Over 40 percent of Americans retire with no savings. Increasing amounts of student debt, financial instability, and underemployment are likely to exacerbate that figure. For many, the only financial cushion available rests in the promise of the monthly checks retirees receive as part of Social Security. But when today’s headlines depict Social Security as facing insolvency, where does that leave the average American?
In a basic sense, Social Security gives money to people who can’t work anymore, whether that’s because of disability, hardship, or age. If you’re a retired American, you’re probably getting a monthly check from the Social Security Administration. The program is paid for by workers and employers through taxes, and those who pay in will eventually get paid out. Or so the logic goes. But several economic and demographic shifts in the population have caused a glut whereby a large amount of people are going to start claiming benefits all at once.
Social Security is a vital program, and must be rapidly expanded. Currently, it keeps over 22 million Americans out of poverty, according to the Census Bureau. That makes it the most effective program for fighting poverty in the country. It’s not just for the elderly, either. Over a million children are lifted out of poverty through Social Security. And it’s particularly important for people of color, who have access to fewer retirement resources. The country can’t afford to lose it.
In its current form, Social Security’s stash of funds will be exhausted by 2035—and that’s the origin of the insolvency question. But it’s not exactly as dire as it sounds. Even if policymakers took no further action, the program could continue to run at 75 percent capacity, purely on collected taxes. So it’s not an armageddon on the horizon, but it’s not an acceptable outcome, either. Left as is, the program will significantly decrease benefits for those who are already struggling.
As it stands, Social Security in the US, on average, replaces less than 40 percent of the average retiree’s past earnings, coming out to about $14,000 a year. By comparison, retirees in the Netherlands and Denmark earn over 90 percent and 80 percent of past earnings, respectively. These countries understand that the cost of living doesn’t suddenly drop once someone retires. When ranking the social security benefits of the OECD, a group of rich nations, the US is in the bottom third. To worsen matters, American seniors work longer, and harder, than their European counterparts, who receive better benefits. From this perspective, to allow Social Security to lapse into 75 percent functionality is close to allowing it to fail completely.
It’s not just a question of math. It’s a question of values. As President Franklin D. Roosevelt said in 1929, as Governor of New York: “No greater tragedy exists in modern civilization than the aged, worn-out worker who after a life of ceaseless effort and useful productivity must look forward for his declining years to a poorhouse. A modern social consciousness demands a more humane and efficient arrangement.”
Much has changed in the last 90 years, but the truth of such a statement has not. Policymakers should take notes from Reagan (who proactively reformed Social Security in 1983 to maintain solvency) and take bipartisan steps towards safeguarding their constituents’ futures.
In 1960, five working Americans were supporting a single retiree through Social Security. In 2013, less than three working Americans were supporting a single retiree. The tax base has eroded significantly since the last major reforms towards the solvency of Social Security in 1983. Key demographic factors are the driver here: the retirement of the Baby Boomers, increased longevity, declining fertility rates, and growing income inequality. The one factor that’s expanding the tax base, however, suggests an elegant solution to Social Security: let more young and tax-paying immigrants into the country.
Even undocumented immigrants represent a boone to the system. According to a study by New American Economy, undocumented immigrants in 2016 contributed over $13 billion to Social Security, a program from which they will not receive benefits. That’s in line with estimates from the Social Security Agency itself, which put the figure at $12 billion per year in 2013.
The reason is simple: most undocumented immigrants are working, and thusly contributing to payroll taxes. Encouraging legal immigration into the country would expand the tax base further, and create an even larger financial windfall for Social Security and its recipients.
The US has a nearly stagnant native-born population. Social Security is dependent upon population growth, and, with birth rates dropping to 32-year lows, immigration is the most direct way to fill the gap. Any growth in immigration reflexively lowers the Social Security deficit.
Making immigration easier therefore isn’t just a compassionate choice—it’s a financially sound one. The people building walls on their borders are blocking out a valuable funding stream.
Retirement benefits in places like Iceland, which rank near the top of the OECD, are means tested. Roughly translated, if you make too much money, you won’t be receiving extra funds upon retirement in such a system. In the US, however, means testing doesn’t exist and wealthy Americans who have saved handsomely for retirement still receive a monthly check. That check might not mean much to a couple of retirees with over a million dollars in the bank, but if it split between families who lack retirement savings, it could make a world of difference.
So what’s the issue?
It’s not that cut and dry in America, where the math doesn’t check out. According to a study by the Center for Economic Policy and Research (CEPR), there aren’t enough rich retirees in the US, and means testing would realize very little savings overall. In order to see a substantial return, means testing would need to exclude solidly middle class families. Furthermore, the administrative cost burden placed on a system that up-until-now has been universal might undercut savings further.
Social Security reformists will have to dig deeper, but means testing is a step in the right direction.
Several wealthy countries mandate occupational pensions, which require contributions from both employees and employers. In Iceland, which ranks highly on retirement benefits, citizens generally pay 6.6 percent in a social security tax. But the nation also imposes a mandatory occupational pension where at least 12 percent of earnings must be redirected to such a program (with an 8 percent employer, 4 percent employee split).
By comparison, the US doesn’t require any employers to have an occupational pension plan, let alone require employee contributions to one. While Social Security is funded through payroll taxes, only half of Americans have access to a secondary retirement plan through their jobs. Increasing the methods for Americans to save, and splitting the burden across more stakeholders, could pay dividends.
Money buys less now than it did in the past, and if we want to give ourselves more money in the future, we need to give more money now. Privatizing income streams, or forcing citizens to be reliant upon personal investments, removes a critical safeguard against recession and unforeseen events. An increase in the Social Security tax is the safest and surest method to grow Social Security. And there’s room to grow. Norway, for example, takes 22 percent from payroll taxes (14 percent by the employer, and 8 percent by the employee), as opposed to the American 12 percent. That difference adds up significantly over time, and Norwegians understand that this is less of a tax, and more of an investment secured by a sovereign nation.
Another way to increase funding is to remove the income cap on Social Security and payroll tax. Americans only pay Social Security tax on up to $132,900 of their income, while countries like France have no such limit. As a result, 90 percent of Americans pay Social Security tax on every cent that they earn, while $1.2 trillion goes untaxed every year.
Reducing the income cap would effectively erase the estimated $13.2 trillion cash shortfall Social Security would experience between 2019 and 2034. A current bill to remove the income cap already exists: The Protecting and Preserving Social Security Act. Lawmakers would be wise to pass it.
Social Security shouldn’t be a partisan issue. The values are simple: provide for workers who have spent their lives providing for their families and their country. The logistics, however, remain knotted in a complex tapestry of math and politics. If you’d like to learn more about Social Security, and what can be done to save it, check out some of the links below.