Social Security is both the largest program in the federal budget and one of the most fiscally unsustainable. The program has already begun paying out more in benefits than it is taking in through payroll taxes. By 2033, the Social Security Trust Fund will be drained and the benefits paid out will decline by 25 percent. Given the system’s tenuous finances, finding ways to reform Social Security over the long run should be the priority of every policy-maker in Washington. But when the President released his proposed budget for 2015, he gave in to the progressive wing of his party and stripped the sole item from his proposed budget that would have improved the financial position of this entitlement: Chained CPI.
Chained CPI is a different means by which Social Security benefits are calculated. As the system exists today, benefits rise with the rate of inflation as calculated by the Consumer Price Index (CPI). Chained CPI would calculate benefits using a formula that assumes that consumers alter their spending patterns with the rise in prices. If the price of certain goods or services rise, buyers will move to spend on substitutes that are less expensive.
Transitioning to Chained CPI would fall far short of fully addressing Social Security’s imbalances. Adjusting Social Security’s benefit formula would only reduce annual benefit increases by a quarter of a percentage point and would only shave $130 billion off of the program’s $11.5 trillion budget over the next ten years. But Chained CPI was the sole change to the program that Republicans and Democrats had negotiated an agreement on–an agreement that the President just reneged on.
This decision was immediately applauded by members of the President’s party. It has become an article of faith among prominent progressives that Social Security’s existing structure is sacrosanct and any change to amend it is a direct attack on American retirees. Sen. Bernie Sanders (D-VT) has repeatedly disregarded Social Security’s impending bankruptcy as “total nonsense” and introduced legislation to require a supermajority of 60 votes on any cuts to the program. Sen. Tom Harkin (D-IA) has gone even further in advocating for expanding the benefits Social Security pays out to retirees.
What supporters of social security do not understand is that the system in its current form does not serve the interest of most Americans, especially those with low and moderate incomes. This is because Social Security is broken for the following reasons:
It is Regressive:
Social Security’s initial purpose was to keep America’s elderly out of poverty. At the time of Social Security’s passage, nearly half of America’s elderly lived in poverty. But by 2010, the percentage of elderly under the poverty line dropped to just 11 percent. Unlike the elderly of the 1930s, today’s retirees lived through a period that experienced a wave of financial innovation which offered a plethora of choices in which to save and invest wealth accrued over their lifetime. Combined with living through one of the most prosperous times in US history, those 65 and older comprise the wealthiest demographic group.
According to the Pew Research Center, the median wealth of an individual entering retirement in 2009 was $170,494, while the median wealth of someone 35 or younger is only $3662. And the gap between the earning of the old versus those of the young has only widened. In 1984, households headed by individuals aged 65 and older had 10 times the wealth of households headed by people under 35. By 2005—before the recession hit—the gap had increased to 22 times, and by 2009 it was 47 times. Having the young continue to subsidize the retirement of such a wealthy demographic group should be cause for worry for anyone concerned with wealth inequality or the shrinking opportunities available to millennials.
It is Wasteful:
Even from the standpoint of current retirees, Social Security is a bad deal. The most productive use for savings is to lend it to those who could put your funds to profitable uses. This capital will be invested into expanding capacity, hiring workers and producing goods as well as providing a return to those who parted with their savings. Unfortunately, the savings that Social Security takes from workers from every paycheck is sent straight to the accounts of current retirees to be consumed. Rather than being invested to the benefit of everyone, funds are wastefully transferred from one individual to another and consumed. These benefits are determined using a formula to deliver payments that currently yield a return of 2.2 percent on social security “contributions,” after adjusting for inflation. If today’s workers who are entering retirement had been allowed to invest their payroll taxes in S&P 500 stocks, they could have earned an average annual return of 6.85 percent over the last 40 years. For retirees with less appetite for risk, they could have acquired corporate bonds that yielded 3.46 percent over this time period. Even the federal government’s own treasury bonds produce 2.44 percent returns that are superior to Social Security.
It is Deleterious:
Despite its subpar returns, Social Security’s flawed structure requires greater future sacrifices from its so-called beneficiaries. By design, the system funds the retirement income of current retirees through the income of current workers. This precariously assumes that birth rates will always provide enough workers to support retirees. This system initially benefited from a massive jump in birth rates that began in the 1930s and lasted until 1960, known as the ‘Baby Boom.’ With the passing of this phenomenon, U.S. birthrates continued their historical decline that had been briefly interrupted by the Baby Boom. Absent any long-term increases in birth rates–which other aging developed countries have failed to accomplish–maintaining Social Security requires squeezing greater revenue from existing workers. Currently, Social Security collects 6.5 percent from employers and 6.5 percent from workers on wages and salaries up to $113,000. For Social Security to fully fund its future liabilities would require raising taxes paid by employees and employers to 17.6 percent, an increase of 42 percent. The only way this program could possibly be sustained is at the increased expense of workers and businesses.
At a time when Social Security’s solvency becomes more tenuous with every passing day, the President should be working with both parties to strengthen the America’s retirement security, rather than putting off critical reforms to a system whose existence poses a direct threat to this security.