Social Security Matters

By James Kwak

Catherine Rampell wrote a post last week about how Americans expect to retire later and how more elderly Americans are working. Her last chart also showed that a growing proportion of nonretirees expect Social Security to be a major source of their income in retirement.

That shows that Americans are becoming more realistic. But still, just 33 percent?

Just how important is Social Security, anyway? Let’s look at some numbers. Around 2003, Barbara Butrica, Howard Iams, and Karen Smith analyzed the composition of household income for people at age 67. They projected that median-income early baby boomers, when they reached 67, would have mean per capita family income of $33,000 (Table 3), of which Social Security made up $13,000, or 40 percent. Does 40 percent qualify as a “major source” of income? I would say so. Imagine losing 40 percent of your income.

But Social Security is actually more important than that. Remember, these are 67-year-old people, and 49 percent of them are still working. Yet most people hope to stop working someday. If you subtract out earnings, imputed rental income (the non-cash benefit you get from living in a house you own), and co-resident income (earnings of younger family members who happen to live with you), you’re down to a total of $23,000, of which Social Security is now 57 percent.

Another way to look at Social Security is to compare it to the things that, in some people’s eyes, were supposed to make it unnecessary: 401(k) plans. In the projection, for early baby boomers (people retiring now), about half were expected to have defined benefit pensions and the other half were expected to have individual retirement accounts like 410(k)s and IRAs. The latter group are getting about $4,000 from those retirement accounts. That could go up; maybe people are withdrawing less while they are still working. It could also go down; maybe people are withdrawing money at an unsustainable rate. But in any case it isn’t much, and it’s not even close to what Social Security contributes. (Remember, the Social Security figure of $13,000 also doesn’t include people who have chosen to delay taking benefits until after age 67.)

In 2008, Andrew Biggs and Glenn Springstead did a similar analysis, with similar results. Social Security provided 41 percent of income for beneficiaries ages 64–66 (Table 5), but when you strip out earnings and co-resident income, that figure goes up to 53 percent.

Both of these analyses focus on people in their 60s. As people get older, it seems that they rely on Social Security even more—not only because they stop working, but probably because they exhaust their other assets, or because their other pensions are not indexed for inflation (unlike Social Security). According to Sylvia Allegretto, if you look at retirees in the middle of the income distribution in California, a full 70 percent of their income comes from Social Security, with only 16 percent coming from retirement funds.

There’s a lot of talk today, some of it coming from Simon and me, about how the federal government is in danger of running out of money. But at least the federal government has some pretty potent options, like raising taxes. But American families as a whole are also running out of money, and they don’t have a lot of options. That’s a major reason why now is not the time to dismantle our social insurance programs.

40 thoughts on “Social Security Matters

  1. The solution to the Social Security :problem” is laughably simple. Just remove the earnings cap and the Fund is fully financed forever! Use any math you wish. Make any assumptions you wish. It still comes out the same way.

    And the reason to do this simple. Social Security works! In the early 1960’s, the evening news almost always included a piece, usually from Florida, that showed elderly people leaving a supermarket with a cart filled with dog food because that was all they could afford to eat.

    Those stories are now gone and good riddance!! Somebody should find them and show them to Paul Ryan.

  2. PK looked at the current situation a few weeks ago:

    If you look at Table 9B6 you’ll see (left column) that 55 percent of the elderly get more than half their income from Social Security; 33 percent get more than 80 percent of their income from that source.

    And if you look at Table 10.5 you see that the elderly in the middle of the income distribution get 66 percent of their income from Social Security, versus 9 percent from private pensions and just 5 percent from assets.

    if we raise the minimum wage to $10, & get back to full employment, SS will be funded out of revenues…

  3. Nice post underscoring the importance of income security in old age. Another important component of Social Security is its reliability. Despite what the hair-on-fire crowd says, it is a well managed and extremely popular program. Current recipients can expect payments for the rest of their lives regardless of market conditions. Further, these payments are periodically indexed to inflation. It is the foundation of the 90 percenters retirement strategy.

    One other element you mention, but left me wanting more of, is defined benefit pension plans. These were the second leg of the stool – so to speak – and we are just starting to learn how sorely they will be missed. I’d love a thoughtful analysis of the current state of defined benefit plans, how companies gamed them in good stock market years such that now many are underfunded. It feels like a big game of bait-and-switch. negotiate for pension benefits as part of a compensation deal with labor and then under-fund them. Or, sell your company to vultures who will renege on the promises and leave taxpayers holding the bag.

  4. The scariest thing for me is how many of my friends in my general age group (35-45) have little to no (or negative) savings, despite being relatively high earners. Very few people I know (myself excluded) save at all, and spend very liberally–fairly elaborate vacations (renting houses in the South of France in summer, when airfares are >$1000, etc.), expensive dinners, rarely cooking at home, leasing German cars, etc. And to a person, they discount the importance of SS, and have some notion that they would be better served by not having to pay into it at all. I fear that, like most Boomers, Gen X has not absorbed the great lesson of the 2008 crash–beware of leverage, personal or otherwise.

  5. @Nick – Grandma’s stock was cut in half due to the bust just as she reached retirement – so the *boomers* who weren’t in on the massive theft of labor’s slow growth profits THAT time around sure are aware NOW of how to conduct generation theft!

    Low life thinking (the predictability of criminals) to try and rob the SS fund of what’s still left in there after TARP….right up there as a genius plan with those who figure they’ll eventually get their paws on the artwork in the Vatican to swap out as pay for their HIV meds….

    making it up as you go along….

  6. So, the larger the bloated government program, the more important it is to increase the budget of the bloated government program. Got it.

  7. Unlike some people, my wife and I actually have managed to accumulate some retirement savings, so we will not be ENTIRELY dependent upon Social Security. However, contrary to what some people in the financial industry and the right wing might think, it really isn’t possible for middle class households to save and accumulate so much money that they can afford to just ignore Social Security as if it did not (or might not) exist. It really is only the very top tier of households who are in such a fortunate position. The vast majority of us, even if we are as frugal and prudent as we can be, are still going to have to rely on Social Security for at least a part of our retirement income.

  8. The replies here seem to imply that the trust fund is filled with a store of wealth that can simply be liquidated when there is a cash shortfall. According toi the latest Medicare Tustees report, there has been a cash shortfall in the SS trust fund since 2010. This shortfall has been made up by redemptions of interest from the trust fund.
    But this redemption of interest is not a similar transaction as to that of private bonds in a retirement trust fund. In a private plan, thes pre-paid intact investment is simply liquidated. In the case of the SS trust fund, the interest is redeemed by new revenues taken from the general fund of the Treasury, increasing the deficit, the same way we pay for all expenses, like Medicaid..
    The latest trustees report also states why the trust fund can grow while there is a cash shortall. It is because there is an accounting surplus, rather than a cash surplus.
    Which surplus would you rather have in your trust fund retirement account?
    Don Levit

  9. James, I just turned 66. I applied for early Social Security, because I had lost my job at 61, just about 3 months before I became 62. I frantically applied for jobs and drew unemployment for the three months leading up to that birthday. I found nothing and decided to find out what my benefit was, having had decent earnings during my life. I am now on Medicare, and my net Social Security benefit after the Medicare premium, is about $1540 per month. I live on that, entirely. I am comfortable, but it is difficult. That is my story. The benefit would not have been substantially higher had I been able to wait the extra three years.

    I am interested about something, though, regarding the level of the national debt. The MMT (Modern Monetary Theory) as propounded by Jamie Galbraith, and others, claims that we should absolutely ignore the present level of national debt, primarily because we are capable of printing our money, unlike Greece, which means that we don’t have to borrow it. What he says makes sense, if for no other reason that the FED has pumped, over the past three plus years, literally trillions of dollars into the “economy” by lending it to the monster banks at 0.25% interest (essentially free), and this has, by all accounts, not produced even a shade of inflation, most of the inflation has come from a spike in energy costs as it cascades through the economy, not by money printing. Jamie contends that if the money is put into the economy for productive purposes, like infrastructure, it not only is it helping alleviate the recession, but it is not inflationary. Maybe you and Simon would like to opine on MMT, the positives and negatives, or perhaps some other reader would do so. I can’t find any real flaws in this idea.

  10. “just 33 percent?”
    When you’ve heard for your entire adult life that Social Security is going “bankrupt,” you internalize the message that it would be smarter not to rely on it being there for you.
    I would say that has been the plan all along.

  11. The ghoulish GOP attack on the great NEW DEAL programs of Franklin D. Roosevelt, and subsequently programs enacted in the 1960’s under another democrat, is one reason the GOP truly remains the “Death Cult”, and with traces of their fascist roots in the 1930’s re-surfacing, one wonders with trepidation whether the ghouls on the right will get to see their pernicious set of wishes come to fruition.

    The fulfillment of these wrong-headed and misguided pledges would plunge the USA backwards and anyone seriously entertaining a vote for a GOP doctrinal-candidate needs to seriously consider the radical bent of these ideas, and where these originate……with the rich oligarchs who own the right, and other pols in the other wing of the Nader “duopoly.”

    Here’s the latest scoop, derail kids getting fed to over-fund the USA war-machine, the effects of which have and continue to devastate the country.

    It’s disgusting and immoral, ghoulish and predictable, but this death cult of GOPers are so brainwashed, only correct thinking and doing can defeat it. I remain an optimist.

  12. Anonymous at 3:39:
    The article you provided was excellent. It detailed how the excess FICA taxes had, indeed, been used to pay for other government expenses.
    Then it posed the question: Since the SS trust fund can invest only in Treasuries, you have to do something with them. They need to earn interest – they can’t just sit there.
    I agree that is a problem in that the government is not known for its ability to create pre-paid, funded reserves.
    The point is, though, that the excess taxes were not designed to pay for other government expenses. These were to be invested special-issue Treasuries to be used exclusively for SS beneficiaries. So the excess taxes were supposed to stay in the trust fund and not used to pay for other expenses.
    The conumdrum is “How do these securities earn interest?”
    Currently, interest is paid from the general fund of the Treasury. But, as I mentioned above, that is the same way we pay for Medicaid, and any pay-as-you-go expenses. So, the question remains:
    How can we earn interest on the intact principal? I do not know the answer. However, I did not write the law regarding special-issue Treasuries. Either the law has been abused, or there was an inherent contradiction in special-issue Treasuries, and their ability to remain intact as a real reserve fund.
    Don Levit

  13. Social Security is a total disaster. It is a Ponzi scheme that pays out benefits to the baby boomers far in excess of anything they paid in during their lives with interest. Social Security is a pile of cash laying around in government accounts that Congress has stolen from time and time again.

    The entire premise of this article that social security as it currently exists is a benefit to the country as a whole could not possible be farther from the truth. Social Security allows on generation to rob others and is the program most singularly responsible for beginning and maintaining the insatiable sense of entitlement to pervades our society today.

    Social Security is an unmitigated disaster and should be privatize as soon as possible.

  14. Privatization is too nice a word. Looting is better, and impoverishment,
    theft, extortion, and embezzlement are far better in describing not only the process, but the ill-effects of this veiled form of wealth transfer to the economic elite class.

  15. @Dave Thomas – don’t even TRY to spin it out to Social Security being a Ponzi scheme! Grandma’s measly Verizon stock growth was STOLEN by the STOCK MARKET *crash* and her life-long garnished tax dollars went to fund the perpetual war machine that runs on DELUSIONAL *prophecy*!

    Your *analysis* is perfidy of the highest order. And all that remains is BRUTE FORCE against your thieving ilk.

  16. Here is what puzzles me. Bernie Sanders, senator from Vermont and Robert Reich, former Secretary of Labor, among a very few others, understand that simply removing the cap on earnings would make the Social Security system solvent forever. But nobody else seems to want to deal with that simple fact. Even AARP won’t take that stand. And apparently the readers of this blog are to be included.

    So what is the problem? Is the solution too simple? Is it simply apolitical? Does it offend someone’s religion? What???

  17. James, I just want to second your thought. How is that possible. That option has been there for ages. The other option is simply to adjust the percentage of the amount taken. Easy. Both answers are relatively painless. Why aren’t they broadly endorsed. With the Republicans, it is simply a matter of allegiance to their confiscatory natures. But with all others, go figure.

  18. Removing the earnings cap, under the present system of “break points,” would provide 15 cents for every dollar paid in – a tax rate of 85%.
    I do not think those effected would go for it, and I tend to agree with them.
    Too much taxation, too little representation.
    And again, you are avoiding the fact that if current cash expenditures exceed current cash receipts, tapping the trust fund means new revenues from the general fund of the Treasury, the same way we pay for all pay-as-you–go-expenses, such as Medicaid.
    Don Levit

  19. Dear Don, there seem to be some misconceptions here about Social Security. Let’s see if we can clear them up.
    1) In 2008, for example, if you earned $102,000, you paid $6,324 for a rate of 6.2%, not 85%. In that same year, Jimmy Cayne, who led Bear Sterns into bankruptcy, was paid $61,300,000, and he also paid $6,324, same as you (assuming you earned $102,000).
    2) It is not a new tax. It has been in place since the 1930’s.
    3) It is not a tax on different people. All the people, employees and self employed, pay the tax.
    4) Current cash income far exceeds current payments. The worry is that as baby boomers continue to retire income will fall and payments increase.
    But removing the cap solves that problem for ever.
    5) You are comment about the Social Security Fund being raided by Congress is dead on! Lyndon Johnson set the premise when he raided it to pay for the Vietnam War. But keeping Congress from stealing from the Fund is a completely different problem, but it can also be solved with a single act of Congress.

  20. Mr. Taylor, thanks for the comment. I agree on everything but the bit about Congress. Owing to the fungibility of money (and, let’s face facts, Congress isn’t truly confiscatory except when it passes laws to do that, but not by “stealing” money from one thing for another), the “Social Security Trust” always has “assets” equal to contributions minuse administrative “costs” and benefit payouts. This is governmental bookkeeping. It’s not like real money is ever there. When I receive my benefit, it is paid by the Treasury and is accounted for, just as when I paid my contribution it went through the Treasury and was accounted for. Congress can’t actually raid the fund at all. No one can, because it is just accounting, not actual money to be taken or that could be “taken” by anyone. Talk to anyone. The SS “bucket” is one of hundreds, cash in cash out and all according to gnomish accounting nerds at GAO. What you’re talking about is the use of the actual cash. But when it is used, it doesn’t deminish the fund. That’s impossible, unless the Inspector General isn’t doing his job, that is, auditing the GAO to eliminate any accounting fraud or mistake.

  21. James:
    You wrote that current cash income far exceeds current payments. According to the paper entitled “Status of the Social Security and Medicare Programs, A Summary of the 2011 Annual Reports”:
    Page 1 “Social Security’s expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The $49 billion deficit last year (excluding interest income) and $46 billion projected deficit in 2011 are in large part due to the weakened economy. Through 2022, the annual cash deficits will be made up by redeeming trust fund assets from the General Fund of the Treasury. Because these redemptions will be less than interest earnings, trust fund balances will continue to grow.”

    Regarding the 15 cents, it is not the tax I am alluding to. Rather it is the benefit per every dollar one receives by exceeding the maximum income to which Social Security taxes are paid in.

    You say that the trust fund has assets, but not real money.
    Do you agree that to tap the trust fund requires the use of the Treasury’s General Fund revenues, just like we pay for all expenditures – for example, Medicaid.
    Do you agree that the trust fund balance is simply an accounting mechanism, detailing how much can be withdrawn from the Treasury without an appropriation?
    Do you agree, from a cash perspective, the trust fund makes it no easier to pay benefits than it does for any pay-as-you-go expenditure, with or without a rust fund, such as Medicaid?
    Don Levit

  22. Don, I agree, but don’t understand your point. I don’t detect new information to change the point I made. It seems to me that you are saying, regarding appropriations that this is somehow different. This is just an ordinary obligation of the government, and, unless they somehow were to fail to raise debt limits such that the government would have to delay payment of certain expenses, then I fail to see that makes a difference. When the last debt ceiing debate took place, the Treasury assured recipients that they would receive their checks regardless. Please explain how the fund can run out of funds in it’s account so long as it generates more in income (interest or otherwise) than it pays out in benefits. I just can’t understand it, and it seems that you are just a bit murky in your clarity of explanation. Maybe I am just stupid, but don’t think so.

  23. Dear Don, for the sake of this discussion, let’s say that you are correct and the payments now exceed the income. All that does is make it more urgent to remove the cap. End of story.

  24. bayardwaterbury:
    My point is not that they can run out of benefits.
    My point is that the benefits are financed as you stated.
    When SS was designed, it was intended to be a self-supporting program, with no use of general revenues. The excess FICA taxes were to be invested in special-issue securities, to be used only for SS beneficiaries. Instead, the excess taxes (and interest) were loaned to the Treasury to pay for current expenses. If these bonds had been kept intcxt, as originally designed, the trust fund would represent a real store of wealth, would, in a sense, be privatized. Like most private pension plans, investments are simply liquidated, with no use of new monies, for the investments are pre-funded.
    Social Security was not supposed to be an ordibary obligation of the government, at least according to the citizens. It was to be a sacred pact between generations, on a much higher level than obligations to the military.
    Don Levit

  25. I almost got a headache following the logical inconsistencies, but then I was saved by looked at who provides funding to the Treasury – and that is the Federal Reserve Board.

    Here is the link to their stated mission:

    Which is my point – as far as the FRB is concerned, I exist for one reason only and that is to pay them interest on the money that they lent to Treasury to run the sovereign nation of the United States of America where we all run free like antelopes :-))

    That’s dangerous moral ground for a hoi poloi of mixed breeding and social diversity like USA is, currently. To take 35% of what was supposed to be money paid for labor (all sorts of “middle class” jobs) from age 15 to 65 (BABY BOOMER REALITY FOR THOSE BORN IN USA – 50 years of pay in!!!!) without it ever touching our fingers because the Feds were putting it in the bank for us for when WE need it (at *retirement* whatever the hell that was supposed to be) and now to start explaining to us that that is not how it was really working, since the money was not only never yours via .payment for work, it was never really there in Treasury, either.

    Well then, if the money was never really anywhere it was supposed to be, then how can everything middle class suddenly be up for sale to people who always had the money that was never anywhere else?

    Hope I gave you all a LOGICAL flaw headache…

  26. Thanks, Don, for your patience. However, what makes any obligation by the government less than sacred. We all know that if anything they are obligated to is “willfully” unpaid, we are all in deep crap. If it gets to pick and choose what is “sacred” and what is otherwise, perhaps “optional”, then they loose all credibility. So, yes, their obligation for SS is certainly sacred. It was a shame to change the original concept so capriciously, but I don’t actually see this as a problem. After all, they let us down on a daily basis in so many ways, what is one more? The fact is that the citizens have absolutely no control over the level of irresponsibility exhibited by the US government literally every moment of every day. Someday enough of us will be willing to say “enough” that they may have to listen. For now, they just serve those who pay the freight on campaigns.

  27. bayardwaterbury:
    The obligation is sacred, from the citizens’ viewpoint. It is NOT sacred from the federal government’s viewpoint.
    The FASAB is the accounting advisor for the federal government.
    Here is their take on SS “obligations:”
    From a paper entitled “Accounting for Social Insurance, Revised:
    Page 87 A nonexchange transaction arises when one party receives value without directly giving or promising value in return. In regards to social insurance the federal government gives value to beneficiaries without receiving value in return. The fact that benefits paid are not based on the amount of taxes paid confirms the nonexchange nature of social insurance.
    Another important distinction between exchange and nonexchange transactions is the type of obligations that are recognized.The U.S. Supreme Court has affirmed the right of the Congress to modify future Federal Government benefits in any manner and at any time.”
    Click on Exposure Drafts and Documents for Comment
    Don Levit

  28. How is this a true statement when the monthly benefits are calculated precisely on how much money someone was supposedly paid for doing a job that someone wanted done?

    “….Page 87 A nonexchange transaction arises when one party receives value without directly giving or promising value in return. In regards to social insurance the federal government gives value to beneficiaries without receiving value in return. The fact that benefits paid are not based on the amount of taxes paid confirms the nonexchange nature of social insurance….”.

    The FRB is LYING about their mission. They should take down that stupid statement of what their mission is on their website.

    Who the hell wants to live in a country where you have to be a psycho to thrive? This is WORSE than the dual *isms* that were DISCREDITED after WWII….looks like the new global *ism* is resistant to any and all previous remedies – psycho heaven in creation – the idealists must serve the most wantonly selfish who doodle numbers on papers and call the number doodle a god…

    No wonder why Putin is blowing off attending the G8…he’s got zero GENETIC tolerance for such “rip the face off” perfidy….

  29. Don, yes, that I knew. Of course that is sad, but it appears, from past experience, and probably at present, that Congress is loath to make any serious modifications. I think that they know, or believe that the backlash would be quite withering. Having said that, the mere fact that a large majority have an expectation that they won’t be receiving the same benefits as their parents indicates an appropriate level of cynicism that this fact is unlikely to continue in the future. In a plutocracy, we are given what we are purely by good fortune. Let’s face facts, the oligarchs who control our government with an iron boot, don’t, in the long run, care whether their slaves live or die, and see half of us a overpopulation — a riffraff standing between them and the ultimate usance of America. Most of them don’t give a damn about this country, since they are all, defacto, global citizens whose American citizenship is, at best, perhaps just a nuisance.

  30. That was some good stuff their guys, and Bayard you are close on your description of gvt. What you are lacking are the people behind the scenes pulling the strings so to speak. They use the congress, and there actually is a purpose, and a time frame, behind it all, (a future so full human accounting, the average citizen can not comprehend it, agree to it, or understand why it has to exist, and has existed for so long a period of time.) although only a handful of folks can sipher it true timing and meaning. Its the reason why we have to give the devil his dues, while stealing his shoes. Oh, and one of you just said her name out loud again, with feeling I might add.

  31. Social Security ran a cash flow deficit of $49 billion in 2010, and the 2011 trustees report indicates such deficits will be the norm by 2017. The report also reveals that Social Security’s unfunded obligation stands at $9.1 trillion, in net-present-value terms; in other words, it owes $9.1 trillion more in benefits than it will take in through taxes. The program will experience further financial strain as the worker-to-retiree ratio keeps falling.

  32. @bayard – you’re right, it’s eugenics again, only this time, they are ENJOYING a slow-mo suffering, no efficient crematoriums for the moon-walking “middle class”. I guess sadism – the true enjoyment of inflicting suffering – is a SIGN of a superior evolutionary trait? An advancement to establishing paradise on earth?

    The good thing about a full scale eugenics *war* is that everyone has an opinion about *superior* and everyone gets the chance to prove, by their ACTS, which collection of human traits survive as the fittest.

  33. I am not sure, but you sound somewhat like a conspiracy theorist. I am not. I have read about the Bilderberg Group and the Trilateral Commission. These are real, but not true conspiracies, just lots or rich and powerful people getting together to figure out how to protect what they have. The other, even more powerful organization is The Committee on Foreign Affairs. Look it up, its membership reads like a Who’s Who of super wealth and power. Of course, the idea of these folks getting together at all would indicate what we see, which is a high level of cooperation in controlling the present and future. I don’t really think that they make a plan and coordinate their activities, because they don’t need to do so. With the level of power they have, their capabilities are amazing, even without a coordinated agenda. The two things which give them nearly endless and unquestioned control is election buying — they all invest in everyone in both major parties and therefore call the shots on legislation and regulation — AND they control the disemination of information by owning all the media, other than the internet, and deciding what we know and what we don’t. In the mainstream press, the level of disinformation is almost astonishing, and the mere fact that so many of our fellow citizens are too tired, too lazy, too overwhelmed, or too apathetic to read the vast sources in books and on the internet to find out the truth. Including this site, and others like New Economic Perspectives, Mother Jones, Real TV Network, there’s lots of in depth information available. If enough people begin to realize this, a revolution would become inevitable.

  34. What a crock of revisionist history this Ludwig disciple has produced!! You might want to check that version of history with Marie Antonette. She may have a different idea of what happened.

  35. @bayard – when you wipe out a whole class of people in one fell swoop – it’s *eugenics* – you knew who you corralled into the pen and when to slaughter them. Agreed, after WWII, they’re powerful enough to pull it off and name it whatever they wish to name it….thanks to the re-structuring of debt and who got in on controlling the flow of the $$$$ right after WWII when everyone else was on their knees cleaning up poverty diseases, dead bodies, live ammo, and raw sewage – distracted populations, indeed….

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