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Social Security or grave robbing?

Published 11:00pm Wednesday, July 25, 2012

Poverty rates in the United States have reached their highest levels in 40 years, driven by our slow economic recovery and high unemployment rates. This fact has renewed debate on how best to help the poor. Besides promoting economic growth, of course, the working poor could be helped by common-sense reforms for some of our government’s social welfare programs. Among those most ripe for change is Old Age and Survivors Insurance, also known as Social Security.

Social Security is said to provide a safety net for the poor, and the program has the appearance of being a progressive, redistributive system: up to a cutoff limit of $110,100, Social Security taxes are a flat percent of wages, with 6.2 percent of salary paid by our employer and 4.2 percent (normally 6.2 percent) paid by the employee. Since people with higher earnings pay more into the Social Security system, it appears to shift money from high earners to low earners.

However, many features of Social Security hurt poor and low-skilled workers. For starters, low-skilled workers enter the workforce at a younger age and thus pay into Social Security earlier and for eight to ten years longer than their peers who go to college and graduate school. However, since their payments are poured into a common fund rather than being put in individual accounts, low-skilled workers contributing to Social Security don’t benefit from the miracle of compound interest, which causes private investments to grow.

On average, poor and low-skilled workers are also hurt by Social Security through demographic realities. According to the Centers for Disease Control, a ten-year life-expectancy gap exists which favors college grads over Americans with no high school diploma. Living longer means collecting more benefits relative to others, so educated, wealthy individuals tend to draw more Social Security benefits on average.

On the flip side of the coin, a person with lower levels of education might fail to make it to retirement age, die, and miss out on the retirement benefits he paid into the system. For example, black men, who have shorter average lifespans than other demographic groups, end up paying more into Social Security than they get out, losing somewhere around one percent per year on their contributions. Further, since Social Security contributions go into a common fund and are not seen as belonging to the individuals who make them, the money contributed by a worker who dies before retirement cannot be passed along to heirs of the worker’s choosing; instead, the money is used to subsidize payments to retirees fortunate enough to live longer.

With our knowledge of Social Security’s perverse redistributive effects in mind, consider what raising the retirement age for Social Security means for poor and less educated workers: it will disproportionately hurt them, so we are fixing the system on their backs.

Rather than raising the retirement age, there are other ways to fix Social Security and protect the poor. One option would be to allow for personal retirement accounts, which operate like traditional defined-contribution retirement plans. Payments made to such funds could, quite rightly, be passed along to heirs. The personal retirement account model has been successfully implemented in countries like Chile.

If personal retirement accounts aren’t politically viable, “means testing” Social Security is another option. Social Security in its current form is not pro-poor and instead slushes money from everyone to everyone. A “means tested” system would provide more Social Security benefits to the poor and less benefits to people like Warren Buffet, who have the financial means to take care of themselves in retirement. The restructuring would, as a whole, lead to significant savings for taxpayers and return Social Security to a model of social insurance, rather than an entitlement system for anyone lucky enough to live a long life.

Raising taxes to cover Social Security’s $10 trillion in unfunded liabilities would harm our already weak economy, and it would fail to fix the real problem with the system: it disproportionately benefits people who least need it. In this time of rising poverty, we should implement Social Security reforms that protect the working poor and limit liabilities for all taxpayers.

 

Scott Beaulier is Executive Director of the Manuel H. Johnson Center for Political Economy at Troy University.

 

  1. JoeTheEconomist

    “However, many features of Social Security hurt poor and low-skilled workers. For starters, low-skilled workers enter the workforce at a younger age ”

    They also receive the EITC which is an offset for the high cost of payroll taxes.

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  2. JoeTheEconomist

    “One option would be to allow for personal retirement accounts, which operate like traditional defined-contribution retirement plans. Payments made to such funds could, quite rightly, be passed along to heirs. The personal retirement account model has been successfully implemented in countries like Chile.”

    If you divert cash away from Social Security how do you expect to pay legacy benefits?

    When you say countries like Chile, what other countries are you talking about. Chile is the one that is frequently mentioned, but where are the others.

    Chile’s plan covers 66% of the workforce where as Social Security covers 94%. The irony here is that you want to help the low-wage worker by modeling a plan that largely excludes the low-wage workers.

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  3. JoeTheEconomist

    “Social Security in its current form is not pro-poor and instead slushes money from everyone to everyone. A “means tested” system would provide more Social Security benefits to the poor and less benefits to people like Warren Buffet, ”

    Social Security is already means tested with a test that reaches up to 1/3rd of retirees.

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