Demystifying the Social Security “Crisis”And Three Steps to Avert Any Crisis in Social Security Social Security (in this paper, Social Security refers to the Old-Age, Survivors, and Disability Insurance program, OASDI) is a pillar of economic security for Americans. About 90 percent of the U.S. population aged 65 or older receives Social Security benefits. Social Security is a significant component of the income of America’s elderly; for 65 percent of them, it accounts for at least half of total income.
Social Security remains a healthy program with a surplus of funds: currently, income into the program in the form of payroll taxes exceeds benefits paid out. The chief challenge that the Social Security program faces is demographic. As the share of the elderly in the U.S. population grows, and as that of the non-elderly shrinks, it is expected that there will be fewer working people paying Social Security taxes per person receiving Social Security income. The turning point is projected to be reached in 2017 when, with only 2.7 workers paying Social Security taxes for every one person collecting Social Security, taxes paid into the Social Security system will fall short of the income scheduled to be paid out to retirees. Currently, with 3.3 workers paying into the system for each recipient, the Social Security program is in surplus.
The impending crisis can be quite easily averted by strengthening the economic dynamism of America. Social Security can be preserved as a pillar of economic security by thinking out of the box. I propose the following three steps to avert any crisis in the Social Security system. These recommendations will not raise the age of eligibility to receive Social Security, nor do they involve any reduction in benefits. (In fact, I recommend that the age for eligibility be restored to 65 years for all Americans; this age is currently 67 for those born in 1960 or later).
1. Support changes in the workplace and the organization of business to make it easier for people in their 60s, 70s and even 80s to work. This way, an elderly person can be collecting Social Security benefits at the same time that she is making contributions to the Social Security program through payroll taxes. Supporting flexible work arrangements, telecommuting, working from home, part-time work, and self-employment will make it easier for the elderly to work. Technology, the legal system (including taxation), and social attitudes should be supportive of the working elderly. Many seniors want to work, but they don’t want to be forced to work; and they definitely don’t want the government to force them to delay collecting their hard-earned Social Security benefits.
2. Invest in education, job-training, and entrepreneurship development for all workers, especially younger workers, in order to obtain higher earnings for American workers. Create a supportive environment for setting up and running businesses. All this will, in addition to raising the economic well-being of these workers, increase revenue-inflow into the Social Security program significantly. Reverse the present direction in the treatment of minority youth—invest in their education, and in creating healthy communities instead of investing in the prison system and criminalizing young people.
3. Adopt an age/work-conscious immigration policy. Currently, even without such a policy, immigration has helped reduce the pace of aging of America. A conscious policy that makes it easier for young workers with marketable job skills to enter and live in the U.S. will alter the age-composition of our population, and increase the number of workers per retiree. Quantitative simulations of these recommendations will provide estimates of their precise financial impact on the Social Security system. A nation that creates economic opportunities, rewards productive work, and facilitates the engagement in productive work by its citizens should never have to worry about providing basic economic security to its elderly citizens. Reducing benefits or raising the age of eligibility should never be on the table.
My recommendations do not involve any increase in taxes. I propose that changes in tax policy should be dealt with separately under ‘rationalizing the tax system in America.’ There should be a convening on the rationalization of the tax system that would consider several meritorious proposals such as adoption of a flat tax, elimination of mortgage interest deductions for income tax, and eliminating the income-cap for payroll taxes. I support eliminating the income-cap of $97,500 for payroll taxes because such a cap is regressive. No other tax provides exemptions for higher incomes. I support preserving the dollar benefits for higher income persons at the current rates, but do not support increasing these benefits in response to them paying payroll taxes on their full income (after the elimination of the income-cap). It might be useful to consider a revenue-neutral version of the elimination of the income-cap; that is, a version under which the elimination is accompanied with a reduction in payroll tax rates for everyone, such that the total payroll taxes collected is the same as under the current system. This will result in considerable tax relief for a great majority of American workers. Thus, Social Security can be saved for generations within a dynamic and rational economic system.
Dr. Nandinee K. Kutty is an economist and an economic policy consultant. She works in the Washington, D.C. area. She can be contacted at email@example.com.