The United States needs a new conversation about how Social Security is part of the solution to the growing economic risks American workers face. The key question is: How can we build on the strengths of Social Security – its fiscally responsible design, its universality, progressivity, efficiency, and it effectiveness – to meet the needs of working families in the 21st century?
As employers’ shift away from traditional pensions to 401(k) plans, workers shoulder more financial risks. Social Security offers employers what they want – freedom from financial risk and fiduciary burdens, and it provides workers what they need – economic security.
Social Security has features of an ideal pension plan. It covers virtually everyone and is fully portable between jobs. Its retirement benefits last for life, keep up with the cost of living, and continue for widowed spouses in old age. Social Security provides family life insurance and disability protection. It has a permanent sponsor (the federal government) that will not go out of business or move its operations overseas. And Social Security is remarkably efficient – spending less than 1 percent of income on administration.
Social Security will continue to be affordable in the future. It is not part of an “entitlement crisis.” Its cost is projected to rise from 4.3 percent of gross domestic product (GDP) today to 6.0 percent by 2030, and then decline slightly and level off for the rest of the next 75 years. The increase in the share of GDP going to Social Security (1.8 percentage points) is smaller than the increase in national security spending in just the last 7 years (2.0 percentage points). It is also smaller than the increase in spending for public education (2.8 percentage points) when boomers were children and showed up in record numbers to enroll in kindergarten.
Social Security provides bedrock security for seniors. But benefits are modest. The case for improving Social Security benefits rests on the facts that:
- U.S. seniors have lower replacement rates from Social Security and are more likely to be poor than are seniors in other advanced economies;
- Benefit cuts already enacted and rising automatic deductions for Medicare premiums mean that seniors will need higher benefits in the future just to maintain replacement rates that retirees have had for the past 25 years; and
- The rest of the retirement system is becoming less adequate and subjecting workers to more risks.
All these findings were true even before 2008 put in jeopardy all other resources that workers hope to have in retirement – home values, pensions, 401(k)s, savings accounts, and jobs.
Policymakers have an excellent tool at hand to strengthen retirement security. Social Security is well designed, secure, and efficient. With its proven track record, it holds the best prospect for using new money effectively to improve retirement security for American workers. Wise policy would first balance Social Security finances without cutting benefits. It would then make benefits more adequate before subsidizing other retirement income tools.
This post is based on a paper presented at an Economic Policy Institute briefing. The views are those of the author. The full paper can be downloaded here.