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Home Publications Blogs Beat the Press How Should Social Security Benefits Respond to an Economic Collapse?

How Should Social Security Benefits Respond to an Economic Collapse?

Tuesday, 19 August 2014 04:27

This is the issue that Andrew Biggs implicitly raises in his Wall Street Journal column highlighting the jump in the size of the projections of the Social Security shortfall since 2008. Biggs complains that progressives have responded to the economic collapse by proposing an increase in benefits that would make the shortfall even larger rather than supporting plans for eliminating the projected shortfall. While Biggs' focus is explicitly the solvency of the program, the actions of progressives can only be understood against the larger economic context.

The calls for expansion of benefits are at least in part a response to the economic collapse.It's worth noting that this collapse was 100 percent preventable and that it was one of the worst blunders in the history of economic policy-making in the history of the world. Unfortunately the top economic advisers in both political parties whose errors were responsible did not have their standing affected by this mistake.

As a result of the collapse, many people nearing retirement saw much of their savings disappear as the stock market collapsed, house prices plummeted and they lost their jobs during their peak savings years. This meant that millions of workers had to draw down their savings to support their families at a point where they had planned to be accumulating wealth for retirement. In addition, due to the weakness of the labor market created by high unemployment, tens of millions of workers have seen stagnant wages over the last six years when they could have expected to see real wage growth in the neighborhood of 1.0 percent annually had the economy continued on the path projected in 2008.

In short, the collapse hugely increased the need for Social Security, which is the basis for the response of progressives. Biggs is correct that the cost of additional benefits will have to be covered at some point, but there is no obvious reason that it is necessary to come up with the full plan today. Part of the cost can be recovered by increasing the payroll cap as has been proposed by people across the political spectrum.

It is likely that we will need some increase in the payroll tax at some point, but there is little reason that the exact timing needs to be pinned down today. In the decade from 1980 to 1990 the payroll tax increased by over 2.0 percentage points. In spite of this hike, many conservatives tout the eighties as an economic golden age. It is difficult to see why it would be such a disaster if there were a comparable increase somewhere over the next three decades.

Workers care about their after-tax wages which are primarily determined by what they earn before taxes. Due to economic mismanagement and trade and regulatory policies that were designed to redistribute income upward, most workers have seen very little growth in before-tax wages over the last three decades. If they get an even share of the projected growth in compensation over the next three decades, then before tax compensation will be almost 60 percent higher in 2044 than it is today. It is understandable that progressives would be more focused on ensuring that workers get their fair share of economic growth than the risk 3-4 percent of these gains might be taken back in tax increases to support their retirement.

Comments (17)Add Comment
Boomer Paupers
written by Robert Salzberg, August 19, 2014 6:22
The Federal Reserve estimated that 19% of Americans between the ages of 55 & 64 have zero savings. With pensions dwindling and 401k matches shrinking, Americans need Social Security more than ever.

What the Hell is Insurance For Anyway?
written by Last Mover, August 19, 2014 6:29

It is well documented that SS never had and does not face a serious shortfall due to its pay-as-you-go funding combined with long term productivity trends. Whatever fixes were, and may be necessary are simple and cost little on a per capita basis.

The most glaring error ranted by VSP scaremongers is the fund is headed towards insolvency because the surplus is depleting down to zero in the out years like it was designed to do to as it tracks the declining bulge of the baby boomer generation.

The most glaring omission of the VSPs is how long run productivity gains themselves - as the key offset to SS funding by the working generation - have been confiscated from the 99% by the 1%.

That the Great Recession of today accelerated erosion of the surplus emphasizes SS is performing exactly as designed, to soften the blow of a repeat of what happened after the Great Depression of 1929.

It is shameful and disgusting to watch VSPs bash one of the most efficient and successful government programs ever established in America. It betrays their vile hatred for anything that stands in the way of the march of their economic predator handlers to monetize and privatize everything in sight while protecting themselves with illegitimate socialized losses as they kick and scream about SS rescuing millions from the very carnage they wrought on America.

Enough. The VSPs need to crawl back under the rock where they were when W raided the SS "lock box" to pay for a useless war kept off the books to hide it, that ended up costing over $3T. They kept their mouth shut then and they need to keep it shut now.

If these were good economic times the VSPs would be yelling why SS is necessary at all, as they hawk hugely expensive private rip-off insurance infested with crippling fine print to replace it like W did. What the hell use is any insurance if it can't be used in good or bad times?
Raise the Min Wage
written by jonny bakho, August 19, 2014 6:32
Too much of the profits go to the wealthy and not enough to the bottom.
Raise the min wage and people pay more into the system.
Raise the cap and people pay more into the system.
No one wants their retired mother-in-law moving into their home.
Top wages have fallen; lowest paid rose slightly
written by David Cay Johnston, August 19, 2014 7:16
Despite the government policies designed to redistribute upward that Dean cites above and I have written about extensively, something very curious has happened in wages, my analyses of Social Security data show. SS data measures compensation for services down to the penny.

At the bottom the under $20,000 workers made more in 2012 than in 2000 after adjusting for inflation, while those making $20,000 to $40,000 made a bit less -- and surprisingly so did those paid $2 million or more. Their numbers shrank as did their average pay, leaving them with a 15% thinner slice of the national wage pie.

The top pay decline is at http://alj.am/1o4R3y6 and the bottom pay rise (and $20k-$40k data) is at http://alj.am/1sNI3Du

Next week will be about workers making $40,000 to $2 million.

These shifts in pay are complex and subtle. But NONE of the data argues, as Biggs does, for reducing SS benefits by citing scary huge numbers lacking context.

written by coberly, August 19, 2014 9:10
Dean makes a good case for the JUSTICE of increasing benefits and having the rich pay for it.

But it is a bad idea. SS works because it is worker paid. If you make the rich pay for it, it becomes just another welfare program. And if you TRY to make the rich pay for it they will just work all the harder to destroy it entirely.... in fact calling for making the rich pay for it plays into Pete Petersons hands, who has been saying for years that SS is a welfare program that will cost a staggering burden on "us" (he means "us rich).

If there is hardship because of economic mismanagement, then call for an economic mismanagement tax on the rich and distribute the proceeds according to need. But don't try to load it on the back of Social Security which has a different job, which it does very well. You will only kill it by trying to turn it into something like universal welfare for all seasons.
tax bad things, like carbon....
written by pete, August 19, 2014 9:32
I did a rough estimate a while back and it seemed like $2-$3 a gallon tax could eliminate the need for any payroll tax. This would help (very modestly) with atmospheric carbon, and the incease in take home pay would be stimulative, especially for the poor who pay $2500 a year in payroll taxes on $20,000 in come. $200 a month is not chump change for a lot of folks.
written by Squeezed Turnip, August 19, 2014 10:24
Dean mentioned increasing the payroll tax. I don't see anything about raising taxes on the wealthy per se. Maybe you're confusing him with Ten Years After?
Dean still doesn't understand what money is or where it comes from
written by joe, August 19, 2014 11:04
Why would payroll taxes have to increase? The govt should run deficits on average. There's no real reason payroll taxes need to "fund" social security. Payroll taxes are regressive. It'd be much better to get rid of payroll taxes entirely. You could have the treasury make the payments instead, if you prefer to do the accounting that way.
written by urban legend, August 19, 2014 3:33
Joe, I think maybe you're the one who really doesn't get what money is. Money is whatever the law says it is. The law says that Social Security is to be paid out of the payroll tax, that the payroll tax may be used for no other purpose, and that the general revenue fund may not be used to pay Social Security benefits.

That separation embodied in law is essentially a social contract with the people that they accept and endorse. If you change the law to pay for Social Security out of the treasury, then you have changed Social Security into a program subject to the whims of Congress at all times. Read the second paragraph of what Coberly says above. That was what Franklin Roosevelt and Frances Perkins understood -- that if you don't have a dedicated funding stream, then it becomes another welfare program that the wealthy will always be fighting to defund or destroy completely. Making sure everyone has a stake in the system in the form of future benefits is also the reason why too much playing around with raising the cap is dangerous. Raising the cap without an equivalent increase in benefits means reducing the stake that the wealthy have in the system. I'm surprised to see that Dean doesn't seem to understand those potential dangers in that kind of standard liberal proposal.

A far better idea would be gradual, small increases in FICA that track and are buried in growth in wages, as Coberly has proposed at Angry Bear and other places. I do not think we should start that now, because we need to see what the expansion we are in now, small as it might be, will do to Social Security finances. The expansion in the late 90s and early 00s dramatically improved the system's finances, and kept pushing the exhaustion date further into the future (from 2029 to 2041 in a six year period!), and we are likely to see that to some extent. Even though it likely will not n
be nearly that dramatic an improvement, it also is unlikely that SS finances will be any worse off than they are today, so we could start the gradual increases then with the same impact as now, but, having seen the effect of another expansion, with better knowledge of how the future will unfold.
written by urban legend, August 19, 2014 3:44
Because it has dedicated funding by law that operates like an insurance annuity program, it really is wrong, too, to describe the Social Security tax as regressive. While FICA may be capped, so are benefits. Maybe the wealthy don't really need any benefits, but that's another story on how to tax all income. For a majority of people, Social Security will be most of their retirement income. For the overwhelming majority, probably 97-98%, it will still be a significant source of income. It's a good idea to have 97-98% of the people with a stake in the system. If a few wealthy people get back an amount based on what they paid into it, that's a reasonable price to pay for that public stake.
urban nobody pays in to nuthin
written by pete, August 19, 2014 5:12
This myth is useful politically. But technically it is a pay as you go system. I consider those who promote the myth simply fraudsters, snake oil sailsmen. Since the concern was and is an insurance for poorer older folks, then that should be funded, for sure, probably with some serious means testing. But the source of these funds is really irrelevant. Tax bad things, especially rents, but not income, and certainly not 12.5% of some struggling worker's income. Its a horrid system.
written by PeonInChief, August 19, 2014 6:14
@pete. I think that it may have been Dean Baker hisself who pointed out that if we means tested SS, we'd either save very little money or be cutting people off at about $30K a year which, as those of us who live anywhere near that income know, is not exactly rolling in dough.
the wealthy
written by joe, August 19, 2014 9:10
urban- The wealthy are already trying to destroy it. So much for that point I guess... So I really don't see much difference there.

written by sd, August 20, 2014 5:33
My retired mother in law is now living with us. She was still working until quite recently. San Francisco rents have skyrocketed and her landlord essentially forced her out by creating a hostile living situation. On part time income, she could afford an independent lifestyle. Now on fixed income, she cannot.

The rentiers are vacuuming up what little income there is. There is just no way to sustain any real effort at savings at this point. The availability of quality work at quality pay is slipping. I see my own savings is now being depleted supporting my own family.

Wages are in a death spiral.
reply to squeezed turnip
written by coberly, August 20, 2014 10:53
dean said raise the payroll CAP. that is a bad idea. it is exactly what FDR fought against. SS works because the workers can say "i paid for it myself."

the cost of making up for the longer life expectancy, fewer children and likely slower wage growth would amout to one tenth of one percent of wages. that's 80 cents per week for average worker, maybe 40 cents for low wage workers.
reply to joe
written by coberly, August 20, 2014 11:00
only SOME of the wealthy are trying to destroy SS now. they are not quite succeeding. raise the tax on the "rich" and then all the lies of the Petersons will come true, and even the more or less sane rich will work to destroy SS.... probably by means testing it at first... within a decade.

reply to pete
written by coberly, August 20, 2014 11:07
200 dollars is not chump change. retirement is not cheap. neither is bread. maybe you want to stand outside the grocery store and make the rich man buy your groceries.

a person making 20k a year pays about 2k for his SS.... his boss pays the other half. if you argue that the boss's share is "really" the workers money, i'd agree with you. but get rid of SS and see if you can get that "wokers money" from the boss.... so it's more like a hundred a montth. now you want to pay 2$ per gallon tax for SS... at 10000 miles per year and 20 miles per gallon that's 500 gallons or a thousand dollars a year... i don't see the advantage.

really, it works out a lot better for most people to pay for their own retirement. then they own it. they paid for it and no politician can take it away from them.... unless they let them, having been fooled by the Peterson lie machine, or maybe by their own desire to have someone else pay for their basic predictable costs of living.

i am NOT a conservative, but when you start talking like someone who wants to live on welfare, you are telling the conservatives that they are right about "the 47%."

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.