Battle Over Benefits

Richard Quinn

ALMOST EVERYBODY collects Social Security at some point in their life. But it seems like that’s the only thing we all have in common.

Why are there such stark differences of opinion regarding Social Security’s purpose and effectiveness? Why are so many Americans willing to believe that one administration or another stole the Social Security trust fund? Why is any effort to modify the program for future retirees immediately denounced as a cut in benefits?

The roots of Social Security go back to the Great Depression. It was a time when there was great suffering, few pensions and where retirement was short—if workers did indeed retire. It was also a time when multigenerational households were more common.

When Social Security was enacted by Congress in 1935, average life expectancy was age 61. Not only did that mean that benefits were paid for just a short period, but also there were many more workers to support each beneficiary. In 1960, a man’s life expectancy at age 65 was 12.8 years. By 2017, it was up to 18.1 years, and yet adjusting the Social Security formula to reflect that increase in longevity is controversial.

Today, Social Security is far more than a retirement benefit. Over six million Americans and their families receive disability benefits. Another six million receive survivor income.

Social Security was controversial in 1935 and perhaps more so today. From the start, the message was clear: The program’s purpose was to relieve poverty. But as of 2020, many Americans still haven’t got that message. Social Security was not intended to be sufficient to live on and yet many endeavor to do so. Among older Americans, 21% of married couples and 45% of single individuals rely on Social Security for 90% or more of their income.

What role should Social Security play in 21st century retirements? There are proposals to increase benefits, though not to the point where most retirements can be funded with Social Security alone. One politician calls for a $1,300-a-year increase. The Social Security 2100 Act would provide a 2% overall boost in benefits.

When you look at the rest of the world, it’s clear the U.S. is lagging in government pensions. There are different measures, but the U.S. is consistently far from the best. Several European countries replace 100% or more of preretirement income, while the U.S. is at about 49%, according to the Organization for Economic Cooperation and Development.

What’s an appropriate income replacement rate? I’ve never seen a recommendation of less than 70% and more often folks call for 80%. What do we mean by replacement rate? I’d argue that what matters is replacing a high percentage of earnings immediately before retirement. After all, those preretirement earnings are what drive a family’s current standard of living.

Needless to say, the level of government generosity gets reflected in tax rates. How much of our senior citizens’ retirement income do we want funded by taxes—and how much by their own savings?

The latest Social Security trustees’ report says that, for the combined trust funds for retirement and disability to remain fully solvent for the next 75 years, we’ll need to boost revenue by an amount equal to increasing in the payroll tax rate by 2.7 percentage points. If that happened, it would bring the payroll tax for Social Security to 15.1%. On top of that, there’s the 2.9% payroll tax for Medicare. Add that in and the total payroll tax would need to be 18%, up from today’s 15.3%, with presumably half coming from employers and half from employees.

Remember, this would merely keep Social Security solvent. If we want higher benefits, we’ll need higher taxes. One benchmark: In the Netherlands, employees contribute 17.9% of income toward the cost of government pensions.

To add to the controversy, some Americans see Social Security as a bad investment. They say, “Allow me to invest the taxes and I’ll do better. By the time I reach retirement, my assets will provide more income than today’s Social Security benefits—and that money will belong to me and my heirs.”

If everything works according to plan, that’s quite possible. But it’s a big “if.” Think of all the possible vicissitudes of life between entering the workforce and age 65, not to mention the risk of a stock market correction just before retirement. I can’t help but think of the discipline it would take to accomplish such savings. Dare I suggest most people don’t have the necessary discipline?

So here’s where we currently stand:

  • Inadequate retirement planning by far too many Americans.
  • A Social Security trust fund heading toward depletion, potentially resulting in lower benefits for tens of millions of beneficiaries.
  • Many Americans don’t understand how the program works.
  • Disagreement over whether to change benefits or raise taxes to make the program sustainable—and, if taxes are to go up, who should pay them.
  • No agreement on how much of retirement income should come from personal savings and how much from the government.

Whatever solution we settle on, I hope it’s based on the facts—without those facts getting twisted for political gain. That sure isn’t happening right now.

Richard Quinn blogs at Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Side EffectsHow Not to Move and Change Our Ways. Follow Dick on Twitter @QuinnsComments.

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