Celebrating Social Security: The Workers' Program

As we return to work after Labor Day weekend, it is important to recognize all that Social Security does for American workers. The best way to do that is to make sure workers know the facts about the program.

Social Security is America’s largest and most important pension, disability and life insurance program. Every American worker who contributes to Social Security earns the right to receive the program’s benefits when they retire, becomes disabled or die. In 2011 alone, Social Security is projected to provide benefits of $727.3 billion to 54 million Americans. [1] An additional 157 million working Americans [1] contribute to Social Security who will receive promised benefits for themselves and their families, in the event of disability, death or old age.

The payroll tax contributions that fund Social Security have been essential to the program’s strength over its 76 years of existence. They are what make Social Security a workers’ pension and insurance plan, rather than a government program. Instead of financing Social Security through taxes collected for the general fund, workers earn their benefits with deductions from every paycheck that are, in effect, insurance premiums. These contributions are held in trust, separate from the general budget, for the sole purpose of paying future benefits to workers who have paid into the program.

President Franklin Delano Roosevelt, who created Social Security in 1935, understood the importance of financing Social Security exclusively through workers’ contributions and the interest they earn. When pressed about the impact of payroll taxes on the economy, FDR said [2]:

“We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.”

Social Security is more important for American workers than ever. As the availability and value of private pension plans have declined precipitously, Social Security is, for many Americans, the only remaining stable source of retirement income. Defined benefit pension plans [3] now cover only 20 percent of private sector workers, down nearly 100 percent from the 1980 level of 38 percent. As opposed to defined benefit pension plans, defined contribution plans, the most common of which is the 401(k), are subject to fluctuations in the market, and have, as a result, been devastated by the recent financial crisis. In 2008 alone, Americans’ private pension and 401(k) plans lost 37 percent of their value. [4]

Still, Social Security remains under relentless attack from the same conservatives and Beltway elites who have helped make private sector pension plans disappear. Nowadays, Social Security’s detractors rely on claims that the program is broke to convince the public that major benefit cuts are inevitable. As Maya MacGuineas, President of the Committee for a Responsible Federal Budget—a center-right advocacy group funded by private equity billionaire Peter G. Peterson—put it: [5] “We need some combination of benefit cuts and tax increases” to make Social Security solvent. MacGuineas' statement is not only untrue; it also artificially narrows debate about the program. If workers are warned by experts like MacGuineas that benefit cuts are “necessary,” they may withdraw their opposition [6] in advance.

A great way to celebrate Labor Day is to learn the facts about Social Security, so workers are not forced into false choices about the future of the program. Contrary to MacGuineas’ claim, there any number of ways Social Security can pay all of its promised benefits through the next 75 years without cutting workers’ benefits at all. Given the tenuous state of retirement benefits in the private sector, and the modest nature of current benefits (they average just $13,000 a year), avoiding benefit cuts should be the highest priority.

Many Social Security advocates—and indeed, the vast majority [7] of Americans—would like to scrap the cap on earnings subject to payroll taxes, so millionaires and billionaires pay into Social Security on all of their wages, not just the $106,800 they are currently taxed on. That alone could close more than 100 percent [8] of the program’s shortfall.

In the spirit of Labor Day, though, it is worth considering a plan that takes a more orthodox, payroll tax centered-approach. In their “Northwest Plan,” [9] Bruce Webb and Dale Coberly, Social Security experts and bloggers, propose implementing a trigger that would immediately increase payroll taxes if the program were unable to pay full benefits within ten years time. The provision, adopted in increments needed to make the program solvent over a ten-year period, would result in a payroll tax increase of about $2 a week for a median household. The trigger has the added advantage of linking revenue increases to the program’s financial projections, which vary greatly based on the state of the economy.

But, one might ask, wouldn’t scrapping the cap be best for workers, by making the rich pick up the tab? Not according to Webb and Coberly. The Northwest Plan is meant to preserve Social Security’s character as a worker-financed, worker-owned program. The payroll tax increase can be seen as an increase in workers’ insurance premiums, as opposed to a “tax increase” in the traditional sense. It enhances workers’ legally-sanctioned stake in the program, instead of shifting that stake on to the wealthy. Their plan follows FDR’s rationale that payroll taxes grant workers a “legal, moral and political right” to collect their Social Security benefits.

The tactic also gives workers more of a stake in forcing employers to share economic gains. If workers do not like paying a modestly larger amount into the program, then Webb advises them to “Demand better Real Wages.” Easier said than done, of course. But Webb’s advice is consistent with his philosophy of empowering workers to shape their own destinies, rather than relying on elites to change things for them.

By contrast, scrapping the cap entirely could dramatically increase Social Security’s role in the re-distribution of wealth, and undermine the program’s conservative ethos. Currently, Social Security strikes a delicate balance between equity and progressivity, using a flat tax rate and capped tax base to fund benefits that replace a larger share of pre-retirement earnings for low- and middle-income workers. One might argue that it has thrived in a conservative country like America, because it only re-distributes wealth modestly. While scrapping the cap has its merits, forcing rich people to subsidize the program more heavily could disrupt this delicate balance and undermine political support for the program.

Progressives understand this when it comes to means testing. They should keep it in mind when discussing scrapping the cap as well.

Views expressed are the author's own, and do not reflect the views of Social Security Works or the Strengthen Social Security Campaign.