Social Security Isn't Broke, But We Still Ought to Fix It

It has been a big week in Washington for thrashing out the federal budget, both this year's and those for the future. Along with discussions about slashing spending on such things as defense and Medicare, a growing number of lawmakers are lining up behind plans to cut Social Security, one of the most cherished -- and vital -- programs for the elderly in this country.

Republicans want to increase the retirement age and some Democrats have joined the chorus to cut benefits. Even President Obama, in outlining his budget proposals on Wednesday, indicated that Americans would have to accept "reforms" of Social Security.

"There are those who believe we shouldn't make any reforms to Medicare, Medicaid or Social Security out of a fear that any talk of change to these programs will usher in the sort of radical steps that House Republicans have proposed," Obama said. "I understand these fears. But I guarantee that if we don't make any changes at all, we won't be able to keep our commitments to a retiring generation that will live longer and face higher health care costs than those who came before."

But is the program that has provided retirement benefits to millions of Americans since the Depression really broken? Is it causing the federal deficit to spiral out of control as some have suggested?

The Real Numbers on Social Security

Peter G. Peterson, chairman of Blackstone Group, for example, has repeatedly claimed that Social Security is not adequately funded and that younger Americans will have to pay double the amount of Social Security taxes within 10 years. And even the normally sober factcheck.org, which debunks myths propagated by both parties, has repeated claims that Social Security is contributing to the federal deficit.

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The fact is, though, that most of the arguments for why Social Security is facing bankruptcy in the short term are simply not true. As Dean Baker, co-director of the Center for Economic and Policy Research in Washington, says: "The biggest weapon for people who want to change Social Security in a big way, such as privatizing it or seriously cutting benefits, is that the program is on life support." If the program seems like it's going to fade away anyway, people won't feel they have anything to lose by gutting it.

But a close reading of the Trustees report and the Congressional Budget Office analysis paints a different picture. Social Security received about $37 billion less in payroll taxes than it paid out in benefits in 2010. It will have a larger shortfall again this year because the federal government decided to give workers a 2% tax holiday on the amount they pay toward Social Security in 2011.

But Social Security has a trust fund of $2.6 trillion. This is money that was paid into the system but hasn't yet been spent by it. The money is all held in government bonds for which the Treasury must pay interest. It earned $119 billion in interest in 2010 and is projected to receive a similar amount in 2011. Total income in 2010 was $788 billion; total outgo was $706 billion. Does that sound like bankruptcy?

Now, some people regard those interest payments as contributing to the federal deficit. That's correct in in a strictly bookkeeping sense, because the federal government must pay them out of general revenues. But if Social Security didn't own these bonds, someone else would -- perhaps China or a pension fund in California. It is nonsense to suggest they are contributing to the federal deficit, too.

Minor Change Would Help Keep Program Solvent

David Certner, legislative policy director for AARP, points out that the trust fund has enough money to pay all of its projected benefits for the next 26 years. "The rest of the budget is out of balance, not Social Security, which takes in more money than it pays out," he says. Even after the 26 years are up, the program will have enough income from taxes to pay 75% of all benefits.

Certner and Baker both maintain it would be relatively easy to make modest changes to Social Security to close the gap that will emerge in 2037. Among the options: Raise or eliminate the cap on Social Security taxes, which are now paid by employers and employees on only the first $106,900 of income.

Back in 1983, 90% of all wages in the U.S were taxed for Social Security. Today, because of wage inflation, it's only about 82.5%. If the ceiling was raised again to return that percentage to 90%, it would eliminate one-third of the problem. Many people don't even know there is a cap, or that rich people pay less in Social Security taxes as a percentage of income than do middle-income people.

The Poor Die Younger

Others have suggested further raising the retirement age, which is currently 66 and is due to rise to 67 in 2022. But as Baker points out, most of the advances in longevity have come at the upper end of the income scale. Poor people still don't live as long as rich people, so if they have to postpone retirement until age 70, they will face shorter lifespans after stopping work.

In addition, lower income people often have physically demanding jobs, such as custodians, nurses and waiters. For many of them, waiting until 70 years of age to retire would be difficult.

And seniors do need the money. Statistics show that one in three seniors depends on Social Security for 90% of their income. Another third depend on it for two-thirds of their income. "The middle third has seen a lot of damage in terms of other sources of income," says Certner, referring to the market collapse in the financial crisis, the decline in interest on bonds, and the sharp decline in home values. "So you want to do as much as possible to protect the middle income population as well."

Baker has another interesting idea: He suggests taking some of the trust fund money now held in government bonds and investing it in the stock market, where it could earn higher returns. That way, not only would Social security be stabilized, but people could no longer claim that Social Security was to blame for the deficit.