A few facts to know about Social Security

Even though Social Security is about one-fifth of the U.S. budget, it does not add to deficits because of the way it is funded.

Hear IPP’s David Osterberg discuss Social Security on “The Devine Intervention” radio show with Michael Devine, 1400-AM KVFD Fort Dodge.

There is much misunderstanding routinely presented about Social Security and its impact on federal deficits. Some portray it as a problem; in fact, Social Security not only does not add to deficits, but supports millions of Americans and, thus, the economy. Consider these points from the Center on Budget and Policy Priorities (CBPP) and the Economic Policy Institute (EPI):

Social Security keeps 21 million Americans out of poverty

Social Security benefits play a vital role in reducing poverty. Without Social Security, 21.4 million more Americans would be poor, according to the latest available Census data (for 2011). Although most of those whom Social Security keeps out of poverty are elderly, nearly a third are under age 65, including 1.1 million children.
157,000 fewer elderly poor (Figure 1)
—Without Social Security, 47.3 percent of elderly would be in poverty; with it, only 5.6 percent (Table 2)
Beneficiaries: 592,000 in Iowa, including 435,929 age 65 and older, 130,205 ages 18-64, and 25,866 under age 18. (Table 3)

Social Security is a fifth of the U.S. budget …

Social Security: Another 20 percent of the budget, or $731 billion, paid for Social Security, which provided retirement benefits averaging $1,229 per month to 35.6 million retired workers in December 2011. Social Security also provided benefits to 2.9 million spouses and children of retired workers, 6.3 million surviving children and spouses of deceased workers, and 10.6 million disabled workers and their eligible dependents in December 2011.

… but it is not driving the deficit …

Social Security can only spend what it receives in tax revenues and has accumulated in its trust fund from past surpluses and interest earnings. It cannot add to the deficit if the trust fund is exhausted because the law prohibits it from borrowing (if current revenues and savings in the trust fund are not sufficient to pay promised benefits, these have to be cut). Though modest changes will be needed to put Social Security in balance over the 75-year planning period, the projected shortfall is less than 1% of gross domestic product (GDP). …

… and it helps to finance the debt.

Money that the federal government borrows from the public or from Social Security is used to finance the ongoing operations of the government in the same way that money deposited in a bank is used to finance spending by consumers and businesses. In neither case does this represent a “raid” or misuse of the funds. The bank depositor will get his or her money back when needed, and so will the Social Security trust funds.
Thank you to CBPP and EPI for offering important resources to the public on these issues. See links above.

Posted by Mike Owen, Assistant Director

Better understanding the 47 percent

Make no mistake: Working Iowans pay taxes.

Heather Gibney, Research Associate
Heather Gibney

The current political environment has set off a firestorm of confusion about who does and who does not pay taxes in America — and unfair criticism of many working families and others.

It’s true that 47 percent of Americans pay no federal income taxes, but they do pay taxes. In fact, almost two-thirds of the 47 percent are low-income, working households who are paying payroll taxes to help finance Social Security and Medicare, and many pay federal excise taxes on things like gasoline, alcohol and cigarettes.[1] These households are also paying a large percentage of their income in state and local sales and property taxes.

Many working Americans are exempt from the income tax because of features Congress added to the tax code — with overwhelming bipartisan support, in an effort to enable people to care for themselves and their children while encouraging them to work. Some of these features include the Earned Income Tax Credit, a Ronald Reagan era anti-poverty program that enables low-wage working families with children to meet their basic needs while promoting employment. In addition, the child tax credit gives families a tax credit through the form of a refund check even when they don’t owe federal income taxes.[2]

The other one-third of the 47 percent — those households that aren’t paying either major federal tax — includes those who are unemployed, low-income senior citizens who paid taxes during their working years and aren’t currently taxed on Social Security benefits, students, those who have disabilities or can’t work due to serious injury and people who don’t meet the income tax obligation because their wages aren’t high enough.

Often missed in the focus on those who are not currently paying income taxes is the errant assumption that all those people have never paid taxes and never will. Just because a household doesn’t owe income tax one year, doesn’t mean they won’t pay income taxes over their lifetime. For many, a career change, the loss of a job, a disability or injury, or low wages can lead to incomes too low to pay taxes.

Iowa households who aren’t paying federal income tax are still paying a large percentage of their incomes to state and local taxes. As the Iowa Policy Project reported in (2009), moderate-and low-income Iowans pay more of their income in state and local taxes than the rich do. [3] [4]

whopays2009As the graph at right shows, Iowa’s regressive tax system takes a larger share of the incomes from those who have the least, and a smaller share from those who have the ability to pay a larger percentage of their income. Make no mistake: Working Iowans pay taxes.

For more on this issue, see our two-pager, “Better understanding the 47 percent.”

Why Social Security Cuts Should Not be Part of the Deficit Discussion

Social Security has an enormous surplus, not a deficit. It is the rest of the federal government that is running deficits.

Peter Fisher
Peter Fisher

The short answer: Because Social Security is not the cause of deficits in the first place.

So then why do so many commissions and politicians insist on including Social Security “reforms” on their lists of things to do to reduce the federal deficit? Because it is a politically convenient way to force cuts in Social Security benefits onto the public agenda.

In actual fact, Social Security has an enormous surplus, not a deficit. It is the rest of the federal government that is running deficits. Social Security has been financing part of the federal deficit by investing the surplus in federal bonds.

Now let me tell you a story. One day a guy named George lent a friend $1,000 for a year. He didn’t need the money now, but he would in a year’s time to pay tuition when his daughter started college. But when the time came for his friend to pay George back, the friend said, “Geez, that’s a problem; if I have to actually pay you back the money you lent me I’ll be short, and it will be your fault, for demanding that I repay the loan. I think the fair thing is for you to cut back by not sending your daughter to college so you can afford to roll over my loan indefinitely.”

Would anyone take such an argument seriously? Of course not. Yet many people seem to take seriously the argument that it will be Social Security’s fault if at some point Social Security needs to be repaid some of the money it lent the federal government. And that the solution is to lower the standard of living of future retirees so Social Security can continue to buy federal bonds.

In a few years Social Security will be paying out more in benefits than it is collecting from payroll taxes. Then it will have to sell some of those bonds held by the Trust Fund to pay full benefits. This is precisely what the Trust Fund was set up to do: to be drawn down to ease the burden of paying baby boomer retirement benefits. But Social Security will still not be contributing to the deficit; it will simply no longer be helping to finance it.

How large the federal deficit will be will depend largely on how well we contain rising health care costs and other expenses, and whether we continue to renew tax cuts to the wealthy. Who will finance that deficit is a reasonable question. The important point is that when the Social Security Trust Fund is no longer purchasing federal bonds, and is cashing in some of the bonds it holds, the size of the national debt will not be one dollar larger because of that. The only thing that changes is who holds the debt. The Trust Fund will hold less, private investors and foreign governments will hold more.

As for the benefit-cutting deficit hounds, I am thinking about asking them if I can borrow $1,000. Just to conduct a little experiment in logical consistency.

But what have you done for me lately?

An astounding number of people have no idea what their government does for them — even as they benefit from government programs.

Source: Suzanne Mettler, "Reconstituting the Submerged State: The Challenges of Social Policy Reform in the Obama Era," via Sara Robinson, Campaign for America's Future

This NYTimes blog post is interesting enough, but what really caught my attention was a table from a recent academic political science paper that has made its way from liberal bloggers to a former Reagan economic advisor.

An astounding number of people have no idea what their government does for them, even as they benefit from government programs.


Posted by Andrew Cannon, Research Associate

Increasing the Social Security Retirement Age: An Unnecessary and Unfair Cut in Benefits

Increasing the retirement age is a substantial benefit cut for all retirees, and penalizes low wage workers disproportionately.

Peter Fisher
Peter Fisher

The President’s Fiscal Commission (the “Deficit Commission”) recently joined the chorus of public figures calling for cuts in Social Security benefits. The commission did this partly in the guise of tying increases in the retirement age to increases in longevity.

This seems at first like a reasonable approach: as we live longer, perhaps we should be expected to work longer. What is not well-understood, however, is that an increase in the full benefit retirement age is a benefit cut for all future retirees, regardless of when they retire. Furthermore, increases in longevity are likely to be felt very unequally. The net result could be lower retirement income and fewer years spent in retirement for low wage workers retiring in the latter half of this century.

The table below shows how Social security benefits depend on the age at which you retire. Under current law, those born in 1960 or later will receive full benefits (100.0 in the table) if they retire at their full retirement age of 67. Those retiring sooner receive less (for the rest of their lives) and those retiring later receive more, up to age 70.

If the full benefit retirement age is increased to 69, as the commission chairs propose (others have suggested raising it to 70), then all retirees from that point on receive about 13 percent less in benefits, every year, than they would have under current law.  Those who wanted to retire at 62 or 63 would no longer be eligible for any Social Security benefit. Those wanting to retire at 66 (the full age for the baby boomers retiring now) would get 80 percent of the full benefit instead of 93.3 percent.

Table-Social Security BenefitsThe Commission and others who argue that increased life expectancy is a major contributor to the projected shortfall in Social Security revenue in 2037 or thereabouts ignore an important trend. Life expectancy at retirement has become very unequally distributed.

Those born in 1912 who reached age 65 in 1977 could expect to live about another 15 years. For those born in 1960, it depends on how well off you are.

Those with earnings above the median can expect to live another 22 years in retirement. But those with earnings below the median have a life expectancy beyond age 65 of just 17 years.

(See Dean Baker and David Rosnick, The Impact of Income Distribution on the Length of Retirement, Center for Economic Policy Research, at http://www.cepr.net/index.php/publications/reports/impact-of-income-distribution-on-retirement-length ).

If the increasing inequality in longevity continues and the retirement age is raised to 69 or 70, a lower wage worker born in 1973 and retiring at 69 or 70 could actually expect to enjoy retirement for fewer years than his or her grandfather who retired at the full retirement age of 65 in the mid-1970s.

In actuality, no benefit cuts of any kind are needed to guarantee payment of full Social Security benefits for the rest of this century. Modest increases in the earnings threshold and the payroll tax are sufficient. Increasing the retirement age is a substantial benefit cut for all retirees, and penalizes low wage workers disproportionately.

Posted by Peter Fisher, Research Director