What Does Fixing Social Security Mean?

While some Republicans hanker to demolish the promise of Social Security, the program faces another historic challenge that it never faced before.  The program played an important role in reducing poverty among older households from about 36 percent in 1960 to the current level of about 10 percent.  However, it was always intended to supplement individual saving and private pension funds that in the context of the growing American economy in the post-World War II era combined for an impressive assault on poverty among older Americans.

Economic realities undermine the conditions that made Social Security successful.  Since the mid-1980s income inequality has intensified as the bottom 40 percent of households has not shared in economic growth.  Department of Labor projections show that the fastest growing occupations pay less than $30,000 and there is almost no growth in occupations paying between $30,000 and $40,000.  The implications are obvious.  Households with relatively low income will not be able to save enough to supplement lower Social Security benefits.  Meanwhile the third leg of the retirement security stool, defined benefit pensions plans, are being phased out in favor of defined contribution plans.

The flip side of this trend is the rapid rise in incomes enjoyed by the richest households.  While income stagnated in the two lowest income quintiles, 40 percent of the population, the top 20 percent saw their real incomes, which is adjusted for inflation, almost double from 1985 and 2016.  Average incomes of the top five percent of households more than doubled to $375,000 in 2016.

Future cohorts entering the ranks of the 65 and older age group will have many more households in need of Social Security.  If we want to avoid an increase in poverty among these households, Social Security will need to expand, not contract.  This is what it means to “fix” Social Security.  Reforms such as requiring workers to pay Social Security taxes on all income rather than only on the first $128,000 goes a long way to sustain the current benefit levels.

Unfortunately, labor market trends make clear that just sustaining current benefits will result in an increase in poverty among older households.  The demise of defined benefit plans and fast job growth in lower paying occupations will guarantee that result.

Those who argue that we cannot afford our entitlements like Social Security may have it wrong. It is entirely possible that we cannot afford to not resuscitate our efforts to fight poverty among older households.  Older households whose “golden years” turn to dust can be a formidable voting block that can undermine the benefits of relatively free markets that are valued by opponents of Social Security.  And the older households may well be joined by their children and grandchildren who are required to help impoverished parents.

Fixing Social Security is not rocket science.  There is money available to fix it.  Consider the $1.3 trillion of annual tax expenditures that are made each year.  While some of these benefit low income households, it is estimated that over half benefit higher income households.  Annual expenditures on Social Security are about $946 billion, so taking a knife to tax expenditures that favor the wealthy has promise.

About two thirds of Americans believe that our economic system favors the rich.  Over half the rich agree with them.  Republicans who want to gut entitlement programs could support a tax reduction package that increased the profits of Warren Buffet’s Berkshire-Hathaway by $29 billion.  Labor market polarization is the term used to describe expansion of low and high wage jobs while those in the middle stagnate.  Expansion of low wage jobs in the long-run means that future cohorts over age 65 will need Social Security more than ever.  Growth of high-income occupations can provide the resources needed to fix the system.

Listen to Dr. David Rasmussen’s Policy Pub on the topic here.


Dr. David Rasmussen holds the James H. Gapinski Professorship in the Department of Economics and is the Emeritus Dean of the College of Social Sciences and Public Policy. He studies important public policy questions, including economics of discrimination, urban and regional economic development, the economics of crime and substance abuse policy, and housing economics. 


The feature image is from Kiplinger.com.

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