Social Security is a big piece of most Americans' retirement. The program, however, is running out of money and conservative politicians, including those in the new Republican-majority House of Representatives, want to cut it. In this essay, adapted from his new book Retirement Reboot: Commonsense Financial Strategies for Getting Back on Track (Agate Publishing, January), veteran financial journalist Mark Miller argues that fixing and beefing up Social Security is affordable, practical and necessary.
With a narrow and highly fractious Republican minority now in control, it is a safe bet the House of Representatives will be the site of loud debates over government spending in the coming months. As part of the fighting over things like raising the debt limit, expect to hear renewed talk about reforming Social Security.
The GOP has made clear that what they mean by reform is cutting benefits. They'll argue that we cannot afford Social Security and that the program is going bankrupt. Both arguments are false. Social Security does face a long-expected shortfall in the years ahead but closing the gap is a manageable task. And we need to do more than simply close the program's funding gap. Millions of Americans are approaching retirement confronting a devastating decline in their standard of living. The best remedy is to expand Social Security benefits, not cut them.
The most important measure of financial readiness to retire is your ability to replace working income after you retire, in other words, your ability to maintain your standard of living. Financial planners say most people will need to replace at least 70 percent of their wage income in retirement.
Anyone who has not been able to save much for retirement will depend solely on Social Security, which typically replaces only about 40 percent of pre-retirement income. Federal Reserve data indicate the median balance in a retirement account in 2019 for a working household nearing retirement (age 55-64) was just $144,000, an amount that will not last very long in retirement. And far too many have not been able to save anything at all.
In my book Retirement Reboot, Commonsense Financial Strategies for Getting Back on Track, I write about several strategies that can help, even for people getting close to retirement. But I also argue that we have the power as a society to make retirement more secure by strengthening and expanding our two most critical social insurance programs for retirement: Social Security and Medicare.
The Meaning of 'Social Insurance'
The phrase has fallen into public disuse although it is still used by policy experts. These programs are social because they bring us together as a society, with the federal government serving as plan sponsor. We call them insurance because that is what they are: Social Security and Medicare protect us from certain risks in exchange for our insurance contributions via the payroll tax. Everyone who contributes is protected. Together, we pool our risks and our responsibilities.
But over the past three decades, we've moved away from this collective approach and toward market-driven products and services offered to individuals by corporations, often wrapped up in tax incentives. Those products shift the risk to individuals. Need retirement income? Save in a 401(k) or IRA. Worried about the high cost of health care in retirement? You need a Health Savings Account. Is the potentially ruinous cost of long-term care a concern? Maybe a long-term care insurance policy is what you need. Even Medicare, a federal program, is rapidly morphing into a suite of "plans'' offered by private companies in insurance "marketplaces."
Some of these market-driven products have worked well for higher- income households, but they have failed to serve the needs of middle- and lower-income Americans. It's time for the pendulum to swing back to social insurance. We need a new American era of social insurance.
There is good reason to worry about the American retirement system today. In fact, it's not a system at all, but a patchwork of programs and products. Health care out-of-pocket costs have eroded seniors' standard of living. We have failed to protect seniors against the ruinous potential risk of a long-term care need.
Over the past four decades, the rise of a tax-deferred saving system has accrued wealth for the affluent but it has not come close to closing the gap left by the decline of traditional pensions.
Many of the changes to the retirement system included in the just signed-into-law Secure Act 2.0 will help only the wealthiest retirement savers, who need the help least, although some changes promise to expand access to savings plans for middle- and low-income households and provide incentives for them to save.
Now is the time for social insurance to do more. The COVID-19 pandemic has accelerated an already-wide income gap between the have and have-not households, a problem that persists in retirement. What's more, Gen Xers and millennials are likely to fare even worse than boomers and today's seniors when they reach retirement: the result of escalating higher education costs and staggering student debt burdens; wage stagnation; soaring housing costs and the decline of traditional defined benefit pensions.
Meanwhile, Social Security is on track to replace less pre-retirement income for today's younger workers than it will for boomers and Gen Xers. That is due, mainly, to the last major reforms to the program, which were enacted in 1983. Those changes have reduced benefits by around 19 percent, in large part due to the increase in the age when you qualify to receive 100 percent of the benefit you've earned over the course of your working life. Before the reforms, that age was 65, but for everyone born in 1960 and later, it is 67. Every year increase equates roughly to a 6.5 percent cut in benefits.
The Center for Retirement Research at Boston College calculates that an average worker who retires at age 65 would have seen 41 percent of her pre-retirement income replaced had she claimed benefits in 1995. The same person claiming benefits in 2034 will receive just 29 percent.
Expanding Social Security offers the best route to improving the financial well-being of the elderly in America. Nothing else comes close. A more robust program is also one of our best available tools for addressing income inequality and the staggering gap in racial wealth, which carries over into retirement.
Social Security is especially vital for women, who tend to outlive men but also earn less income, generating lower levels of retirement assets. It is also critical for people of color and others who have faced disadvantages in the workplace. These are groups that are less likely to have jobs with retirement benefits and they have lower earnings that leave them less able to save. And they are more likely to see interruptions in their working lives to provide care for children or disabled family members, which cuts further into their available resources in retirement.
Filling the Gap
Progressives have offered a Social Security reform agenda that features two components. The first priority is to address the program's long-term financial shortfall; the second is to expand the program so that benefits replace a much higher percentage of pre-retirement income than they do today.
The program's funding gap—if left unaddressed—could have disastrous consequences: an across-the-board benefit cut of roughly 20 percent for all workers and retirees, current and future. The number of retirees living in poverty would jump by about 40 percent, with the most dramatic cuts hitting Gen Xers and older millennials.
Here's how the program works: Social Security has two trust funds that finance retirement and disability benefits. Tax revenues go into them and benefits are paid out of them. Together the two funds had $2.85 trillion in built-up funds in 2021, but these reserve funds will shrink in the years ahead as the baby boomer retirement wave accelerates.
Absent reforms, the program's combined trust fund accounts are projected to be empty in 2035. At that point, funds coming in each year will be sufficient to pay only about 80 percent of the obligations to retirees and disabled workers. One key cause is the falling ratio of workers paying into the system compared with the number of beneficiaries. Another cause is rising income inequality. Social Security collects Federal Insurance Contributions Act (FICA) contributions only up to a certain level of wages ($160,200 in 2023), and a growing share of wages have effectively been pushed outside the taxable FICA base.
Numerous workable plans have been proposed to fully fund Social Security with tax increases and tweaks to the system—without cutting benefits.
Averting trust fund exhaustion is important, but expansion of benefits offers the best route to addressing income inequality and racial and gender gaps in retirement security. We need to boost the amount of pre-retirement income that Social Security replaces, especially for lower- and middle-income households who rely on the program most. Some progressive advocates have called for expansion of benefits to raise these replacement rates substantially.
The pushback against these proposals comes from centrist and conservative critics, who argue that spending more on Social Security is unaffordable and will drive up our already-high level of federal debt and deficit. Social Security spending today, however, accounts for just 5 percent of U.S. gross domestic product and that will rise to just 6 percent by 2100. That increase would be less than we spent on pandemic relief or on increased military spending after 9/11. And the current benefit is very modest by any standard: the average monthly benefit in 2023 will be just $1,827.
How to Pay for It
As a candidate, Joe Biden called for restoring trust fund solvency and expanding benefits modestly by adding a new tier of payroll tax contributions for people with incomes over $400,000. That would extend solvency only until 2040. A proposal by Senator Bernie Sanders would start that tier at $250,000.
More progressive Democratic reform and expansion plans would extend solvency by 75 years. Those proposals would also add new taxes for high earners, but gradually phase in higher payroll tax rates for all workers. Currently, the rate is 12.4 percent, split between employers and employees; progressives have called for gradually boosting those rates to 7.4 percent each by 2042.
While public opinion has long reflected overwhelming bipartisan opposition to cuts in Social Security benefits, reductions likely will be on the table once again this year in the GOP-controlled House.
The Republican Study Committee, a group of House conservatives, has developed a plan to push the eligibility age for full Social Security and Medicare benefits to 70. During the midterms, Republican Senators Ron Johnson and Rick Scott both suggested Social Security and Medicare should be eliminated as federal entitlement programs and instead should be approved on a regular basis by Congress.
Their Senate colleague Mitt Romney has been pushing a bill called the "Trust Act," which would establish congressional "rescue committees" to consider cuts to Social Security and Medicare. The committees' recommendations would then be fast-tracked for approval, without ability to amend, in the House and Senate. That's no more than a mechanism for pushing benefit cut legislation without the fingerprints of any individual lawmakers.
We need to advocate for changes in these programs so that they can serve us better. Now is the time to push for a more positive social insurance future, and getting it done will require sustained pressure from voters.
Politicians like to hide the ball. None of them will express open opposition to the program. Instead, you'll hear something like "I love Social Security, but it's going bankrupt, and we have to do something about it." That's a politician who wants to cut your benefits.
If we want to change the debate about social insurance, the argument should not be about the expense of these programs. It should be about values, about the kind of future we want for ourselves and generations to come.
The market-based systems that we have developed over the past four decades afford protections mainly to the affluent. Social insurance is different. We all participate and we are all covered. That was the vision of Social Security's founders. And their vision remains as relevant today as it was on August 14, 1935—the day that President Franklin Delano Roosevelt signed Social Security into law.
Mark Miller is a financial journalist and author. His latest book is Retirement Reboot: Commonsense Financial Strategies for Getting Back on Track. Follow him on Twitter @RetireRevised.
