This is the season when we hear calls to cut Social Security. That's because of the annual trustees report on the system's financial condition.
Last week, the trustees reported that Social Security can pay all of its projected obligations through about 2034. To keep faith with today's workers and tomorrow's retirees, Social Security will need additional funds, though the shortfall is entirely manageable if we act in the next few years.
The report prompted the usual rightwing blarney about cutting benefits or privatizing Social Security, as well as familiar bleatings from billionaire deficit-hawks about the need to delay the retirement age for people far less fortunate.
One part of the system, the disability insurance fund, needs additional resources by 2016 -- and of course Republicans are calling for cuts in benefits to some of society's most needy people.
The context for this debate is:
- The collapse of traditional private pension plans in favor of totally inadequate 401-k plans. Traditional pensions, which typically paid about 70 percent of your best earnings, once covered about one worker in two. Now they cover just one in about twelve.
- The diversion of 401-k savings into the pockets of middlemen and fund-managers.
- Unlike Social Security, which has extremely low administrative expenses, private fees can reduce actual retirement savings by about a third. With the trend to have fund managers use exchange-traded finds and mutual funds, retirees pay two or even three layers of fees.
- The casualization of work, with the result that on-demand workers in the so-called sharing economy have no retirement savings plans whatever, not even 401-k's. Their dismal earnings are insufficient to live on, much less to sock away savings.
- The Republican assault on public employee plans. Public employee pension funds have been one bright spot in a collapsing retirement system. Republicans say they are too good for government employees. In a few states like Illinois, opportunistic governors of both parties have sometimes underfunded them, making their finances someone else's problem. Even so, the problem is concentrated to a relatively small number of states. Most state pension plans are adequately funded -- but under political attack.
Bottom line: the total inadequacy of retirement savings for most Americans. Half of elderly Americans have no retirement plan at all-other than Social Security. The typical worker nearing retirement age with a 401k plan has funds sufficient for only a few years of retirement.
The one part of the system that is reliable and cost-effective is Social Security. The problem is that Social Security pensions are inadequate because of the collapse of the rest of the system.
There was a time during the postwar boom, when America's retirement system was said to be a three-legged stool. One leg was pensions -- but that system is collapsing. The second leg was ordinary savings. With wages and salaries rising, workers could afford to save. But earnings are flat or declining for most workers, and households are borrowing rather than saving.
The third leg was Social Security -- it provided (and still provides) only the most basic income. But for most people today, Social Security is all there is.
Two-thirds of elderly people depend on Social Security for more than half of their total income. For one-third Social Security provides at least 90 percent of total income. Benefits are very modest -- averaging just $1,300 a month.
That puts us near the bottom in a comparison with other wealthy countries. The average national pension benefit in 34 OECD countries is about 60 percent of median worker earnings. In the U.S., our national pension system, Social Security, provides just 40 percent. And due to previously legislated cuts, that will gradually fall to just 32 percent.
Social Security needs to be expanded. Though its projected shortfall after the mid-2030s gets a lot of attention and prompts calls for cuts, the 75-year deficit is only about one percent of GDP. That could easily be made up, by raising the cap on income subject to the Social Security tax, or adding new revenues from, say, a tiny tax on financial transactions.
Another way to improve the solvency of the system would be to increase wages, since Social Security is financed by taxes on payrolls. Had earnings kept pace with productivity, as was the case before the Reagan era, Social Security would be solvent indefinitely with no further adjustments.
Ideally, we should move to a partly funded system, as Canada does. The Canadian system is partly pay-as-you-go, like ours. But Canada's national pension system collects sufficient revenues to underwrite an expanding pool of invested capital -- which in turn produces income just like a true pension system. Over time, returns on assets, now totaling over $264 billion, provide an increasing share of the system's payouts.
Social Security demonstrates that public systems are often better than their private counterparts -- more transparency, fewer middlemen, less opportunism. The problem is that government-managed systems are only as good as their stewards, and one of our two major parties hates government. The only cure is stronger democracy, so that citizens who value good programs vote to elect leaders pledged to defend them.
Robert Kuttner is co-editor of The American Prospect and a visiting professor at Brandeis University's Heller School. His latest book is Debtors' Prison: The Politics of Austerity Versus Possibility.
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