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Social Security: Now More Than Ever
There's a sort of vague notion out there that because Social Security is a very old program and lots of things have changed since it was started, it's therefore obsolete and ought to be replaced by something more modern and high-tech. The collapse of the United Airlines defined benefit pension plan shows how wrong this is. Social Security was originated in the 1930s, but the program as we know it really dates to the 1950s when it was greatly expanded to cover many more sorts of workers. Arguably, it was a bit inappropriate to its historical moment. People were craving security in the wake of depression and war, but they didn't really need it. Workers in the fifties (men, at any rate), could be reasonably assured that if they were willing to show up to work on time everyday and do as they were told, they would do allright. Not everyone would strike it rich, of course, but everyone would have a job and, unless they fucked up, would keep that job. Their wages would rise. Their employer would provide them with a pension when they retired. Under the circumstances, an additional super-secure retirement program wasn't really the country's most pressing need and a program design to create universal stock ownership might have been a better idea.
Flash forward to the early 21st century, and all of that has changed. Relatively few workers have defined benefit pensions anymore. Starting very soon, pretty much nobody will. Most of the plans that exist are in trouble, and nobody's starting up new ones. And there's some good reason for this, it's not merely a case of corporate managers trying to screw people over (though sometimes it's that, too), it's a question of what is and isn't appropriate for an economy where lots of people work for smallish companies and almost everyone switches jobs a lot. On top of that, lots of people lose jobs through no fault of their own. You show up on time. You do your job. But your job gets eliminated anyway and you need to look for a new one. There are upsides to all of this, but life has become much more insecure.
Trying to turn back time and return to the economy of the 1950s is neither wise nor realistic. But preserving -- and expanding -- universal social insurance is. Social Security: Now more than ever.
May 11, 2005 | Permalink
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Don't forget Delta:
Reuters (05.10.05):
"The Atlanta-based carrier, which has managed to narrowly avoid bankruptcy over the past year, said a need to bolster pension costs -- underfunded by $5.3 billion -- over the next three years would also worsen its cash problems."
"Delta last week said it faces about $3.1 billion in pension costs between 2006 and 2008. But a bill under consideration by the U.S. Senate would stretch out employee pension payments over 25 years, and could ease the airline's liabilities."
Delta Air struggle raises bankruptcy fearAs to Delta, Jim Corridore of Standard & Poor thinks that "'(u)nless they sell at least one of their regional carriers, they will be forced to file for bankruptcy within the next six months'". Mr. Corridore continued: "'And if they did sell a regional carrier, it still wouldn't change their overall situation. It would just buy them more time out of bankruptcy court.'"
Then there's Detroit:
Detroit News (04.12.05):
"In a Wall Street Journal interview, PBGC officials last week estimated the auto sector's unfunded pension liability at $45 billion to $50 billion."
U.S. pension guarantees are at risk
Gee, what's that? Another $55 billion of unfunded pensions lurking out there?
Not to mention what happened to the folks at Polaroid.
Posted by: knobboy | May 11, 2005 2:04:58 PM
And, as Matt has pointed out, SS is not just for old folks:
My 13 year-old son receives $750 per month in SS Suvivorship payments, as my ex-wife died this last Christmas. I'm now a single parent with a decent but low-paying job and another kid in college. As she and I had both paid into SS for 30 years (and I'm 49 in July), we've paid our dues, and my son has a much better shot at that College education, as well as health care, etc...
Posted by: Mr. Bill | May 11, 2005 2:10:40 PM
I've always found those arguments that because Social Security was enacted in the time of wall-mounted rotary telephones, Model Ts, and radios, it's ill-equipped to deal with the challenges of the modern world. Does anyone think we should scrap the Constitution because it comes from the time of powdered wigs, men wearing stockings, and quill pens?
Posted by: clarkent | May 11, 2005 2:12:46 PM
I should add that I find those arguments to be weak. I don't just find them... ;)
Posted by: clarkent | May 11, 2005 2:13:46 PM
Funny how Alex Tabarrock takes the diametrically opposite tack.
Posted by: praktike | May 11, 2005 2:14:42 PM
I agree.
And what's more, the 'now more than ever' argument suggests INCREASING the average level of SS payment.
Posted by: otto | May 11, 2005 2:17:39 PM
> I've always found those arguments that because Social
> Security was enacted in the time of wall-mounted rotary
> telephones, Model Ts, and radios, it's ill-equipped to
> deal with the challenges of the modern world to be weak.
The funny thing is, the people making those arguments are quite likely to have a 1903 Springfield rifle in their vast arsenals - a rifle which was designed in 1903 but is still prized by championship shooters today. Because despite improvements in manufacturing, its design has never been improved.
Cranky
Posted by: Cranky Observer | May 11, 2005 2:21:37 PM
Matthew has it exactly backwards. Back in the day, the elderly were the most likely to live in poverty. Hence they needed some type of safety net to provide them with a modest income in old age.
Today, OTOH, the elderly are the LEAST likely to live in poverty. The young a much more likely to live in poverty. Accordingly, we must provide a system that helps those elderly who need it most. Young people in poverty shouldn't have to pay for ever larger increases in Bill Gates' (sorry, wrong celeb: PARIS HILTON'S) Social Security.
Posted by: Al | May 11, 2005 2:29:20 PM
Al,
A couple of questions. I've seen you use the point about the elderly now being least likely to be in poverty a bunch in comments here. First, could you please give me the source of the claim. I'm not necessarily doubtful of its truth, I'd just like to have a look at the info for myself. Second, assuming its true, why is it the case? More particularly, the obvious question is, have you controlled for Social Security? And what about controlling for precisely the sorts of things Matt is talking about disappearing, from which presumably the elderly are still benefiting more than the future elderly will? (In this latter vein, I'm not clear on how you think Matt has it exactly backwards.) Third, assuming it's true, it seems like you're viewing these matters as a kind of zero sum game -- if so, why? That is, why does addressing youth poverty entail gutting Social Security? Why couldn't we keep Social Security and address poverty among the young?
Posted by: Jeff L. | May 11, 2005 2:48:10 PM
Matt takes a roseate view of the 50s. In reality, this was a time when our cities were emptied and discarded as useless husks by the financial and business elites. Bad decisons by the nation's railroads pushed them towards a bankruptcy orgy while the national debt was rolled over to build the interstates, and the worker kept paying taxes just as though WW II had never ended. The (temporary?) end of the coal-steam economy meant unemployment for many; the increasing mechanization of agiculture hastened the depopulation of the rural lands.
And, undoubtedly, there was an awareness that the improvements for businesses during the 30s had not translated into a better situation for the nation as a whole. GM and Ford weathered the depression well, but a general improvement in our prospects didn't happen until the mild redistribution of SS reached those most in need.
Posted by: serial catowner | May 11, 2005 2:55:30 PM
Does anyone think we should scrap the Constitution because it comes from the time of powdered wigs, men wearing stockings, and quill pens?
Those same people would argue that the Constitution has withstood the test of time and nothing in it should EVER be questioned.
Posted by: Adrock | May 11, 2005 3:05:35 PM
First, could you please give me the source of the claim.
See the tables giving poverty rates for "Under 18", "18-64", and "65 and Over" here.
assuming its true, why is it the case? More particularly, the obvious question is, have you controlled for Social Security?
No, I assume that Social Security is part of the reason for the difference.
it seems like you're viewing these matters as a kind of zero sum game -- if so, why?
That's what a pay-as-you-go system is: today's younger workers pay for the today's elderly's benefits. To the extent that tomorrow's elderly's benefits are increased in real terms (and, with wage indexing, they are), tomorrow's younger workers have to pay for them.
Posted by: Al | May 11, 2005 3:16:25 PM
Re: Today, OTOH, the elderly are the LEAST likely to live in poverty.
Ah, but todays elderly were those fairly secure workers of the past. They are living off the fruits of that bygone era. Many of them were able to save siginificant amounts of money because they had good-paying jobs and were not laid off (or just temporarily laid of). Many of them also enjoy old-fashioned pensions, and some even have company paid supplementary health insurance.
Theses thinsg will not be true of us when we retire in 30 years. That's the argument for at least keeping one leg of the tottering retirement system stable.
Posted by: JonF | May 11, 2005 3:42:37 PM
Hey Matt, this isn't your answer to how society should respond to corporations dumping their obligations to their workers is it? Or maybe it is.
Posted by: jon stanley | May 11, 2005 3:45:00 PM
Matt, there were layoffs and corporate bankruptcies in the fifties too. Remember Studebaker? Pennsylvania Central Railroad? Allthose inner city factories before the lofts became residential? I thought not.
Posted by: old guy | May 11, 2005 4:41:53 PM
Al,
Thanks for the answers. I took just a real quick look at the data, so I'm sure there's a lot more digging to do. But the first thing is, just to be clear, those with the highest poverty rates are not by and large paying into and for the Social Security benefits of today's elderly, right? That is, the rates between 18-64 year olds and 65+ year olds are pretty close. Second, JonF made one point that I was trying to make that you did not address. Third, the point of my zero sum game comment was that you seem to be addressing Social Security in a strange, and unjustifiable, isolation, as though the only way we could address youth poverty was by gutting Social Security which provides some guaranteed level of well-being for the elderly (along with others, of course, including some groups of under-18s). Especially if you think Social Security is part of the reason for success in mitigating elderly poverty, why not leave that in place and find other ways to address youth poverty? Fourth and finally, am I right to assume that you must be especially unhappy with Bush's entire approach, since whatever his actual plan turns out to be, he is clear that he is keeping things as they are for those who are now or will soon be elderly and cutting back on the future benefits of those who are younger. See Matt today in Tapped (http://www.prospect.org/weblog/archives/2005/05/index.html#006426) on this, and last week or so when he was on TPM: http://www.talkingpointsmemo.com/archives/week_2005_05_01.php#005589. As Matt says today, "Bush isn't proposing cutting benefits on today's old people to give money to today's children. He's proposing cutting benefits on tomorrow's old people (i.e., today's kids) in order to give more money to today's rich people."
Posted by: Jeff L. | May 11, 2005 4:43:56 PM
Al,
You make a good point that in our society, the elderly are the least likely to live in poverty. Why? Because their generation were the ones to benefit from the economic windfall of the post-WWII era. Today's elderly, of course, are also the beneficiaries of a robust private and public welfare programs.
You seem to harbor ill-will against today's elderly because they don't live in poverty. I see it as a triumph and would like to change the system so that fewer people across the board live in poverty. Thus, instead of bloating the medicare plan (or gutting it, per the wishes of some republicans), Democrats would like to see it made more efficient and would like to expand health care to all Americans.
Bush's privatization scheme would keep the benefits for today's elderly and gut the program for future generations. Hence, it is today's young Americans (who, as you point out, are disproportionately impoverished) who will not have the social security program to alleviate their poverty when they become tomorrow's elderly. To make things worse, today's youth would be expected to bear the costs of social security privatization's immense transition costs. Future generations are already slated to pay the price for Bush's fiscal profligacy, so I don't think they need any extra burdens...in fact, they will be in desperate need of a little security...
As you can see, Al, your point only strengthens Matt's argument that social security is needed NOW, more than ever!
Posted by: seank | May 11, 2005 4:57:10 PM
If we're so concerned for the (young) poor and worried about the (elderly) wealthy, then why don't we rescind Bush's tax cuts for the wealthy and spend the money on programs that help the poor?
Posted by: Oh Snap! | May 11, 2005 9:08:26 PM
You're right on target, Matt. The collapse of private industry pensions shows how necessary Social Security is to the US.
Posted by: Deborah White | May 11, 2005 11:46:01 PM
Hi people,
I usually hang out over at dalythoughts (Gerry seems to like you Matt), but I couldn't resist posting here on my favorite topic of Social Security reform. You're making an apples and oranges comparison when refering to the United pension plan. That's a "defined benefit" plan, which is nothing even CLOSE to a private account or 401K. The employees and retirees have no control over these plans. If anything the defined benefit plans are a private version of the current SS system and a 401K is more like a PSA.
As a proponent of PSAs, I've never heard (or used) the argument that SS is just an outmoded idea akin to the model T. I think that's a straw man argument.
Mr. Bill, I'm sorry that your son lost his mother too early. It's hard at any age, but 13 is just terrible. But that argument in favor of the current system is wrong on several levels.
1. The survivors benefits, SSI and disability benefits programs are separate from the retirement benefits programs, though they are all administered by the SSA. I don't believe any of the current PSA proposals make any changes to anything but retirement programs.
2. If your ex wife had worked for 30 years, made an average of $40K/year and put 4% into a PSA at an average return of 7% (pretty low rate over that time span). She would have had $163,606.81
in that PSA account. Assuming she designated your son as the beneficiary, he would have received that amount as a lump sum, plus the survivor benefit. Again at 7% that's a payment of $954/month without touching the principal.
3. The survivor benefit ends at age 18 (or 21 if a student). If your son was a few years older, he would have received nothing for all those years his mother paid in. (I was just a little too old at 19 when my father died).
seank,
You seem to think Social Security is keeping people out of poverty. That's just wrong. The MAXIMUM retirement benefit under the current system is $1,939/mo. ($23,268/year). That's IF you've been paying the maximum into the system for the past 10 years. A more common payment for someone making $40K would be $1,430/month $17,160/year (using the SSA's calculator). This is a poverty level payment. With PSA's, the same person could reasonable expect to receive $24,640/year from the private account alone. The PSA proposals all include a reduced benefit in addition to the private account payments. Sen. Reids calculator says this person would receive an additional "reduced benefit" of $7,286 for a total of $31,926/year or about twice the poverty level.
Which plan is going to keep more people out of poverty?
Posted by: Brian H | May 12, 2005 9:27:43 AM
Oops, under current law DI recipitants flip over to OAS when they become eligible and OAS stands for Old Age/Survivors all of which drains all content from the following:
" The survivors benefits, SSI and disability benefits programs are separate from the retirement benefits programs, though they are all administered by the SSA. I don't believe any of the current PSA proposals make any changes to anything but retirement programs."
A little less talking from on high and a little more attention to detail would be helpful here. Under the current proposals people drawing income from DI are suddenly exposed to the reduced benefits under OAS once they hit retirement age. And there are two types of Survivors: minor children and spouses. Perhaps these proposals protect the kids but spousal benefits are directly tied to retirement and both are paid from the same pool of funds.
OAS and DI are reported separately in the Reports but all the numbers generally cited are from the combined OASDI tables and figures, any attempt to draw a line between the two programs is just to try to blur the issue.
Posted by: Bruce Webb | May 12, 2005 10:24:23 AM
Bruce,
Yes, when you reach retirement age, your benefits will be changed to be called "retirement" benefits, but the amounts do not change. From the SSA's FAQ pages:
http://ssa-custhelp.ssa.gov/cgi-bin/ssa.cfg/php/enduser/std_adp.php?p_faqid=160&p_created=955633366&p_sid=B8KTFeFh&p_lva=&p_sp=cF9zcmNoPTEmcF9zb3J0X2J5PSZwX2dyaWRzb3J0PSZwX3Jvd19jbnQ9OSZwX3Byb2RzPSZwX2NhdHM9MTA1LDg4JnBfcHY9JnBfY3Y9Mi44OCZwX3NlYXJjaF90eXBlPWFuc3dlcnMuc2VhcmNoX25sJnBfcGFnZT0xJnBfc2VhcmNoX3RleHQ9cmV0aXJlbWVudA**&p_li=&p_topview=1
No bluring of the issue here.
Posted by: Brian H | May 12, 2005 10:36:10 AM
You're making an apples and oranges comparison when refering to the United pension plan. That's a "defined benefit" plan, which is nothing even CLOSE to a private account or 401K. The employees and retirees have no control over these plans. If anything the defined benefit plans are a private version of the current SS system and a 401K is more like a PSA.
Well, the entire point of MY's post and many of the comments is precisely that Social Security is a guaranteed benefit plan which is all that's left as private pension plans collapse, and the fact that it's not like a 401(k) is a good thing. But I'm sure that despite this display of lack of reading comprehension, your post will become intelligent.
put 4% into a PSA at an average return of 7% (pretty low rate over that time span).
See, some of us know what "average" means, and worry about those who get below-average returns. Yet financial wizards such as yourself blather about how everyone can get at least average returns. Normally this occurs on late-night TV.
Some of us, as well as honest economists, have also noted that average market returns of 7% would require economic productivity to be much higher than the intermediate-cost forecast of the Social Security trustees, in which case we can stick with fully-funded Social Security plus IRAs plus 401(k)s. You might want to look up those last two; it seems that there are already mechanisms to invest in the stock market for retirement. Who knew?
With PSA's, the same person could reasonable expect to receive $24,640/year from the private account alone.
Does "reasonable" require that average 7% rate of return? See above.
The PSA proposals all include a reduced benefit in addition to the private account payments.
More specifically, the President has just proposed reduced benefits independent of any PSAs. The primary PSA proposal bandied about has an additional clawback of 3% + inflation. "Here's some money to invest in the stock market. We're loaning it to you at 3% + inflation. Make sure you beat that benchmark, or fuck you, loser. Oh, did we mention that we haven't done anything about skyrocketing Medicare premiums, which come out of your benefit, too? Well, fuck you, loser."
Which plan is going to keep more people out of poverty?
I think I'd be inclined towards the existing benefit over a Fairyland plan that ignores the actual phaseout proposals and where everyone's performance is above average, but that's because I don't live in Fairyland. Your mileage may vary.
I couldn't resist posting here on my favorite topic of Social Security reform.
Well, don't give up your day job, unless it involves lying to people about how certain investment portfolios are guaranteed to yield high rates of return. Then you should give it up, because that's just wrong.
Posted by: mds | May 12, 2005 10:41:58 AM
mds,
The average annual return of the S&P 500 over any 20 year period you can name is at least 11% (even picking the worst years of the great depression). A 7% return is a low end expectation if you are just plunking money into an S&P 500 mutual fund. You can get 7% in a safe long term bond (we are talking about a 40+ year working life span so long term is reasonable).
"in which case we can stick with fully-funded Social Security plus IRAs plus 401(k)s. You might want to look up those last two; it seems that there are already mechanisms to invest in the stock market for retirement. Who knew?"
Most people arguing against PSAs try to include worries about the poor because the poor can't afford to pay into PSA. Then try to avoid PSA discussions by saying they should be separate or by refering to 401Ks, IRAs and the like. But they forget that these same poor people can't affort to put money into an IRA or a 401K because the government is taking 12.4% of their income to put into a ponzi scheme. Who knew?
"Which plan is going to keep more people out of poverty?
I think I'd be inclined towards the existing benefit over a Fairyland plan that ignores the actual phaseout proposals and where everyone's performance is above average, but that's because I don't live in Fairyland. Your mileage may vary."
So you'd really prefer a guaranteed POVERTY LEVEL payment over an extreamly likely TWICE POVERTY level payment?
Yes, I used a 7% return rate. But if you prefer we can try it with 5% (or is 5% so extrodinary that you can't imagine making that kind of return in your fairyland? The current treasury I-bond rate is 4.8% in my fairyland.)
At 5% a person making $40/year over 40 years will have $204,310.94 in a PSA. At 5% that will generate $10,215.54/year without touching the principal. (Buying an anuity at this rate would provide a much higher payment, but I don't want to be accused "artificially" inflating the numbers.) Add in Sen. Reid's estimate of $7286 from the reduced Social Security plan and you get $17,501.55 which still beats the amount you can expect under the current plan (though not by much).
Posted by: Brian H | May 12, 2005 11:24:15 AM
"Well, the entire point of MY's post and many of the comments is precisely that Social Security is a guaranteed benefit plan which is all that's left as private pension plans collapse, and the fact that it's not like a 401(k) is a good thing. But I'm sure that despite this display of lack of reading comprehension, your post will become intelligent."
Yes, I understood the point of Matt's post. I disagree with his analysis. The defined benefit programs are currently starting to suffer from the same problem that the Social Security system has. The number of recipients is increasing at a rate faster than the contribution rate. The analogies that fit are Defined Benefit Plan -> Social Security and 401K or Cash Account Pension Plan -> PSAs.
I also disagree with your statement that SS is "all that's left as private pension plans collapse". There is a government run pension benefit guarantee program that will take over the payments to the retirees. This payment may or may not be reduced depending upon the assets of the current plan (which the government will seize) and the plan's payment obligations. In most cases the payments will get cut, but not eliminated.
Posted by: Brian H | May 12, 2005 11:51:35 AM
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