Framed: Social Security

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This frame supports continuing Social Security as the basic retirement plan for all citizens of the United States.

Contents

The Problem

Social Security is one of the keystones of the New Deal and a pillar of progressive legislation. This makes tearing it down one of the prime targets of conservative politics. Conversely, preserving and defending it is critical to the progressive legacy.

Many politicians and pundits tell the public that Social Security is running out of money. By repeating this, they seek to make the public believe cutbacks in Social Security benefits (in the amount received, the age of eligibility, or both) are required. However, the models on which this “factoid” rest are questionable. In addition, any shortfall is due to low wages and lack of jobs. Social Security should be strengthened by addressing these more fundamental problems.

Conservatives have waged an ideological battle against Social Security since it was created. This allows them to draw adherents to their cause and slowly build popular support against the program. Attacking Social Security helps them undermine other progressive initiatives.

It isn’t necessary to give up Social Security. But progressive must fight for it. To do that, we have to be very clear on why it is necessary, beneficial, and justified.

Realigning the Frame

Social Security addresses a fundamental inequity of capitalism: Employers in general have so much economic power that workers are not always able to fund their own retirements. By playing off the law of supply and demand, where there are many workers for each available job, employers can exploit workers to keep any them from earning and retaining enough to survive in their retirement. Only by bargaining collectively can workers ensure enough income to satisfy their basic needs after the age when they can no longer reasonably work.

The purpose of Social Security is to provide income security at the minimum required level for retirement. It does that by forcing employers to pay money in addition to regularly negotiated wages. This additional money is then transferred to retired workers. Since employers must then pay not just enough to employ workers but also enough to maintain those that have retired, the total amount is greater than would be determined by market forces alone.

This is why company owners want to stop Social Security. It cuts into their profits. If they could exploit workers by only paying them enough to keep them alive while they were actually working, then they would make more money. However, to stop paying workers as soon as they stop working and let them die is immoral. The collective bargaining that the U.S. government has done on behalf of workers prevents this exploitation and allows workers to live with dignity after their working years end.

Social Security should not be considered part of the public sector. Many conservative commentators complain that government is too large and then include Social Security and Medicare as part of the federal budget. However, Social Security is part of the private sector. It is just a requirement that employers pay enough that their employees survive retirement. This is not the same as, say, military expenditures. Money spent on the military is not available to be spent in the private sector. However, money paid in Social Security taxes is transferred to seniors who then spend it for private goods. Military spending shifts spending from private goods (“butter”) to public goods (“guns”). It changes the guns to butter ratio. Social Security spending does not. It does not reduce the number of private sector products produced or sold.

The payroll taxes used to pay for Social Security have been attacked as regressive. However, payroll taxes are really taxes on employers. As long as workers are being paid enough that they can meet their minimum requirements out of their take-home pay, the regressive nature of payroll taxes is not a problem for workers. In any case, this problem would be mitigated by extending payroll taxes to all levels of income. The current cut off is a far larger factor in making these taxes-for-the-poor than the fact that they do not have progressive rates.

Social Security and Privatized Retirement Accounts

Conservatives and Republicans are attempting to replace Social Security with private accounts. The effort to create 401(k) plans and Individual Retirement Accounts (IRAs) was the first initiative on this. They have now turned to pushing private retirement accounts as a substitute for Social Security, telling voters that individuals can earn a lot more money for their retirement if they are allowed to invest this money on their own rather than through a government plan. At the same time, these defined contribution plans do not take on the obligation to provide any given amount of return. This would free the government from an obligation, but at the risk of not providing adequate funding for retirement. Since the goal of Social Security is to provide income security for retirement, a defined contribution plan is not sufficient. Social Security is a defined benefits plan, which is intended to guarantee adequate funds for retirement.

It is possible to earn a lot more money through private investing than through the Social Security system (or to lose it all). However, the goal of retirement funding is not to maximize returns, as you would with traditional investing. The purpose is to provide a secure income for retirement. No plan will work if there is a possibility that it will provide no income when the person has retired. You don’t have the option to go back and invest differently if you reach, say, 75, and your plan doesn’t provide any income.

In addition, the premise of Social Security is that it is a collective system. This is what allows it to force employers to pay money for retirement when the wage market doesn’t demand it. If you create individual plans, individuals no longer have a stake in a common plan. The strategy of offering individual plans is to try to break apart the collective, and thus weaken it so that individual workers can be exploited. Destroying collective bargaining is a key goal of conservatives because it increases the profits of the rich (through exploiting workers).

See Framed: PRAs (Personal Retirement Accounts) for more information.

Social Security and the Baby Boomers

One of the premises of the attack on Social Security is that the large number of people reaching retirement age in the early twenty-first century will require the relatively smaller number of working age people to pay too much to fund Social Security. While it is true that demographic trends (especially the reduced family sizes most first-world societies want) and technology trends (which allow people to live longer, healthier lives) mean the number of retirees has steadily increased while the number of workers has declined, the more important factor in funding Social Security is the relative lack of earnings. This comes about because:

  • Real wages have declined, and
  • The number of employed has declined.

Meanwhile, productivity has risen. This has resulted in a shift of income from the workers to employers (generally, from the poor to the rich). Since the rich are exempted from paying into the Social Security fund beyond a certain cutoff point, this has caused a decline of Social Security funding relative to economic capability. If the amount paid into the Social Security fund had kept pace with productivity increases, rather than declining with the general decline in real wages, Social Security would have plenty of funds to pay its obligations. Viewed in this way, any shortfall in funding is due to the reluctance of employers to pay a living wage.

In addition, contributions were increased in 1983 in order to fund the relative increase in retirement age workers due to the baby boom. These workers have already paid an increased share of wages to fund their retirement. It is simply unfair to these workers to now decrease their benefits at the very point they are due to receive them.

Examples of Attacks on Social Security

Don’t use.

“It is solvent until 2037. Workers your age who are contributing to Social Security every day, we concurrently tell you when your time comes to collect, the money will not be there according to all projections we have today.” – Lawrence O'Donnell on Countdown, MSNBC.

In response, see Lawrence O'Donnell Hits a Social Security Foul Tip by BruceMcF, which notes that economic models by the OASDI Trustees forecast a variety of possible outcomes, including projections that the fund will never be exhausted.

Realigning the Frame

To push back on conservative attacks we need to stop talking about how demographics and longer life expectancy are causing problems and concentrate on how the decline in earnings is weakening our retirement security. We should also stop talking about funding Social Security as a problem and start talking about how to make the system better. We also need to stop talking about the dollars to be taxed or received and start talking about why workers should have a secured income during retirement. We should stop defending entitlements in the abstract and remind people that these systems are designed to prevent economic exploitation.

Social Security is not a kind of socialism, as it is often portrayed. “Socialism is an economic and political theory advocating public or common ownership and cooperative management of the means of production and allocation of resources.” (Source: Wikipedia.) Social Security has nothing to do with the means of production and only tangentially with allocation of resources. Rather, Social Security is an example of successful collective bargaining by workers using the power of the federal government to counter the illegitimate economic power of employers.

The power of employers to set wages lower than the living wage is an illegitimate power. This power has no moral basis and it is not related to economic value. Employers do not create additional value in the economy because they have the power to drive down wages. It only allows employers to make higher profits, but does not add to efficiency or productivity.

It is legitimate for workers to use democratic processes to set conditions for wages that require employers to pay enough for all workers to survive until their natural death. This is an appropriate use of governmental power to protect citizens from conditions that would cause their death or suffering. Setting such conditions is a form of collective bargaining that uses governmental power to prevent those with economic power from exploiting workers.

Also, the power of the federal government to define work conditions, including setting minimum conditions for employment, is a constitutional power, deriving from the Commerce Clause. Employment is part of interstate commerce because:

  • Any offer of employment extends across state lines (especially in an era of Internet job boards).
  • The terms of any employment affects the employment market in the U.S. as a whole.
  • Employers pay in dollars, a national currency.
  • Money paid to employees affects the economy as it is spent.

In addition, the U.S. has an obligation to defend the rights of its citizens. The right to not be exploited through economic leverage is an inherent right of citizens, and is protected by the Ninth Amendment. The core job of government is to protect its citizens, and protecting them from economic exploitation is a legitimate job for the government.

Securing Retirement

When anyone talks about Social Security, we should be talking about “securing retirement”. What does this new term, securing retirement, mean? Securing retirement means providing a system that will guarantee enough income for each citizen when they retire that they will be able to pay for their basic needs. To do that, we need to strengthen Social Security and Medicare. The key to strengthening these systems is to increase earnings in the U.S., since these programs are funded out of payroll taxes (which are levied on earnings due to employment). That means reversing the decline in wages and the decline in the number of wealth-producing jobs. (However, see below for the impact of wages and jobs.) Steps needed to increase earnings include:

  • An international minimum wage that is a substantial and growing portion of our domestic minimum wage.
  • A strong industrial policy.
  • Support for unions and for the domestic minimum wage.
  • Elimination of the cap on FICA contributions based on income level.

In addition, the Social Security Fund could be strengthened if employers were required to give up some of the increased profits from productivity gains. The employer contribution to payroll taxes (but not the employee contribution) should be raised by at least 50% to account for some of these gains.

Impact of Wages and Jobs

Social Security is funded by payroll taxes. For every extra dollar of income an additional 10.6 cents goes into the Social Security Fund (minus 2 cents temporarily for 2011). When a dollar is not earned, that depletes the fund by this much, but it also can decrease the future liability of the fund as well. The relationship between these is not one-to-one because:

  • Once a person qualifies for benefits, they get at least the minimum benefits.
  • A person can only receive benefits up to a maximum amount.
  • Additional dollars earned now do not go to current retirement funding, but rather are used to purchase T-bills for later benefits. (We are currently overpaying. We pay more than it takes to fund retirement due to the 1983 fix for baby boomers.)

Also, the amount of earnings today can potentially influence the models used to determine what the Social Security trustees believe they will be paying in the future. In addition, those current earnings are used by proponents and opponents of Social Security in the political debate. Declining wages also mean the government collects less income tax, which makes it harder for federal revenues to pay back money borrowed from the Social Security fund (and to otherwise balance the federal budget).

A decline in wages today from what they would be under better conditions may not necessarily make it harder to fund the corresponding obligations in the future because it also reduces those obligations. However, the fact that all the current money would be earning interest until those obligations come due suggests that it will create a disproportionate shortfall.

What the current reduced earnings inarguably do is reduce the total funds available in the future for funding retirement for American workers.

Retirement Funding Goals

What are the goals of funding retirement? One goal should be that minimum economic needs are met. If the system does not work so that the vast majority of people have their basic requirements met during retirement, then it does not meet the standards of a first-world civilization.

This means that everyone entering retirement should have sufficient income to provide for the necessities of life, including essential medical care. This is the non-negotiable requirement of the system. No proposal that does not provide at least this should be considered for replacing the current system.

The goal should be to make the system better. There is plenty of money with which to do this, since productivity has risen over the years. Alternatively, anything that attempts to reduce outlays to make them fit within reduced earnings fails to solve the underlying problem—a lack of jobs and reductions in wages for those jobs.

Publicizing the Frame

Say, “I want to strengthen the retirement system in the U.S. To do that, we need to raise wages and increase the number of wealth-producing jobs, so that more money goes into the Social Security fund.”

Say, “No, the baby boomers are not a problem. That problem was fixed in 1983 when Reagan signed the Social Security Amendments.”

Say, “I’m not interested in any plan that won’t guarantee enough for everyone to retire on. Making more money in the market won’t help if that money isn’t there when I retire.”

Say, “No, Social Security and Medicare are not government spending. They just require that employers pay enough that seniors can afford to retire. Social Security is part of the private sector.”

Say, “The capitalist retirement plan is: (1) Don’t retire, but (2) If you do retire, die quickly!”

Say, “Employers have been getting a free ride on better and better productivity. That extra money should be going into strengthening retirement, not extra profits. I’d like to see employers kick in more out of the money they’ve gotten from better productivity over the last several years.”

Important Facts About Social Security

Social Security is funded by a payroll tax. This tax is currently limited to earnings on the first part of income, up to an annual limit. Both the employee and the employer pay the same rate, currently 5.3% for retirement benefits. Additional payroll taxes are collected to fund disability benefits and Medicare Hospital Insurance. The current total payroll taxes, taking both employee and employer contributions into account, are 15.3%, but only the 10.6% that goes to OASI really goes to retirement. That is to say that out of every dollar earned through employment 10.6 cents goes into the Social Security OASI fund.

Funding for Social Security was largely fixed during the Reagan Administration by the Social Security Amendments of 1983, which were designed to put aside money for the baby boomers by investing it in special non-marketable Treasury securities. This allowed the government to avoid having the Social Security Fund run out of money at that point. Regardless of the accounting, the federal government must still produce the funds as the baby boomers actually retire. This can only be done in an economic sense by having currently employed workers pay for what the system pays out to retirees. As the ratio of the number of employed to the number of retired changes, the tax rate must change to keep incomes for those retired above the level necessary for life. Since productivity in the U.S. has increased even as the number of employed has declined, the money is available to pay increased rates to cover essential income for the retired.

The Republican tax changes, passed in December 2010, reduce the employee portion of the payroll tax by 2% and promise to fill this by transferring money from the general fund to the Social Security Fund to make up the difference. This change puts more pressure on Congress to reduce government spending or borrow the money for this change. It also may affect the way that models will show how quickly the fund may start running a deficit.

Statistical Support for Social Security

The following statistics support the statements made above.

Declining Real Wages

In 1978, the year in which industrial capacity peaked in the U.S., the average private production and non-supervisory weekly wage was $320.58. In 2009 (the last year for which full figures are available at this time) the comparable wage was $294.32, a decline of about 8%. Wages also declined from 1964 by about 6%. Wages here are given in constant 1982-1984 dollars, and are the average of all months of seasonally adjusted numbers.

Source: Working Life, based on U.S. Bureau of Labor Statistics.

Declining Minimum Wage

The spending power of the minimum wage dropped over 30% between 1978 and 2007, and about 27% between 1972 and 2007. It dropped almost 39% since it peaked in 1968.

Source: Info Please.
Source: Wikipedia--Federal Minimum Wage Chart.

Declining Employment Rate

The unemployment rate has risen since industrial employment peaked in 1978. In the 30 years prior to the peak, average annual unemployment was 5.17%. In the 30 years since then (up to 2008) the average has been 6.07%, or 0.9% higher.

The unemployment rate for December 2010 is 9.8% out of about 154 million in the workforce. The 0.9% difference amounts to about 1.4 million unemployed persons. At the current OASI rates of 10.6%, this cost the Social Security Fund a minimum of $2.2 billion in 2010 (based on those people working for at least the federal minimum wage of $7.25/hour).

Source: U.S. Bureau of Labor Statistics.
Source: BLS Employment Situation Summary.

Increased Productivity

According to Thomas Geoghegan in Were You Born on the Wrong Continent? “From 1973 to 2005, productivity in America went up approximately 55 percent.” This is probably a conservative number. Actual numbers from the Bureau of Labor Statistics show a rise of about 80% over the period 1973 to 2005. The output per hour index for 1973 is 55.654 and the index for 2005 is 100. (The index is normalized to 2005.)

According to the BLS, productivity has risen every year since the 1940s, and has risen at the following rates in recent years (productivity change in the nonfarm business sector, last updated on August 10, 2010):

            Average annual percent change
1973-1979	1.1
1979-1990	1.4
1990-2000	2.1
2000-2007	2.6
2007-2009	2.3

Prior to 1973, productivity growth corresponded closely with rising wages. However, since then, productivity has risen at a higher rate than wages. This is partly because less of the money generated has gone to workers and more to employers. However, the wealthy have also retained more money because taxes for the rich have gone down. As Richard Freeman writes in America Works, “Most of the productivity growth of the past twenty to thirty years ended up in the pockets of a small number of super-rich Americans.” (Page 38)

Source: BLS
Source: America Works: Critical Thoughts on the Exceptional U.S. Labor Market, 2007, Russell Sage Foundation, New York.

Other Resources to Draw On

What Progressives Value and Want

Sustainability. Social Security prevents workers from being systematically driven into poverty. Keeping retired persons in the mainstream of society allows them to make their unique and extensive experience available to us all, including their long term view. Fairness. It is also unfair to pay workers only enough to survive while they are working. Common decency demands that we provide workers with a living wage. Consistency. Also, we protect citizens from invasion and flood. It would be inconsistent not to protect them against malicious economic forces that would cut them off when they are the most vulnerable.

Notes

Remember: Productivity has risen steadily since the 1970s. But that productivity has not translated into increased wages, and the number of available jobs has declined. These factors have weakened financial support for Social Security and should be fixed by increasing the payroll taxes paid by employers, who have benefited disproportionately from increased productivity.

The way to strengthen retirement is to manage globalization so that the number of jobs and the wages they pay increase. This will naturally bring more money into the Social Security Fund. Social Security funding comes down to this: well-paying jobs.

Additional notes:

The Republican idea that Social Security and Medicare will need to be cut back is part of their ongoing attack on government spending. This is in furtherance of their goal of increasing the power and the wealth of the elite. However, the natural result of cutting back is to have nothing. If we continue to cut back, eventually we will have no economy. This focus on cutting costs leads eventually to no income, because it is always necessary to spend money to make money.

The alternative is “top-line thinking”. What is required to create more income? If you concentrate on the top-line then you increase the economy. What needs to be done to expand earnings?

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