Expanding Social Security Is the Cheapest Way to Bring More Security to America's Retirees
Editor's note: The following is an excerpt from a new book, "Social Security Works! Why Social Security Isn't Going Broke and How Expanding It Will Help Us All," published by The New Press, 2015, all rights reserved. Order a copy here.)
How should the costs of an expanded Social Security be shared without unduly burdening anyone? There are numerous options, all quite affordable, reasonable, good policy, and fair.
Social Security's wage insurance has been financed, from the beginning, primarily from premiums split evenly between employees and employers. Those premiums today are12.4 percent of wages, equally divided between employer and employee, up to a maximum salary amount, $118,500 in 2015. The 12.4 percent rate has not increased since 1990.
If the rate were to be gradually increased by 1 percent on employers and employees each, over a two-decade period, as some have recommended and we propose, that would translate to an average increase of about 50 cents a week each year. Just that gradual increase would bring in substantial revenue as shown in Social Security Works!.
Social Security premiums are assessed against covered compensation. A larger and larger proportion of compensation is paid not as cash but as deferred or noncash compensation, such as health insurance and so-called flexible spending accounts for such items as medical expenses, dependent care, and commuting costs. This compensation is generally not treated as compensation covered by Social Security. The failure of this compensation to be counted for Social Security purposes means that those noncash wages are not insured against loss in the event of death, disability, or old age. Moreover, the tax code unintentionally encourages employers and employees to set up deferred or noncash compensation plans for the express purpose of avoiding part of the cost of the mandatory Social Security premiums. If just payments to flexible spending accounts were considered wages for Social Security purposes--as contributions to 401(k) plans already are, and as we advocate--the change alone would generate meaningful new revenue. The revenue produced would be even more if combined with increases in both the Social Security contribution rate and the maximum dollar amount on which that rate is assessed--a proposal that is described next.
The maximum amount of wages on which Social Security contributions are made-- $118,500 in 2015--increases every year by the percentage that average wages nationwide increase. However, because wages at the top have gone up rapidly over the last thirty years, while nearly everyone else's have stagnated, more and more wages at the top keep escaping from being assessed for Social Security. This result of uneven wage growth has cost Social Security billions of dollars each year. Restoring the maximum to where Congress intended should have been done years ago. But we believe that Congress should go further. The maximum should be scrapped altogether, or at least with respect to the employer match. This would result in workers all paying the same rate on all their wages whether they earn the minimum wage or are CEO of a Fortune 500 company. It also would mean that all wages would be insured against loss in the event of death, disability, or old age.
Only 6 percent of the workforce earns in excess of the maximum. Our plan gradually phases out the maximum, so that all workers would contribute to Social Security at the same rate on all their cash compensation. (It is instructive to note that Congress eliminated the maximum with respect to the hospital insurance part of Medicare in 1994.) Those 6 percent, who would under the proposal make larger contributions, would also receive somewhat higher benefits. Nevertheless, the net revenue gain to the Social Security trust funds would be substantial.
There is no reason that employers and employees have to pay the same rate, or cover the same wages. Employers could pay premiums on their entire payroll, while employees could continue to pay only up to a maximum wage amount. Persons with extremely large annual incomes could pay a 10 percent premium on income from all sources in excess of $1,000,000. There are many ways that the increased premiums could be allocated. Although our plan does not include some of these proposals, they are all reasonable and would produce substantial revenues to pay for expanded benefits. And as Social Security Works! explains, new dedicated sources of revenue assessed against the mega-wealthy offer other possibilities for income to pay for an expanded Social Security system.
Expanding Social Security is Fully Affordable
What will Social Security cost in the future? The cost of Social Security as a percentage of Gross Domestic Product (GDP) is close to a flat line for the next three-quarters of a century and beyond. Social Security currently accounts for a bit less than 5 percent of GDP. That percentage is projected to peak at 6.16 percent in 2035, when the youngest baby boomers, those born in 1964, reach their 71st birthdays, and then drop slightly, remaining below that peak of 6.16 percent for the subsequent fifty years and beyond.
To put those percentages into perspective, in 2009, a number of other industrialized countries spent considerably higher percentages of their GDP on the part of their social security systems that provides old-age, disability, and survivor benefits. Moreover, they spend more today, as a percentage of GDP, than we will spend in 2035, when the entire baby boom will be over age 70. Indeed, we will even spend less at the end of the century than those nations spend today!
And our nation will be much wealthier then, just as we are wealthier now than we were seventy-five years ago, before computers, smart phones, and other technological advances. Economists project that our GDP will be 430 percent larger in seventy-five years than it is today, just as today it is 1,364 percent larger than it was seventy-five years ago--and that is using inflation-adjusted numbers, so the growth is real growth. That means that the 6.16 percent of GDP will be easier to afford in the future.
Indeed, expanding your Social Security is not a matter of mathematics or demogrpahics. It is about values and political choice. It is about what kind of nation we want for ourselves and those who follow. It is about peace of mind, security and dignity.
(Copyright (c) 2014 by Nancy J. Altman and Eric R. Kingson. This excerpt originally appeared inSocial Security Works! Why Social Security Isn't Going Broke and How Expanding It Will Help Us All, published by The New Press in January 2015, and is used here with permission.)