Debunking the Social Security Myth—Viewpoints | EPI
By Edith Rasell
October 6, 2005

Opinion pieces and speeches by EPI staff and associates.

THIS PIECE ORIGINALLY APPEARED IN THE SEATTLE POST-INTELLIGENCER ON AUGUST 15, 1999. 

Debunking the Social Security Myth 

The political debate over "saving" Social Security has become much more complicated and confusing to the public than is warranted. Politicians are busy creating mind-numbing schemes to fix Social Security when the problem itself is simple.

The Social Security Administration projects that a shortfall in funding will occur in 2034, largely because we're all living longer and we will spend more time in retirement. That we are living longer ought to be good news, but proponents of privatization have irresponsibly seized upon the forecasted shortfall as an
excuse to dismantle the program by replacing it with a system of risky, private individual accounts administered by Wall Street.

Social Security is sound. Its trustees, including the secretaries of the U.S. departments of treasury, labor and health and human services, agree that Social Security has sufficient funds today to pay full benefits for the next 35 years, and beyond that, the program will pay two-thirds to three-quarters of benefits for an additional 40 years.

Because of increases in productivity and wages, even this partial amount will be greater in purchasing power than full benefits today. And this is if we make no changes to the current system. Ask yourself what other program -- federal, state, local -- has put aside all of the money needed for the next 75 years?

The answer is none. Privatizers look at Social Security and say the glass is empty, when in fact the glass is, at its very worst, more than four-fifths full.

Social Security is not in crisis. Over its entire 60-year history, Social Security has never had enough money to pay 75 years of benefits, simply because it is a pay-as-you-go program. In any year, most of the money coming in through payroll taxes is also paid out in benefits. Revenue not being used to pay Social Security benefits are invested in U.S. Treasury bonds -- considered the safest of all investments. In 1998, interest earnings on the $750 billion Social Security surplus were $49.3 billion.

Social Security is an insurance program, not an investment program. Providing benefits to more than 43 million people, Social Security is three programs in one: a retirement plan, a life insurance policy that covers the family of every
worker (equivalent to a $300,000 life insurance policy) and a disability insurance program (equivalent to a $200,000 disability insurance policy.) Social Security benefits are protected from inflation and guaranteed for life. It is impossible to replicate these benefits in the private market.

No other program has been as successful as Social Security at ensuring long-term economic security, especially among the elderly. The benefit for a typical retiree is about $1,200 a month. Thanks to these benefits, the poverty
rate for the elderly has fallen from 35 percent in 1959 to under 10 percent in our state today.

Individual accounts put workers' retirement funds at risk. Privatizers have seized upon stock market fantasies to wage their attack on our Social Security. But privatization would convert the Social Security insurance program into an
investment program, replacing guaranteed income for beneficiaries with mandatory and risky investments in the stock market. Workers' investment decisions governing their private accounts -- wise or unwise, lucky or unlucky --
would determine their retirement income security.

Workers already have the ability to invest in stocks and bonds with the security in knowing that, however these investments turn out, their basic retirement benefit will be there for them. And for the majority of retirees, Social Security
is the most important source of income. This core retirement income security must not be put at risk.

Read the fine print. Individual accounts have far higher administrative expenses than the Social Security program. Estimates based on fees currently charged by Wall Street show that the overhead on the private accounts would absorb fully one-third of the total value of each individual account, draining billions of dollars from retirement accounts. In contrast, the current administrative costs for Social Security amount to less than 1 percent of benefits.

Another key point buried in the fine print is that a system of private accounts would require benefit cuts and an immediate tax increase on all workers. Large amounts of new money would be needed to cover a 30- to 40-year transition
to the new system, while the two programs operated simultaneously.

Workers would need to put money aside to build up balances in the new private accounts, while also paying taxes to maintain much of the current Social Security system (in order to provide benefits to current retirees and to those
retiring over the next 20 to 40 years who will not have accumulated sufficient balances in their individual accounts).

Moreover, we would still need to provide for the disabled and survivors of deceased workers -- currently one-third of all benefits paid out.

Then there's the virtual certainty of fraud and abuse. Arthur Levitt, chairman of the Securities and Exchange Commission, says such a system would require an "unprecedented level of broad-scale policing" of investment brokers to
prevent abuses.

While privatizers want to dismantle Social Security, we can guarantee this essential social insurance program for the next 75 years with a simple and painless solution: Scrap the cap. Currently the Social Security payroll tax is
levied only on earnings up to $72,600. The 6 percent of earners with salaries above this level pay taxes only on their earnings below this cap.
So, a worker making $72,600 and a CEO making $7.26 million dollars pay exactly the same amount in payroll taxes. Under the current system, the vast majority of workers contribute payroll taxes on all their income, while the
highest earners pay on only a fraction of their wages.

Removing the cap and taxing all earnings would bring in more money and make the payroll tax fairer. It would not require any change in the payroll tax rate, so 94 percent of payroll taxpayers would not be affected. The wealthy would pay more in Social Security taxes and their benefits would increase. In the early '90s, the cap on earnings subject to the Medicare payroll tax was removed. It is time for the Social Security cap to be removed as well.

This one change, affecting just 6 percent of the wealthiest salaried workers, would eliminate three-quarters of Social Security's total funding shortfall. The small funding gap that would remain could be filled in a variety of ways. One
source of revenue is the federal budget surplus. Using one-quarter of the surplus over the next 15 years would provide all the necessary additional money. This would still leave most of the surplus available for other needs: Medicare, education, public investment, paying down the federal debt or a middle-class tax break.

With the help of Wall Street, politicians and ideologues have managed to redefine a modest fiscal problem into a financial nightmare. But the funding shortfall can be resolved with minor adjustments.

Social Security can and should remain a social insurance program providing guaranteed income for retirees, disabled workers and survivors of
deceased workers. It should not be converted into a get-rich-quick scheme for the lucky and a lose-your-shirt catastrophe for the unlucky.

There is no crisis in Social Security as long as Wall Street is not left to guard our retirement security.

[ POSTED TO VIEWPOINTS ON AUGUST 17 ]

Edith Rasell is an economist with the Economic Policy Institute. She is a former family physician and specializes in health care issues.

John Burbank is the director of the Economic Opportunity Institute in
Washington state.