Every Spring, a renewed round of anguished wails arises from Washington, when the annual Social Security Trustees’ report is issued. That report contains a wealth of information about the finances of the Social Security system, along with forecasts extending for decades, purporting to tell us whether the system is fiscally sustainable.
Although each year’s report is hundreds of pages long, and contains summaries of dozens of economic forecasts and accounting analyses, the only number that anyone seems to care about is the date upon which the system’s trust funds will supposedly be depleted. This year, that has again been estimated to occur in 2033. Because that date is now exactly twenty years in the future, the deficit scolds and panic-mongers have seized upon the annual report as supposed proof that all good women and men must line up behind them, demanding “responsible” actions from Congress to fix a supposedly broken and unfair system.
One of the primary targets of this annually choreographed display of budgetary angst is, of course, younger generations of Americans. Through a decades-long campaign designed to discourage and frighten post-Baby Boomers, people born after 1965 have now become—quite unnecessarily—convinced that Social Security is a bad deal for them. This impression has been conveyed quite deliberately and cynically.
There are, in fact, reasons for younger people to worry about their economic futures. As it happens, however, the Social Security system is not one of the problems that young people should be worrying about. Contrary to what many have come to believe, Social Security will be there for them when they retire—but only if young people are not fooled into dismantling a system that they, even more than the generations that have preceded them, will desperately need when they become old.
Social Security could, however, be even healthier. And the same is true of the economy as a whole. Younger Americans have a legitimate complaint that their economic futures have been needlessly diminished. The question is: Who should younger people blame for this state of affairs?
It turns out that younger Americans’ legitimate worries can be traced to one basic cause. Although many think that it is the Baby Boomers fault, the problem is actually not generational, but distributional. In the simplest terms, it is “the 1%,” not the Baby Boomers, who are at fault. If young people are inclined to draw battle lines, therefore, they should invoke the specter of “class warfare,” not that of “generational warfare.”
The Basics of the Social Security Trustees’ Report: Mostly Good News, Portrayed as Bad News
This year’s annual report of the Social Security trustees is little changed from last year’s. As I noted earlier, news reports trumpeted the date on which the systems’ trust funds might be depleted, which again this year is 2033. As usual, however, the media generally ignored the existence of two alternative forecasts: One, the “high-cost” scenario, forecasts depletion of the trust funds in 2027, while the “low-cost” scenario shows depletion decades later, roughly in 2070.
If young people are wondering whether they should be worried, therefore, they should first note that all three of these forecasts use very conservative assumptions. Although the low-cost scenario is the least conservative, it is hardly pie-in-the-sky. If things start to go even mildly in the right direction, it is easy to see the life of the trust funds being extended for decades.
Much more importantly, young people need to understand that there is an enormous difference between “the balance of the trust funds reaching zero” and “Social Security not being there for us in the future.” As the trustees’ reports state clearly every year—but somehow the media-fueled brouhaha manages to downplay without fail—the system will continue to pay benefits even after the trust funds’ balances reach zero. The system will continue to collect payroll taxes, and those taxes will (as they always have) support benefit payments owed to eligible retirees.
In the current report, the “mid-range” forecast indicates that the system would be able to pay 77 percent of the full scheduled benefits for recipients after 2033. While that 23 percent reduction is significant (and, as I will demonstrate below, unnecessary), young people should understand that they will still receive more than three-fourths of their scheduled benefits, even if the trust funds’ balances do reach zero in 2033. In the vernacular, “That ain’t nuthin’!”
But how much is it, really, in dollars? The picture is even better than it looks, because all of these forecasts are based on the government’s legal obligations to pay younger people more in benefits than current retirees will receive, even after adjusting for inflation. For example, a middle-class Baby Boomer who retires this year with full benefits, after working in a job with a modest income of $40,000 per year, will receive about $1,200 per month, or $14,400 per year, in Social Security retirement benefits. That is hardly a princely sum, but it is the difference between living out one’s golden years in dignity or poverty.
By contrast, an American worker who was born in 1980 who retires with full benefits in 2047, and who also earned a salary, at the end of her career, of $40,000, is scheduled to receive benefits of about $1525 per month, or $18,300 annually. Again, these numbers are all adjusted for inflation. (Interested readers might be interested in experimenting with the calculators on the Social Security system’s website.)
What if the trust funds are depleted prior to 2047? Seventy-seven percent of $18,300 is almost $14,100. That means that the post-Baby Boomer would receive—even after the Social Security system has supposedly gone “bankrupt”—almost 98% of what a current retiree will receive over the remainder of his life, adjusted for inflation.
Again, we should hope that it will not be necessary to reduce scheduled Social Security benefits, in 2033 or at any other time. These calculations do, however, offer a strong antidote to the general level of hysteria regarding the Social Security system’s supposedly “going broke.”
The Baby Boom and Its Aftermath: Why Younger People Should Not View This as a Generational Conflict
Based on the estimates discussed above, it is clear that younger Americans should not imagine that the Baby Boomers have “stolen” young people’s Social Security taxes. It hardly makes sense to call a system broken, when it can still pay benefits in the future that are virtually unchanged from current levels. The modest benefits paid to current retirees are not bankrupting the system, nor do they line up with the image of the “greedy geezers” that politicians and pundits invoke in their anti-Social Security screeds.
Even so, younger people are also quite rightly concerned with their prospects during the years before they retire. They face an immediate jobs environment that remains bleak, and those with jobs know that working is no longer the path to upward mobility that it was in the first few decades after World War II.
The stagnation in wages, however, has been a problem for over three decades. Starting almost exactly when Ronald Reagan’s presidency began, wages and salaries have (with the brief exception of a few years during the Clinton Administration) famously stalled, barely keeping pace with inflation. For the first time that anyone can remember, parents are wondering if their children will end up with lower living standards than their own.
Baby Boomers came into the work force in the largest numbers in the late 1970’s and early 1980’s. Therefore, their working lives, too, have already been strongly harmed by the stratification of incomes in the United States. Younger people who are quite understandably upset about their own job prospects are naturally tempted to blame their parents. (Every generation thinks its parents ruined everything, it seems.) But if the Baby Boomers had really stolen from their children and grandchildren, we should be able to see the evidence of the riches to which the Boomers helped themselves. That is simply not what happened.
Instead, what we have seen is the return of the Gilded Age, with a tiny slice of the population pulling away from the rest. Although it has become common to refer to this elite group as “the 1%,” the most extreme gains have been concentrated in even fewer hands. No matter how one slices the data, however, it is not Baby Boomers that have done well. The vast majority of Boomers has—like the generations following them—been forced to run just to stand still. The super-wealthy have enjoyed enormous gains, while everyone else saw their situations stagnate.
The Real Cause of Social Security’s Financial Shortfalls: Inadequate Wages for Baby Boomers and Their Children
The life facing post-Boomers before they retire is, therefore, rather daunting. Looking for someone to blame is an understandable response; but that blame is, as noted above, properly laid at the feet of those (no matter their age) who have appropriated ever more of the economic spoils of society to themselves.
Even if we were to focus solely on the financial prospects of Social Security, however, it turns out that the possible harms facing younger generations, with respect to their retirement years, are also due to income polarization, not generational theft.
Any potential shortfall in revenues to pay for future Social Security benefits is, after all, directly tied to the failure of wages to rise over time. Because Social Security taxes are levied against income from working—and not income from investments in stocks, bonds, hedge funds, and other speculative activities—the stagnation in wages is a direct cause of the relatively worrisome long-term forecasts regarding Social Security.
This has led us to a stark reality: If wages had continued to rise at a rate that was even half of the extent to which they had risen before 1980, Social Security’s long-term health would be a non-issue today.
Again, the economic prospects for younger generations, both during their working lives and in retirement, are not as good as they should be. This should not be addressed, however, by blaming the vast majority of Baby Boomers, who are themselves also the victims of the very policies and trends that are hurting their offspring. It should be an occasion for renewed efforts to mitigate income inequality.
What to Do About Income Inequality: Do Not Use Social Security’s Contrived “Crisis” to Make Things Worse
At this point, a younger American might say: “Well, I can now see that this isn’t a generational matter, but rather a distributional issue. But what can we do?” Although income inequality is an enormously complicated issue, we can at least say that the Social Security system should not be used to add insult to injury.
Imagine that we find ourselves in 2033, with the trust funds reaching a balance of zero. (Again, this seems unlikely, but we can think this through even based on needlessly pessimistic assumptions.) Congress, at that point, could decide to simply allow benefits to fall to 77% of their scheduled levels, as described above. But what else might Congress do?
One possibility would be to increase payroll taxes, to prevent retirees’ benefits from falling. Unless wages begin to rise substantially in the next twenty years, however, that would simply shift the burden of wage stagnation from then-retired workers to then-active workers. (And if wages do begin to rise before then, Social Security’s finances will improve significantly.)
Another possibility would be for Congress to raise the amount of earnings that are subject to payroll taxes. As some readers might know, the first $113,700 of labor earnings is subject to taxation in 2013, with every dollar above that level remaining untaxed by the Social Security system. Simple forecasts have long suggested that eliminating that cap could eliminate any long-term shortfall in Social Security’s financing.
The vast majority of Americans earn far less than $113,700, which would mean that lifting the Social Security cap would be progressive in a meaningful sense. As noted above, however, it is not even the top 1% of earners who have really made out like bandits over the course of the last generation. Incomes of the “poorest” part of the top 1% are more than $500,000 this year, whereas the top one-tenth of one percent starts at more than two million dollars in annual income.
Therefore, although taxing people with incomes above $113,700 would be better than cutting Social Security benefits for future retirees, or increasing taxes on current and future workers with lower incomes, there is an even better option. Congress could supplement Social Security’s finances by directly taxing the non-labor incomes of only those people who have truly done well for the past thirty or more years.
I should note that this solution is actually very much a half-measure, for those who are truly concerned about income stratification. After all, this proposal would merely divert a tiny fraction of the income received by the top earners in the country, in order to allow current and future workers to retire with full Social Security benefits. If we were willing to go further, and thus to allow workers again to earn enough to finance Social Security through payroll taxes alone, then that would be wonderful. At the very least, however, we should divert enough money from the winners of the economic lottery to support the retirement of workers whose wages have been depressed throughout their lifetimes.
Younger people are genuinely worried about their futures. The problems that face them, however, are continuations of problems that have already greatly harmed the vast majority of the Baby Boom generation. Non-wealthy Americans of all generations should work together, not at cross-purposes, to make sure that Social Security is fully funded in the future—with its finances supplemented by the people whose vast fortunes have created the problems that we all now face.