension program have put pensioner poverty, which had been all but eradicated, back on the agenda.

Chile and other South American countries have also tried partial privatization of their public pension programs.  Twenty five years after the Chilean changes were initiated, workers who stayed with the old system are retiring with higher pensions than those with private accounts.  Again, these outcomes document serious flaws in the privatization schemes.  Hopefully, the United States Congress will look at these facts rather than be solely driven by ideology as social security reform proposals are considered.

Solvency for Social Security

Setting privatization aside as a philosophical debate still leaves the long-term solvency of social security as a major policy issue.  The issue can best be framed as a balancing of revenues and expenses over a 75 year period.  The last major reform for OASDI in 1983, used this period as the framework for policy changes, producing a solvent system until at least 2040.  While changing demographic projections have shortened the projected period of fiscal balance produced by these earlier reforms, the 1983 legislation is a useful model for policy changes needed today.

There are four major areas for policy action to address the solvency issue.  Legislation could be enacted that would:

·        Decrease benefits

·        Increase taxes

·        Increase the age at which full social security benefits are available

·        Extend social security coverage to workers who are not currently covered (state and local government employees)

It is likely that policy choices will include a combination of two or more of these actions.  Let us now look briefly at the choices to be made and the issues involved.

Benefits could be decreased by either changing the current benefit formula or by decreasing the cost of living adjustment (COLA) provided to beneficiaries each year.  The current formula provides benefits based on the worker’s average indexed monthly earnings (AIME).  It is based on the principal that social security will replace a constant fraction of the worker’s pre-retirement earnings.  Today that replacement figure is 42% of monthly earnings for the medium wage earner.  It is a higher percentage for low-income workers. 

One proposal put forward by President Bush is to change the benefit formula from wage indexing to price indexing.  Thus, social security benefits would be determined by the average increase in prices during the recipient’s years of employment.  Since it is an economic fact that over a period of time prices do not increase as fast as wages, this would mean lower benefits for retirees.  In fact, it is projected that workers entering the labor market after price indexing was enacted would have benefits lowered by 50%.  This means that social security would on the average provide only 21% of pre-retirement income.

There are variations of this benefit formula change known as progressing price indexing, which would use different combinations of wage and price indexing for workers with different salary levels.  However, all would produce some reduction of benefits.  This would mean that social security would be less of a safety need for retirees in the future, than it is today.

Changes proposed in the cost of living adjustment would also mean lower benefits over time.  Policy makers could reduce the COLA by ½ of 1% or by 1%.  Over time, this would reduce the purchasing power of retirees between 14% and 41%, because prices would continue to rise faster than benefits.  Thus, while reduction of the COLA would be a partial answer to solvency, it would also increase poverty among the elderly.

Social security taxes could be increased in two different ways.  One policy change would be to increase the percentage of wages/salaries paid by employees and employers.  Currently, each pays 6.2% of wages based on the requirements of the Federal Insurance Compensation Act (FICA) tax.  An increase of 1% for both the employee an employer would mean a total tax of 14.4% compared to the current 12.4%.  This would solve the total solvency issue for the next 75 years.

A different approach to increase revenue would be to “lift the cap on the FICA.”   This means that the total amount of salary that is subject to the payroll tax would be increased.  In 2006, the taxable salary is capped at $94,200.  If the cap would be increased to 90% of all salary levels (about $150,000), most of the shortfall in revenues would be covered.  High earners and their employers would pay considerably more, but they would also receive higher benefits when retired.

Another alternative would be to increase the age at which full retirement benefits under social security were available.  The 1983 amendments mandated an age change from 65 to 67 over a period of years starting in 2000 and concluding in 2027.  This means that retirees born in 1960 or later cannot receive full benefits until they are 67 years of age.  They can still receive benefits at any point after they reach 62 years of age, but early retirement will mean smaller benefits.

Enactment of this alternative could be done by raising the age for full benefits to age 70 over a number of years.  Those arguing in favor of this approach point out that the average life span past age 65 continues to increase and that most retirees in their 60s are much healthier than prior generations.  In fact, the average onset of chronic health ailments is now 10 years later than it was 50 years ago.  Another variation in this change would be to speed up the current move to age 67 for full benefits.  Implementing both of these options would cover 64% of the shortfall in revenues anticipated during the next 75 years.

Finally, extending coverage to all newly hired state and local employees would bring in the last major group of workers currently not part of the social security system.  The 1983 amendments brought federal employees into the system.  While enactment of this option would reduce the revenue shortfall by only 10%, it is often mentioned in combination with other options.

Action for Policymakers and Social Workers

As policymakers consider these solvency alternatives, it is important to recognize that for the short run, social security is in excellent financial condition.  There is currently a surplus of over $150 billion a year coming into the trust fund.  The trust fund surplus will continue to grow until the year 2017 and because of interest income will not start decreasing until the year 2027.  Then it will be able to pay full benefits until either the year 2040 (projected by the social security trustees) or the year 2051 (projected by the Congressional Budget Office).  At that time, annual incoming revenue will be sufficient to pay 73% of promised benefits.

Social security is not in immediate crises, but long-term solvency solutions must be enacted in the near future if we are to avoid more drastic action in the future.  It is likely that the above discussed options will be debated in the 2007-2008 session of Congress.  Thus, social workers need to be well-informed about the options and their likely impact on those served by the profession if we are to be effective advocates for positive change.

Because social security is the most effective anti-poverty program ever enacted in the United States, it is important to determine which alternatives will have the least negative impact on low-income workers and retirees.  The option of raising the payroll tax cap to $150,000 would make the tax more progressive and have an impact on the cost of the program for only high income workers.  A Pew Research Center Poll in March of 2005, found that 60% of a nationwide sample supported this option.  Other options discussed in this article all received less than 50% support.  Thus, the most progressive option has the greatest public support.