August 13, 2008

Social Security Turns 73

Posted at 3:32 PM by John Quinterno

This week marks the 73rd anniversary of the establishment of Social Security. And for a 73-year-old, Social Security remains in surprisingly good shape despite the passage of time and repeated attempts to undermine America's signature social insurance program.

At its core, Social Security is a universal retirement system that insures people against a risk that no one can avoid: the risk of growing old. When Social Security was established, older Americans were more likely than other group to live in poverty. Thanks to the modest pension provided by Social Security, coupled with Medicare health insurance benefits, older Americans are now less likely to live in poverty. In North Carolina, for instance, 11 percent of seniors lived in poverty in 2006 compared to 20 percent of children.

What makes Social Security work is its universal and shared structure. All workers pay into the program through payroll taxes (split between employers and employees) and the revenues are used to finance benefits paid to qualifying workers. Those benefits, in turn, help ensure that older individuals can enjoy a basic level of security and dignity in their later years.

In 2005, some 95 percent of older Tar Heels drew Social Security benefits with the average annual benefit totaling $14,702. For most seniors, Social Security represents their main, if not only, source of income. For older households in the bottom 40 percent of the income distribution, Social Security accounts for over 80 percent of annual household income.

Unfortunately, Social Security's success has made it target for critics from both the Right and the Center-Left. The conventional wisdom is that Social Security is an out-of-control program that will destroy America's financial health absent significant reform. In response, the Center-Left has proposed a mix of benefit cuts and tax changes while the Right has called for privatization.

Yet these alarms are overblown. Social Security is estimated to have adequate resources to pay all scheduled benefits through 2041 (that year, the Baby Boomers will be between the ages of 77 and 95). If no changes are made over the next three decades (an unlikely assumption), benefits then would have to be cut, but even reduced benefits would be more generous than those received by previous generations, according to the Economic Policy Institute.

This isn't to say that Social Security doesn't need changes. Most importantly, the system is financed in a regressive way that that imposes a heavier responsibility on low-income wage earners. (This regressivity is mitigated by a highly progressive benefit structure under which Social Security replaces a greater percentage of  the pre-retirement incomes of lower-income workers.) Financing the system more fairly is an important reform, but it doesn't justify the calls for a wholesale overhaul or elimination of Social Security. With prudent improvements, Social Security easily could reach its 106th birthday in 2041 in good health and enjoy many more birthdays after that.

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