Roosevelt Institute | Cornell University

Reforming Social Security

By Joshua MarkPublished October 15, 2013

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Social Security accounts for $768 billion, or 35% of federal expenditures per year. This program, for the purposes of this blog post, uses money collected though taxes to provide monetary assistance for Americans over the age of 65 in the United States. The program ensures financial stability in the final years of life, during which the elderly seldom have a significant income. While the underlying values of the program are clearly laudable, the program itself may not be the most cost-effective, or realistic way to protect the elderly from financial instability looking forward.
By Joshua Mark

What would you do with an extra $3,400 for your first year out of college? What if I went on to say that as you got older, you would get increasing accounts of money until retirement? You can use this money for whatever you want, from paying off college loans, to financing your new home, to saving for retirement, or to paying your medical bills. Well, that $3,400 is about how much I, as a Policy Analysis and Management (PAM) major, am expected to pay towards Social Security in taxes in my first year working out of college (median salary coming out of PAM is $50,000-$60,000).

            Social Security accounts for $768 billion, or 35% of federal expenditures per year. This program, for the purposes of this blog post, uses money collected though taxes to provide monetary assistance for Americans over the age of 65 in the United States. The program ensures financial stability in the final years of life, during which the elderly seldom have a significant income. While the underlying values of the program are clearly laudable, the program itself may not be the most cost-effective, or realistic way to protect the elderly from financial instability looking forward.

            When Social Security was first enacted in 1935, there existed a 50% poverty rate among the elderly. To remedy this situation, President Roosevelt established the Social Security program to provide assistance to this vulnerable population. However, many of the circumstances that existed when the Social Security program was first implemented no longer exist today. First off, the life expectancy for men and women in 1935 was 59.9 and 63.9, respectively, compared to 76 and 81 today. The average American woman is expect to receive Social Security benefits for 16 years today; much longer than at the time Social Security was enacted. Second, the poverty rate among those aged 65+ was 12% in 2011, compared to over 50% in 1935, although the 2011 total would likely have been higher had it not been for Social Security. Finally, in 1945 (I could not find data from 1935) there were 41.9 members of the workforce for each retiree, compared to only 2.9 today. Therefore, the average American today spends more years receiving Social Security benefits, yet has a lower likelihood of being in poverty and has only 6.9% of the workers paying for his benefits compared to 1935.

            What's more, if the tax rates were to stay the same until 2060 (which is two years after I would turn 65), it is projected that my benefits would have to be cut back 25% if the Social Security fund were to remain solvent for any longer. This means that even if I continue to pay for Social Security at the present tax rates, the Social Security fund would only have enough money to pay me three quarters of the amount the elderly receive today.

            Don't get me wrong; I'm not suggesting that we should just get rid of the policy and ignore the elderly. I'm also not suggesting that the current policy doesn't provide many elderly who are at risk of being in poverty with much needed financial assistance. What I am saying is that the current system doesn't do an efficient job of providing poverty insurance for the elderly.

            A number of changes have been suggested that would maintain a version of the Social Security program for the future. One that I found interesting included a lower initial benefit at 65 and gradually increasing benefits every five years. But ultimately, the issue with Social Security is not necessarily that it is running out of funds, but rather that it is funding the wrong people. While Social Security certainly has meaningful effects for those in, and at risk of falling into, poverty, the program unnecessarily contributes funds to those for whom the money has little impact. If the program were to be changed into a safety net program for the elderly in, say, the bottom 20% of the income bracket (covering all those in, and at risk of falling into poverty), the program would require significantly less funding and would provide more meaningful benefits to its recipients. Through this measure, not only would I be able to hold onto more of my $3,400, but I would also have the knowledge that my money is going to those who truly need it.