Happy 75th Birthday Social Security. But What Now?

Filed Under (Health Care, Retirement Policy, U.S. Fiscal Policy) by Jeffrey Brown on Aug 9, 2010

This coming Saturday, August 14, marks the 75th birthday of the U.S. Social Security system. Specifically, it marks the date that President Roosevelt signed the Act into law, famously stating:

“We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family …”

The original Act specified that benefits were to be paid only to primary workers when they retired at age 65.  The Act established that benefits would be based on payroll tax contributions made during the working years.  Of course, the program has been modified many times over the years (e.g., allowing benefits to be taken at 62, expanding coverage to spouses, disabled workers, and others, dramatic increases in tax rates, changes in benefits, etc). 

Initially, benefits were paid as a lump-sum.  While Ida May Fuller is best known as the first recipient of Social Security benefits, SSA’s historian indicates that the first benefits were paid as a lump-sum, and that:

“The earliest reported applicant for a lump-sum benefit was a retired Cleveland motorman named Ernest Ackerman, who retired one day after the Social Security program began. During his one day of participation in the program, a nickel was withheld from Mr. Ackerman’s pay for Social Security, and, upon retiring, he received a lump-sum payment of 17 cents.”

It was not uncommon for early recipients to receive much more than they put in.  Indeed, it has been estimated that the net transfers to early generations of recipients is well in excess of $10 trillion.  In other words, for most of the last 75 years, the majority of Social Security recipients received far more in payments than they paid into the system (and, yes, this is true even if one accounts for inflation and implied interest on those contributions.)

How is this possible?  Actually, it is quite simple.  Social Security is not a funded pension system.  It is a “pay-as-you-go” transfer system in which the funds paid out to current beneficiaries are provided by current taxpayers.  Such a system can work quite well so long as we have wage growth and so long as the ratio of workers-to-retirees is stable or growing. 

But therein lies the crux of Social Security’s financing problems.  Unlike what many citizens believe, the true problem facing Social Security has very little to do with Congress’ penchant for “spending the Social Security surpluses” of the past 25 years.  It has far more to do with the basic financing structure of the program.

In the 1950s, there were 16 workers paying taxes to support each Social Security beneficiary.  By the time JFK was elected President, it was about 5 workers per beneficiary.  Today we have a bit more than 3 workers for each beneficiary.  In my lifetime, that will fall to 2 workers per beneficiary.

So do the math.  If you want to replace 40% of the average workers income upon retirement, and you have 16 workers supporting each retiree, you only need to collect taxes from each worker equal to 2.5% of their income (2.5 x 16 = 40).  With only 5 workers per retiree, you need to tax them at a rate of 8%.  When there are only 3.3 workers (today’s ratio), you need a tax rate of 12.1%.  (Today’s combined tax rate is about 12.4%).  As the ratio falls to 2-to-1, tax rates need to climb to 20% to keep the system in balance.

(I am simplifying a bit here, but it is remarkable how closely this very simple calculation mirrors the Social Security Trustees’ long-term financial outlook!)

So, as we celebrate the birthday of the Social Security system, we have to ask ourselves some difficult questions.  Can we afford the system we have?  If not, whose benefits do we cut? High income retirees ?  Low income retirees?  Today’s retirees?  Today’s workers?  Alternatively, whose taxes do we raise?  Everyone?  Only high income households?

Just as most members of the human race who are fortunate enough to live to age 75 begin to notice varying degrees of health declines due to aging, so too must we deal with the unhealthy economic consequences of an aging Social Security system. 

Do Some People “Choose” to Be Disabled?

Filed Under (Health Care, U.S. Fiscal Policy) by Jeffrey Brown on Aug 2, 2010

The Social Security Disability Insurance (SSDI) program is an important part of the social safety net in the U.S.  If ever there were a risk that ought to be insured, it is the possibility of experiencing a physical or mental disability that brings one’s working-life to an end.  Those of us that have loved ones who rely on the SSDI program as a major source of household income understand how important it can be to financially sustaining those who are unable to continue working.

But the program can also be criticized in many ways.  First, the backlog of cases is very high – meaning that those who are disabled must often a very long time – sometimes even years – before they receive their first check.  There has also been a tremendous rise in the SSDI program caseload, which is placing enormous financial strain on the program as well as on the Social Security Administration’s already stretched field offices.

Nearly all of these problems trace to one root cause – that there is no simple test for determining who is truly disabled, and who is just trying to pass themselves off as disabled so that they can receive monthly checks for the rest of their lives without working. 

I know, some of you are going to say, “who would possibly do that?”  Indeed, some are offended by the notion that any undeserving individual would attempt to “act” disabled when they are not. 

But let’s be honest.  If it were easy to determine who was disabled and who was not – if there were some simple and fool-proof blood test or lie-detector test – then there would be no need for a huge bureaucracy of SSA claims reps, no need for 50+ state disability determination units, no complex layers of case reconsiderations and appeals, no need for hundreds of Administrative Law Judges, and no delays in processing checks.  There would be no backlog of cases.  And, frankly, there would probably be a lot more willingness among the general public and elected officials to generously support the program. 

But it is not that easy.  When a person argues that their back pain or mental condition means that they will no longer be able to work, the law requires that Social Security determine whether the person is indeed unable to earn more than the “Substantial Gainful Activity” amount each month – not just in their prior job, but in any job.  They must also determine whether the disability is permanent and/or likely to result in their death.  No easy task.

Ultimately, however, it is an empirical question whether there are people who apply for benefits but do not truly qualify.  And economists have researched this topic for years.

One recent paper by researchers at Columbia University, the Social Security Administration and the Congressional Budget Office (http://www.columbia.edu/~vw2112/papers/dissa_vwjsjm_final.pdf) finds that “younger rejected mail applicants to the Disability Insurance (DI) program exhibit substantial labor force attachment.  Similarly, a significant fraction of rejected applicants with low-mortality impairments such as back pain and mental health problems is employed.” 

In other words, there are a lot of people who apply for SSDI benefits, thus explicitly claiming that they have a work-ending disability, who return to work after being rejected.  Pretty clear evidence that they were not actually disabled, at least according to the SSDI definition.  But they applied for benefits anyway.  Maybe they really are hurt, maybe they really think they deserve the benefits.  But the fact that they can work after being rejected indicates that they did not suffer a work-ending disability. 

And as long as it remains the case that non-disabled people apply for disability benefits, the disability determination process will continue to be difficult, complex, long and extremely frustrating for everyone involved.  Those who suffer the most are those who truly are disabled.