If We’re Going to Defend Social Security We Need to Understand It

I’ve been writing about Social Security for years, and am happy to say that, only weeks away from my 66th birthday, am also getting close to the point where I will personally become a beneficiary of the program.

First of all, let’s address to the main arguments of attack made by Social Security’s enemies. These are:

* Social Security is going to go bankrupt. This bogus argument alludes to the fact that the Social Security Trust Fund, a surplus that was deliberatelycreated over time as a result of a “reform” of the system instituted in a compromise plan developed by President Ronald Reagan and the Democratic Congress in 1983, specifically to provide funding for the looming wave of Baby Boomers who were not only more numerous than anticipated, but who were living longer than their parents. But while the reform didn’t quite provide enough funding, Social Security will not, and cannot go bust. There are several reasons for this. The first is that Social Security is not a private annuity. It is a government program, and its payouts to retirees are not and have never been primarily from the Trust Fund (which is still growing), but from current FICA tax payments being made by current workers. The truth is that even if, in the tremendously unlikely case (more on this later) that Washington doesn’t fix the shortfall by coming up with more sources of revenue, there will be enough current workers paying into the program along with their employers after 2033, when the Trust Fund is predicted to be exhausted, to pay 77% of promised benefits to retirees indefinitely into the future.

* Social Security might not be here when you retire. This scare line, popular with some financial advisors dealing with younger clients, is designed to get them to invest more money with the advisor, who of course gets to collect the management fees. But it is, in the words of one expert, Michael Kitces, a partner and director of research at Pinnacle Advisors Group in Columbia, MD, “bullshit.” As he puts it, “The idea that the Social Security program will be repealed is simply ludicrous. It may be tinkered with, they might raise the retirement age, for instance, or increase the payroll tax, but even if they did nothing at all to fix it, today’s college student would retire getting 75% of today’s benefits. And the political reality is that it could never be taken away.”

In terms of both the two above arguments — that the soon-to-retire may see their benefits cut in 2033, or that young people may never get their Social Security — the reality is that for the very same demographic reason (the Baby Boomers) that the Social Security Trust Fund predictably and as planned decades ago is being run down, there will be a huge surge in retiree and near-retiree voters who will ensure that fixes are made in the program to assure full, and probably even better benefit payments going forward. Don’t believe the lies being put out that your Social Security benefits won’t be there when you need them! It’s a political, not a financial or actuarial issue, and you simply need to make sure you are politically active in defending your benefits, and not in 2033, or whenever you retire, but now, when the program is under attack.

* Social Security is an Age War, with the Greedy Elderly Robbing their Kids. This absurd arguments actually undermines the prior one, which implies that it’s all about the Trust Fund, by making the point the benefits are actually paid by current workers, i.e. by the children and grandchildren of retirees. But it ignores the reality that those working kids and grandkids are glad to be providing their parents and grandparents with a secure income in retirement. I have never met a young person who complained that their retired parents or grandparents were getting too much money from Social Security! Nobody would want to go back to the old days when children and grandchildren had to provide for the entire cost of caring form their elders.

And don’t forget — Social Security is not just a retirement program for the elderly. It is also a disability payment program for those of any age who can no longer work because of some physical or mental impairment. Those benefits can be substantial too, and in some cases can even provide spousal benefits for a partner. The critics of the program don’t mention that, though they do also want to cut the disability program, and in fact one of the first thing this new Congress did was push for a 20% cut in Social Security disability payments — a disgusting move that is being opposed by progressives but that could still pass.

* The wealthy don’t need Social Security. It should go just to the poor. Well, actually, while it’s probably true that the truly wealthy — those who are retiring with incomes of $200,000 or more — probably don’t need those benefit checks, taking them away would do little or nothing to alleviate the burden of funding checks for the rest of us. What it would do is make higher-income earners opponents of the program, by turning it into welfare. One of the key things that has made retirement programs popular and enduring in countries around the world is that they are universal. Everyone pays into them, and everyone receives the benefits. Don’t get sucked into the trick of turning the program into a welfare program. We’ve seen what happens to those: just look at Food Stamps.

Those are the arguments being used to attack the program. Meanwhile, the fixes for the program are not being talked about. Instead, the talk on the right, and among sell-out Democrats who take their money from Wall Street (which would love to privatize retirement entirely, making everyone’s future live or die based on the performance of the stock market, which would allow the industry to such fees out of every desperate worker), is of cutting benefits, for example by skimping on annual benefit adjustments for inflation, or by raising the retirement age. Actually, there are some easy ways to raise the money to pay full benefits after 2033, and even to raise benefits (The average US Social Security benefit only replaces about a third of the income a person or couple was receiving before retirement, compared to 60-66% of final income for people who retire in most of Europe and Scandinavia.) Here are some of those solutions:

*Eliminate the cap on income subject to Social Security taxation. At present that cap is $118,000. This means that if a person earns more than $118,000, neither the worker or the employer pays any more taxes on that other income. If the cap were completely lifted, so that all income were subject to the same 12.4% tax (6.2% for the worker, 6.2% for the employer), it would raise some $150 billion annually and Social Security benefits would be fully funded fully beyond 2045, to a time when all but the most methuselan of Baby Boomers will have had gone to that great Woodstock in the sky.

*Put a small tax on all short-term stock trading. Most of the trading on the stock market these days is being done not by individuals by by computers run by the too-big-to-fail banks and by hedgefunds. Just check a graph of the market on almost any day, and you’ll typically see the day’s trading on the Dow, the S&P 500, the NASDAQ or any other index begin with an almost straight line rise or fall that often is quickly reversed by the subsequent slower trend in trading. What’s happening is that the computer traders move in and get the jump on everyone else, capture all the gain (or make puts on the losses) based upon whatever news is driving the market that day, positive or negative, and then let the rest of the suckers diddle around for the rest of the day winning and losing the old-fashioned way. It’s estimated that a 0.5% tax on high-speed trading only, which would only impact the top 1% of Americans — the very wealthiest people — would raise $300-350 billion a year in new revenue. If this were applied to the Social Security program it would not only solve projected funding issues, but allow the system to boost benefits to start to be more of a real retirement program, instead of a just a backstop and poverty-prevention program.

* Fully tax Social Security benefits paid to those earning over $200,000 a year. At present, Social Security benefits are taxes at varying rates depending upon the retiree’s income, but even for the wealthy, only 85% of the annual benefit is taxable. The other 15% is tax free. While this won’t raise a huge amount of money, it would help finance any campaign to raise benefits, and makes perfect sense.

* And finally, of course, there’s raising the FICA tax. While raising the tax, currently 6.2% for workers and 6.2% on employers for the first $118,000 of income (and 12.4% on net income for the self-employed), is not the most progressive of solutions to increasing funding for the program, Kitces notes that doing so, with just a 1.5% increase in the FICA payroll tax (keeping the current income cap) for both worker and employer, would “fund current benefits fully for the next 100 years and beyond.” Kitces notes, “This is not a significant increase for people. For a low-income person earning $300 a week, it would be $4.50. And when during the recession, the government cut the FICA tax by 2%, people didn’t even notice the difference in their checks.”

The fundamental point is, there is no real crisis, what funding shortfall is being projected for 2033 could be easily solved at little or no cost to people of low income and negligible cost to everyone, including the wealthy, and there is absolutely no threat to the system except for the manufactured one by politicians backing the greedy desires of Wall Street, the US Chamber of Commerce and the wealthiest 1% of Americans.

Now let’s get to some of the other widespread misunderstandings and points about the Social Security System that people need to understand.

First of all, nobody should start collecting Social Security benefits at age 62, 0r even at age 66, unless they have no other resources, can no longer work, and do not have a spouse who could outlive them and who has little or no Social Security to depend upon. This is because Social Security benefits grow significantly for every year that you wait to start collecting.

My poet brother called me when he turned 62, and proudly announced that he had filed for his benefits and was collecting $750 a month. I told him he was making a huge mistake, and that, as a basically healthy, fit guy, he was dooming himself to a pathetic $750 a month (plus inflation adjustment) for a life that, given our family’s history, could see him living well into his 90s and beyond. I said that if he waited until 70, even if he never worked for another day in his life for pay, he could expect to start receiving, instead of $750 a month, $1320 in constant dollars, or in other words $1320 plus whatever CPI increases were approved over the intervening 8 years. I said that if he didn’t want to work anymore at the manual labor jobs that he had been doing, he should draw that $750 a month from small sum of money he had inherited from our late parents, instead of saving it for later, and hold off on collecting his Social Security benefits until he hit 70. He agreed, and luckily, since one is allowed to buy back up to a year’s benefits and reverse a mistaken decision to start drawing Social Security, he is now waiting ‘until later to collect.

This was the right move. As Kitces, who has done research comparing potential investment returns to the guaranteed 76% boost in benefits you get for waiting until 70 to collect, puts it, Social Security is “a highly beneficial investment, with a real return that dominates TIPS, is radically superior to commercially available annuities, and even generates a real return comparable to equities but without any market risk.” He calls waiting until 70 to collect your benefits “the best long-term return money can buy.”

Obviously, if someone has no savings and can’t stand working any longer, or gets laid off, starting to collect Social Security at 62 or some other year earlier than age 70 can be a must. But at present almost half of all Americans start their benefits at 62 and only 1-2% wait until 70. Such numbers are clearly the result of widespread sheer ignorance, which must be ended.

Meanwhile there is another thing to consider, and that’s one’s spouse. If you are the largest earner in a married couple, you cannot just think about your own longevity. Your spouse, if you die, will be eligible to receive, instead of his or her own Social Security, a “survivor benefit” equal to what you would have received on your own, so you need to factor in your spouse’s longevity, if your higher benefit from waiting to collect will mean the difference between a reasonable life and a life of brutal penury for your spouse.

And don’t forget the important strategy of file-and-suspend available to couples. If you are married, and one spouse has earned significantly more over the years than the other– or even if your earnings were about equal– one spouse, or the lower-earning spouse can opt to receive what are called “spousal benefits” on the account of the other, usually higher-earner, once that spouse has reached so-called the “full retirement” age of 66 (for people born in 1954), or 67 (for those born after 1954). Ideally the spouse going for spousal benefits should be at full retirement age too for this maneuver, in order to collect the highest amount. The way it works is that one spouse, usually the higher earner, at full retirement age, files for benefits, and then asks to have those benefits suspended until age 70. That way, the benefit amount keeps rising to the maximum, but meanwhile, because the account was opened, the other spouse, if also at full retirement age, can start receiving 50% of the full-retirement benefit amount the first spouse is eligible to receive, but is leaving untouched. For example, if one spouse at 66 this year were able to start receiving $1500 a month at that age and files, but then suspends benefits, that spouse would continue not receiving benefits until reaching 70 and then would start receiving $1960 a month. Meanwhile the other spouse, if also 66, could start receiving spousal benefits of $750/month, which would continue until age 70, at which point this person could switch over to her or his own account and start receiving the maximum possible benefit, too. This maneuver can substantially improve the retirement prospects of most couples by providing them with the essentially free cash over four years that can help them both hold off until 70 to start receiving their own benefits.

Minor children can also receive Social Security benefits, either based upon a parent who is receiving disability benefits under the program, or as additional survivor benefits if a Social Security eligible parent dies. A child can receive up to half of the monthly benefit of a disabled parent, or 75% of a deceased parent’s final benefit amount. Children who are in a legal guardianship relationship of a grandparent can also receive dependent benefits on the grandparent-guardian’s account. In the case of multiple children in a family, there is a limit of 150-180% of the primary Social Security recipient’s benefit amount, so where there are three or more kids involved, the benefit amount per child will be reduced, but this is a substantial benefit that can help in such situations of family distress.

While more than a year after starting to collect Social Security benefits at any age lower than 70, you’re locked into the benefit level you got, you are not locked into your benefit if certain situations change. For example, if you opted to collect spousal benefits on your higher-earning spouse’s account, and then your spouse dies, you can switch over to receiving a survivor’s benefit, which would be at least double what you are receiving a a spousal benefit. If your own account will end up being even higher once you reach 70, you can then switch from the spousal benefit to your own account.

All in all, though it is nowhere near as generous a program as the social security schemes that exist in much of Europe and other developed countries, and though it was never intended to provide for a fully-funded retirement as those countries’ plans are, Social Security is a wonderful program that has substantially reduced poverty among America’s elderly (once a desperate problem in the US), as well as substantially easing the burden on children and grandchildren to provide for their elders, but make no mistake — its enemies are hell-bent on wrecking it as much as they can before the mass of Baby Boomers wake up to the threat and rise en masse to its defense.

Now is the moment for a new progressive movement of Americans of all ages built around defending and expanding this signal accomplishment of the New Deal.

Democrats failed to make defending and expanding Social Security a cornerstone of their congressional campaign last year, and as a result, they got trounced, and handed Congress to the Republicans. This disaster cannot be allowed to be repeated in 2016. No one should be supported for Congress in the next election who does not stand foursquare for a progressive funding increase for Social Security designed not only to guarantee full benefits for all for as far as can be predicted, but to improve those benefits so Americans no longer will have to scrimp and save during their working lives, only to see their savings destroyed by a corrupted financial market, and sucked dry by the fee-greedy investment and insurance industry and its agents.