Social Security faces a large and well-known financing shortfall, now being worsened by the COVID-induced economic downturn. However, this looming financial challenge is not the only reason Social Security reform is needed. The program is long overdue for progressive reforms to bolster its effectiveness as income insurance.
Funded by payroll tax contributions, Social Security provides benefits when workers leave paid employment due to old age or disability. It’s designed to be progressive; while rich and poor alike earn benefits, contributions by lower-income workers earn a greater return. Though this mostly works as intended, quirks in the program’s benefit formulas threaten its capacity to fairly serve future generations.
Reflections on the career of Justice Ruth Bader Ginsburg remind us how longstanding assumptions about gender roles led to federal law’s drawing restrictive distinctions between the sexes. For example, Social Security’s “nonworking spouse” benefit was originally a “wife’s insurance” benefit, paid only on the basis of a husband’s earnings. The benefit is now available to spouses regardless of sex, but its design still reflects outdated assumptions about family structure.
The nonworking spouse benefit aims to recognize the value of stay-at-home work, including raising children, but there are problems with its design. It ignores that modern parenting is done by two-earner couples, single parents and others. It’s also regressive, while penalizing women for entering paid employment. A working mother earning the federal minimum wage earns fewer benefits over a career of payroll tax contributions than are paid to a childless, stay-at-home spouse who never contributed payroll taxes, married to an upper-income partner. These regressive transfers divert resources away from Social Security’s purpose of providing a safety net for the most vulnerable.
The intended progressivity of Social Security’s benefit structure is also undercut by an archaic design reflecting former data limitations. The formula is based on one’s average career earnings, making no distinction between a worker earning $40,000 a year for 30 years, and someone earning twice as much annually but working half as often (i.e., $80,000 a year for 15 years). The highest returns go to those with the fewest years of work as much as to those with the lowest incomes.
Consider participants whom the Social Security Administration deems to be “very low” income workers with 20 years of covered earnings. Over two-thirds of these workers are likely to have income beyond the earnings that Social Security tracks, either because they will receive benefits based on a family member’s earnings, are in a state/local retirement plan or are immigrants with earnings abroad. Trying to protect the most vulnerable simply by having Social Security’s current benefit formula be progressive has proved inefficient. A more precise approach would enable workers to accrue benefits with each year of work, as recommended in a 2016 Bipartisan Policy Center commission report.
Because Social Security is progressive on balance, there is a reflexive tendency to assume that the larger the program is, the more it serves vulnerable participants. This instinct is wrong. Social Security is a zero-sum game at best; nobody can gain income through it without someone else losing at least as much. As program costs grow, its inefficiencies and inequities are magnified.
Older Americans have seen much larger income gains than younger Americans in recent years. The biggest gainers from income inequality are more likely in the future to be Social Security beneficiaries than wage earners. This means that slowing outlay growth, rather than raising taxes, offers the most progressive solutions.
Social Security aggressively redistributes income from younger generations to older ones. Under current projections, future workers will lose net income through Social Security exceeding 3 percent of their lifetime earnings. Social Security cannot provide a meaningful safety net if it makes entire generations significantly poorer than they’d otherwise be. This can only be ameliorated if today’s high-income participants contribute to closing its shortfall. Alternatively, the worst possible choice would be to expand the program to give today’s participants additional benefits they didn’t fund.
Enhancing Social Security’s progressivity can increase its effectiveness, but how this is done matters greatly. Making the current benefit formula more generous on the lower-income end, without other reforms, would worsen its shortfall, reduce employment, and misallocate program resources. One provision of Rep. John Larson’s (D-Conn.) Social Security 2100 Act would promisingly base minimum benefit protections on a worker’s number of earning years. However, this approach can only work well as part of comprehensive reforms to moderate cost growth.
For too long, Social Security has gone unreformed because of a false choice between protecting participants and making the hard choices necessary to maintain its solvency. The more attractive reality is that Social Security can be made more progressive, more equitable and sounder financially, if we scale back regressive income transfers and better target precious program resources on households of greatest need.
Charles Blahous holds the J. Fish and Lillian F. Smith Chair at the Mercatus Center at George Mason University and is a former public trustee for Social Security and Medicare; his latest study, “An Analytical Framework for Strengthening Social Security,” is available at Mercatus.org.
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