Everything You Ever Wanted to Know About Social Security’s Future

Reference: AFSCME

What is Social Security?

Social Security is a national program of income protection. It was never supposed to be a personal savings plan in which workers invest their money in hopes of developing a nest egg for retirement.

Social Security is a national program of income protection. It was never supposed to be a personal savings plan in which workers invest their money in hopes of developing a nest egg for retirement. Instead, Social Security is based on the idea that if workers pool a portion of their wages, they will be able to protect each other and their families against catastrophic wage loss due to death, disability or retirement. Benefits create a dependable income floor and are meant to complement pensions and personal savings.

Social Security has succeeded—paying benefits every single month for over 60 years—because it is:

  • universal: nearly all American workers participate in Social Security, with contributions matched by their employers;
  • an earned right: benefits are directly related to lifetime earnings and are guaranteed by the U.S. government to all contributors who meet the eligibility criteria;
  • progressive and fair: the formula is weighted so that the lowest-wage workers receive benefits that replace a larger percentage of their pre-retirement earnings, while the highest-wage/highest-contributing workers receive benefits in the largest dollar amounts;
  • flexible and portable: the system permits early retirement with actuarially reduced benefits, and participation in Social Security follows from job to job;
  • cost-effective: because nearly all Americans participate in the same public system, Social Security’s administrative costs are less than 1 percent of benefits paid; and
  • good, basic coverage: when workers die, Social Security provides basic income for their families; the same is true when workers become disabled. And when a worker retires, Social Security means a reliable income for both retiree and spouse, with full, annual cost-of-living adjustments (COLAs).

Is Social Security Broke?

Reports of Social Security’s imminent demise have been vastly overstated. Even if no changes are made, Social Security will continue to pay full benefits, on time, until 2040.

No. Reports of Social Security’s imminent demise have been vastly overstated. Even if no changes are made, Social Security will continue to pay full benefits, on time, until 2040. After that, the system will have a 25 percent shortfall, not empty coffers. In fact, as long as the Social Security payroll tax continues (6.2 percent of wages, paid by both the employer and employee), the system can never go broke. The challenge for Social Security is to ensure that 100 percent of benefit obligations are paid far into the future.

Social Security’s long-range shortfall presents a significant but manageable problem. According to the 2006 report of the Social Security Trustees, the future shortfall is the equivalent of 2.02 percent of wages. That means that if employers and employees each paid a little over 1 percent in additional payroll tax, Social Security would be in great shape for at least the next 75 years! Of course, there are many other solutions to consider other than raising tax rates, but these figures indicate the relatively modest size of the problem.

If nothing is done to solve the problem, however, it will worsen. Waiting until the problem is upon us isn’t an option, because it would mean huge tax burdens for future generations. To avoid a crisis down the road, we need to act soon.

Who Benefits from Social Security?

Of the almost 44 million people who currently collect benefits under Social Security, only 27 million are retired workers. It also includes 6 million dependent spouses and children, 7 million survivors of deceased workers, and 4 million disabled workers.

Of the almost 44 million people who currently collect benefits under Social Security, only 27 million are retired workers. The beneficiary rolls also include 6 million dependent spouses and children, 7 million survivors of deceased workers, and 4 million disabled workers.

But the number of people who benefit from Social Security far exceeds the number who receive checks:

  • Adult offspring of retirees benefit because they can depend on Social Security to provide a basic income to their parents. When they don’t have to provide for Mom and Dad, more of the family’s resources can be focused on raising children and other needs.
  • Taxpayers benefit because Social Security is the nation’s top poverty fighter, keeping twice as many people out of poverty as all income-tested programs combined. Without Social Security, nearly half of all seniors would be poor, instead of the current 12 percent, and government assistance programs would need more resources and require higher taxes.
  • The economy benefits because Social Security pays out more than $367 billion in benefits annually, which beneficiaries use to pay for rent, clothing and food. This is particularly helpful in recessions, when fewer Americans are drawing paychecks. The fact that Social Security beneficiaries are still getting their checks helps stabilize the economy, keeping businesses open and more people employed.
  • American values benefit because Social Security is a key way in which our society shows we care for our families and for our neighbors. It is an expression of Americans’ sense of national community and our desire to protect each other against the potential hazards of life.

Won’t a Smaller Workforce Make it Impossible to Pay Benefits in the Future?

Over the next 30 years, the number of workers per Social Security beneficiary will go from 3.3 to 2, about the same decline as over the last 35 years (from 5 to 3.3). And since the system has always adjusted to changing demographics in the past.

Over the next 30 years, the number of workers per Social Security beneficiary will go from 3.3 to 2, about the same decline as over the last 35 years (from 5 to 3.3). And since the system has always adjusted to changing demographics in the past — never failing to pay benefits — there is no reason to believe that this won’t be the case in the future.

Each worker today is supporting more beneficiaries than in 1960, while enjoying a higher standard of living. This will surely be the case in the future as well. The reason is that workers will continue to be more productive and earn higher wages. Even using conservative estimates, projected average wages are expected to more than double in real terms by 2070.

Also keep in mind that as the population is aging, the number of dependent children in our society is declining. This will enable us to shift our national priorities, as we’ve had to do constantly since 1946, when the huge baby boom generation began. Somehow we managed to school the boomers in the 1950s, 1960s and 1970s — when spending for education rose from 2.5 percent of the Gross Domestic Product to 5.3 percent — and there’s no reason why we can’t also care for them in old age without plunging the nation into fiscal crisis.

How Does the Trust Fund Work and is it Filled with IOUs?

Social Security has always been a pay-as-you-go system: The payroll taxes of today’s workers pay the benefits of today’s recipients. Workers provide for their parents, just as their children will provide for them.

Social Security has always been a pay-as-you-go system: The payroll taxes of today’s workers pay the benefits of today’s recipients. Workers provide for their parents, just as their children will provide for them.

Payroll tax dollars come into a “trust fund” and immediately go out as benefit payments. For most of Social Security’s history, the amount left over has rarely been more than the equivalent of a year’s payout, which serves as a cushion in case of economic downturn.

In 1983, however, a bi-partisan commission recognized that the baby boom generation would place a heavy burden on Social Security and recommended a build-up in the Trust Fund reserve. As a result, there is a $177 billion annual surplus (2006) in reserve — an amount that will continue to grow to a total of nearly $5 trillion until the baby boomers retire. Then, the reserve will be used to pay benefits until it is exhausted. The larger the build-up in the Trust Fund reserve, the longer it can pay benefits.

As noted previously, current projections show that the reserve will be empty in 2040, when Social Security will return to its traditional pay-as-you-go system. The payroll tax will then be sufficient to cover 75 percent of scheduled benefits.

By law, Trust Fund reserves have always been invested in federal government bonds, which earn interest for Social Security at market rates. These bonds are backed by “the full faith and credit” of the federal government and are essentially risk-free. Are they IOUs? Well, that depends on whether you consider U.S. Savings Bonds and Treasury Bills to be IOUs. Most Americans think they’re sound investments and expect to be repaid with interest when the notes come due.

What is Meant by Social Security “Privatization”?

Privatization of Social Security would make the system work more like savings accounts. Instead of pooling resources to protect each other, workers would invest their payroll taxes individually, in personal accounts similar to IRAs, 401(k)s or 457 plans.

Privatization of Social Security would make the system work more like savings accounts. Instead of pooling resources to protect each other, workers would invest their payroll taxes individually, in personal accounts similar to IRAs, 401(k)s or 457 plans.

AFSCME strongly favors personal savings for retirement and has fought for savings plans in the workplace. Savings/investments are an important leg in the “three-legged stool” of retirement income, the others being Social Security and pensions. But Social Security privatization would make the stool wobbly by combining the Social Security and savings legs. Somehow, a two-legged stool doesn’t seem as sturdy.

The stool looks even more wobbly when you consider that the majority of workers retire without pensions and fewer employers now offer them. In fact, two-thirds of Social Security recipients count on Social Security for at least half their income.

Why Does AFSCME Oppose Privatization?

AFSCME opposes dismantling Social Security and using payroll taxes — or a portion of payroll taxes — to fund personal investment accounts. Here are some of the reasons why.

AFSCME opposes dismantling Social Security and using payroll taxes — or a portion of payroll taxes — to fund personal investment accounts. Here are some of the reasons why:

Risk: In private accounts, the individual bears the risk for any downturns in the stock market. Right now, the market is flying high, but imagine if it dropped just as a worker is ready to retire. Workers with no private pension or adequate savings (the majority of workers, in fact) could find themselves without sufficient basic income to avoid poverty. History shows that the stock market can’t rise forever, and once it suffers a steep decline it often takes many years to come back. Stocks did not regain their 1929 highs until 1954 and it took almost 10 years for the market to match its 1973 high point.

Remember the three-legged stool? Of the three legs, Social Security is clearly the most risk-free and personal investments the most risky. It makes no sense at all to introduce risk into a system that’s designed to protect us from it.

Large Fees: Because nearly all Americans participate in the same public system, Social Security’s administrative costs are remarkably low: less than 1 percent of benefits paid. This compares to the 12 to 14 percent cited by the American Council of Life Insurance for fees in private plans.

Chile’s privatized national pension system is often touted as a model for Social Security privatization. But administrative fees for private Chilean accounts are a huge 17 to 20 percent. Similarly, if the private accounts plan favored by Wall Street were in effect today, estimates show it would cost Americans $240 billion in investment-management fees in the next decade. This would reduce the rate of return in beneficiaries’ accounts by a full percentage point.

Favors High Earners: The benefit formula for Social Security is weighted to help lower-wage workers avoid retirement poverty. With private accounts, however, their benefits would depend on the success of their investment choices. Lower-wage workers usually don’t have much money left over after paying for necessities, so they tend to be inexperienced investors; and because they can’t afford to risk the few dollars they have, they tend to be cautious investors as well — a habit that often leads to small returns.

On the other hand, higher-income workers would have more money in their accounts to invest and could afford to take bigger risks, which could bring bigger payoffs down the road. That’s why a privatized system tends to favor high earners. Low- and moderate-income workers fare better under a system of guaranteed benefits that are paid every month, no matter how long the recipient lives.

Weak Disability and Survivor Coverage: Picture a young worker who dies or becomes seriously disabled and still must provide for children. Today, that worker would qualify for Social Security family benefits — tapping into disability coverage that’s the equivalent of a $234,000 insurance policy and survivor coverage equal to a $347,000 policy. But what if the same worker had to rely on a personal investment account and had had little time in the workforce in which to accumulate significant assets? Lack of reliable insurance protection is a serious drawback of private accounts schemes.

Big Transition Costs: This is the “dirty little secret” that privatizers don’t like to talk about: the huge costs of converting even part of Social Security to private accounts. Remember that Social Security is a pay-as-you-go system in which today’s benefits are covered by the payroll taxes of today’s workers. So, conversion to private accounts would mean workers would have to pay twice — once to keep the current system going for retirees and soon-to-be-retirees and again to fund the new system for their own retirement.

One privatization plan would increase the federal debt by an estimated $2 trillion. Factoring in costs like that considerably reduce the rate of return projected for private accounts. In fact, the return on investment would likely fall below projected inflation rates and below the level of benefits that the current system would provide.

Benefits Cuts: Privatization is not a solution to Social Security’s problem. In fact, it makes the problem worse. Every percentage point of the Social Security payroll tax that’s diverted to private accounts would reduce revenue to the current system and enlarge Social Security’s future shortfall. As a result, all privatization plans must either increase the federal debt, raise taxes or make big cuts in current benefits that go far beyond what’s needed to correct the system’s 25 percent shortfall. Privatization plans already proposed include such cutbacks as raising the benefit eligibility age to 70 and reducing basic benefits by as much as 30-40 percent.

But Aren’t Stocks a Better Investment Than Social Security?

Considering that Social Security isn’t meant to be an investment program at all, it still holds its own when compared with private accounts.

Considering that Social Security isn’t meant to be an investment program at all, it still holds its own when compared with private accounts. If you look at the standard period for long-range retirement savings, 20 to 35 years, you see a lot of volatility in the stock market. In the 20-year period ending in 1982, for example, the overall rate of return was actually negative.

While the average rate of return over the last 70 years has been 7 percent, that doesn’t mean investors can expect the same rates in the future. In fact, the identical economic assumptions used by the Social Security Trustees in determining Social Security’s eventual deficit would put the future real rate of return for stocks at about 4.36 percent. Ultimately, of course, the real rate of return for anyone is based on personal investment choices. Some people will make out like bandits and others will see below-average results.

Ruling Out Private Investment Accounts, How Do We Eliminate the Future Shortfall?

As was mentioned previously, Social Security needs to find the equivalent of 2.02 percent of wages—in the form of new revenue or benefit changes — in order to correct the shortfall.

As was mentioned previously, Social Security needs to find the equivalent of 2.02 percent of wages—in the form of new revenue or benefit changes — in order to correct the shortfall. Luckily, Social Security is designed for flexibility—it can adjust to changing circumstances. In the early 1980s, for example, when high unemployment (less money coming in) and high inflation (bigger COLAs going out) put the system in imminent danger, a whole series of corrections were made that have kept it solvent ever since.

Everybody paid a price — employers, workers and beneficiaries — but nobody paid too dearly. Beneficiaries had their COLAs delayed for six months; employers and employees paid a little more in payroll taxes; a portion of benefits paid to higher-income beneficiaries became — for the first time — subject to federal income taxation. AFSCME believes that the problems facing the system after 2040 can also be corrected by the right mix of revenue-raising measures and benefit alterations. But destroying the system through privatization is simply not a viable option.

One possibility under discussion combines some of the aspects of privatization with the strengths of the current Social Security system. Called “alternative investment,” these plans take a portion of the Trust Fund reserve (about 40 percent in one plan) and invest it in stocks instead of government bonds, just as public employee pension plans do.

This could potentially increase returns to the Trust Fund, enabling the reserves to continue covering benefits well beyond 2040. Unlike private accounts, however, the government — not the individual worker — would bear all the risk of a market downturn. And there would be no need to dismantle the current system. Social Security’s fundamental benefit structure would remain as it is today.

Who’s Pushing for Privatization and Who Wants to Strengthen the Current System?

According to an article in The Washington Post, one privatization proposal would pump $4 trillion a year into the stock market and investment brokers would stand to make over $240 billion in fees during the first 12 years.

The obvious answer to who’s pushing for privatization is Wall Street. According to an article in The Washington Post, one privatization proposal would pump $4 trillion a year into the stock market and investment brokers would stand to make over $240 billion in fees during the first 12 years. That’s why investment houses such as Fidelity, J.P. Morgan & Co., and State Street Boston Corp. have sponsored forums to spread the word that Social Security privatization will make everybody rich.

A variety of pro-privatization groups have sprung up — funded by Wall Street brokerage firms and other money interests: Economic Security 2000 raised huge sums from DuPont, Morgan Stanley and other big companies to develop grassroots support for privatization; Citizens for a Sound Economy, financed by businesses and wealthy conservatives, put millions into media ads and other public relations activities; the Cato Institute, a libertarian think tank, has received millions from companies like American Express and State Street Boston Corp. to fund privatization research projects, conferences and seminars for members of Congress.

Those who oppose privatization in favor of strengthening the current system aren’t concerned about making money from either option. They just want future generations to have the same degree of income protection as those who came before them. In addition to labor unions, progressive think tanks such as the Economic Policy Institute, Campaign for America’s Future, and the Twentieth Century Fund have pointed out flaws in privatization arguments.

Also, nearly every senior citizen group — including the American Association of Retired Persons, the Alliance for Retired Americans, and the National Committee to Preserve Social Security and Medicare — opposes privatization. Groups like the Center for Policy and Budget Priorities and the Institute for Women’s Policy Research have pointed out how privatization will disproportionately disadvantage low- and moderate-income workers, especially women. And the youth organization known as the 2030 Center has shown how privatization is a bad deal for Generation X.

Will Social Security Benefits Be There When We Need Them?

Absolutely — just as Social Security has been there for every generation since 1935. The system is too essential to the economy and too important to the well-being of millions of Americans for it to disappear. It can and will be preserved.

Absolutely — just as Social Security has been there for every generation since 1935. The system is too essential to the economy and too important to the well-being of millions of Americans for it to disappear. It can and will be preserved.

Of course, Social Security advocates will still have to fight to ensure that any changes made in the system are safe and fair. Surveys show that if a worker has no confidence in Social Security’s future, they will be more likely to support risky privatization schemes. Our job, as AFSCME members, is to spread the word to our friends and families about the real strengths of Social Security.

Working together, we can rebuild their confidence in a great system that protects us all.