Keating: The Lost Trust in Social Security
by Maryann O. Keating, Ph.D.
Those on the Right warn of the expansion and inefficiency of government. It is unsettling, however, to hear young adults dismiss any government assistance in protecting their personal retirement savings. Many young adults say they cannot count on future Social Security benefits.
A generation ago, crowds assembled around the country to hear President George Bush’s proposals to keep Social Security solvent. His reforms were never implemented. Voters have learned to tune out budget hawks decrying the 118 percent debt-to-GDP ratio and the coming depletion of the Social Security trust fund.
Past changes and proposed changes to Social Security foster cynicism. Why? A more sincere discussion about the program is needed. The top priority should be to restore trust in Social Security and correct present program biases against labor force participation.
Cynicism is due to the fact that Social Security benefits are guaranteed to anyone contributing to the program for 10 years. Yet, twenty-somethings face several decades of labor force participation. Employer contributions aside, the personal Social Security payroll tax rate of 6.2 percent is capped at $160,200 per person, with a high probability that government will increase the rate, eliminate the cap, or both. There is little expectation that paying higher premiums will increase future personal benefits or even maintain them.
In 1984, the Internal Revenue Service began to tax Social Security payments. Presently, on joint incomes between $32,000 and $44,000, 50 percent of SS benefits are taxed. For those couples who report higher incomes, up to 85 percent of benefits are subject to Federal taxation. Premiums for Medicare Part B also are adjusted for higher income retirees. The standard premium is $164.90, but approximately 7 percent of individuals with modified adjusted gross income exceeding $97,000 pay monthly Medicare premiums ranging up to $553.30 per person. Nevertheless, despite taxed benefits and income adjusted Medicare premiums, present retirees tend to be less open to reforming the system; non-retirees, however, are legitimately concerned about policy changes chipping away promised benefits.
Social Security does continue to provide insurance against extreme financial distress for the elderly, the disabled and minor dependents of deceased participants. Youthful optimism about personal vulnerability contributes to discounting these benefits. Nevertheless, those holding physically demanding jobs realize the personal costs to them if the age for receiving full retirement is increased. Younger workers, even those in favor of subsidizing those in distress, are starting to realize that they alone must assume personal responsibility for funding their retirement.
Past and potential policy changes do not fully explain the loss of confidence in Social Security. Rather it is knowing that with a single vote or the stroke of a pen, government officials can change the rules and reduce any certainty about a participant’s present and future financial well-being. Even those legitimately elected should be concerned about a loss of confidence in their administration. In Latin American and elsewhere, unrealistic transfer programs, cancellation of debts, disrespect of personal property, and loss of purchasing power create national instability and cynicism about a government’s ability to rule.
A compulsory retirement contribution program, in addition to IRA plans, may be justified, but not one that is actuarially unsound, a drain on taxpayers, and arbitrarily distributes costs and benefits. The public realizes that what cannot continue will not continue. Will policymakers use pending Social Security insolvency as an opportunity for restoring confidence in government? Will they have the courage to address generational concerns? Will needed reforms encourage rather than discourage labor force participation? Obviously, congressional deliberations in consultation with constituents, outraged or not, will ultimately determine the fate and shape of the program. However there is little harm in outlining three directions for Social Security reform capable of securing majorities.
First, if the goal of Social Security is to provide a floor income for retirees and dependents of deceased participants, it cannot be perceived as a welfare program or a means for redistributing income. Pensions must correspond to what beneficiaries have contributed, or, at least, offer some degree of certainty.
To offer certainty, suppose that basic monthly benefits for each participant were uniform and tied to the inflation-adjusted average living expenses for a single person residing in the US. Present average retirement and survivor monthly benefits are $1735.35, or approximately 55 percent of a single person’s average living expenses, $3189.
Let’s be generous and propose that each eligible participant were guaranteed 67 percent of single person’s average annual income. Assuming that wages keep pace with prices, average life expectancy and years of labor force participation could be used to calculate a standard uniform payroll tax rate for employer and employee contributions. Given that every participant is guaranteed identical basic payments, contributions might actually be suspended after a participant reaches full retirement age.
Second, Americans often refer to a Social Security “lockbox”. There are two interpretations to how this works. One naively believes that his or her personal contributions grow or remain intact in their name until retirement. Or, one is more realistic and believes correctly that excess contributions by all participants over and above distributions are held in a SS trust fund. Both the naïve and realistic views support the idea that contribution should never be allocated to finance other Federal expenditures. However, if Social Security is to operate as a stand-alone program, it can never count on general taxpayer revenue to meet promised benefits once funds in the “lockbox” are exhausted.
A Social Security “lockbox” or trust fund, consisting primarily of U.S. Federal Debt, does exist but will be depleted in 2033 and promised payments to individuals reduced. Ideally, annual contributions, supplemented with a “lockbox” acting as a shock absorber, must be sufficient to avoid threatening taxpayers and the next generation with increased costs. This would require, given demographics and the state of the economy, that a standard payroll tax rate guaranteeing uniform benefits be reviewed every five years or so.
Finally, issues facing the U.S. mandated retirement program are not unique, and a study of similar programs is useful. For example, Swedish officials, at one point, agreed to no longer deceive voters; contributions became defined but benefits reduced in years when the general economy performs poorly. This insures that the program never runs a deficit. The Swedish government withholds payroll taxes collected on about 2.3 percent of wages, places them in individual pension accounts, and permits workers to place funds into five distinct investment options.
Australia’s superannuation program is also government mandated but contributions are privately managed in a variety of investment funds. Australians closely follow their accounts and can reduce their income tax liability by topping up their “Super.” This creates an incentive for those partially rather than fully disabled to seek appropriate employment.
US policymakers should consider directing some portion of mandatory Social Security contributions to personal accounts. Ownership, permitting one to accrue transferable assets, is an incentive to participate in the labor force, gain financial skills needed for well-being, and maintain trust in government. There is always a risk associated with personal assets but not necessarily more than for Treasuries held in the Social Security “lockbox.” There is an even greater level of uncertainty knowing that officials can both increase your mandatory contributions and reduce your future personal benefits with the stroke of a pen.
Maryann O. Keating, Ph.D., a resident of South Bend and an adjunct scholar of the Indiana Policy Review Foundation, is co-author of “Microeconomics for Public Managers,” Wiley/Blackwell.