Increase wages to protect Social Security Trust Fund

July 30, 2014 | John Burbank

john burbank

John Burbank, Executive Director

This week the Social Security Trustees reported that our FICA contributions plus interest, net of all benefits paid out, have increased the Social Security Trust Fund by $32 billion. The trustees also forecast that Social Security benefits are completely sustainable for the next two decades.

The media hasn’t played these reports up much, perhaps because they don’t fit into the narrative that finances for Social Security are collapsing and the only way to save Social Security is to dismantle benefits now… That’s a solution akin to amputating someone’s foot now, because he might get gangrene 20 years from now.

We shouldn’t disregard the financing of Social Security two decades from now. But the “solutions” proposed by the guardians of privilege only add to the recipe of redistributing money upwards to the already wealthy and powerful. We have had enough of that over the past 35 years.

The Social Security Trustees forecast projected revenue and costs for 10 and 75 years into the future. Obviously, this is at best a “guestimate.” The trustees can’t foresee each economic downturn. They can’t foresee immigration and the Social Security contributions of these immigrant workers. The guessing is educated, but not accurate. In 1986, the trustees predicted that the Social Security Trust Fund would run out of money in 2051. Then in 1994 they predicted that the trust fund would be drawn down to zero in 2029. Now their “prediction” is for 2033.

The funny thing is that the trust fund was purposely built up in anticipation of baby boomers retiring, and intended to be drawn down to help finance their retirement. So while the guardians of privilege see a problem with this drawdown, it is actually the model developed by one of their own, Alan Greenspan, the former chair of the Fed. And when the trust fund is drawn down, it won’t result in the demise of Social Security. Up to 1981, Social Security was pretty much a pay-as-you-go program, with current revenues from taxes paying for current benefits. That is still the way it is for the 80 percent of benefits.

In developing their forecasts, the trustees include a factor estimating worker productivity increases. But while productivity increases were proportionately shared between workers and corporations after World War II, in the recent decades these increases have accrued more and more solely to corporations. That detracts from Social Security contributions through FICA taxes.

There is a simple way to increase contributions to Social Security, insure sustainability of benefits, and actually increase those benefits. Increase the minimum wage, and have all wages reflect increases in productivity. For every $1 increase in wages, Social Security receives 12.4 cents. Increasing the minimum wage to $10 an hour for the 3.6 million American workers who make $7.25 or less would bring a minimum of $2.5 billion each year into the Social Security Trust Fund. If we were to increase wages by $2 for the one-fifth of all workers who make less than $10 an hour, the trust fund would gain $11 billion each year. That equals more than the combined Social Security benefits for over 750,000 recipients.

We often forget about the interconnections between different facets of our economy. If we continue to hold wages down, and not adjust them upwards for productivity, we let more and more income slide into corporate profits, and hundreds of billions of dollars is exported to other economies via the outsourcing of production. It also means that the social programs Americans hold closest to their hearts and depend on for their economic security are undermined by a diminished stream of revenue, that is, FICA taxes. We are willing to pay those taxes. But we can’t when our wages stagnate.

Here is why the effort for increasing the minimum wage is so important. We not only begin to insure that workers will get appropriate compensation (and respect), but in turn, these workers and their employers, through FICA taxes, build up Social Security funds for current and future retirees. It’s mutually beneficial, for all of us.

Via The Everett Herald

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Posted in Column, Retirement Security

Comments

  1. David Gordon says:

    Hi, John, Although I certainly support raising the minimum wage, and I understand how that will increase current contributions to the Social Security Trust Fund, won’t it also mean an increase in the *withdrawals* from the Trust Fund in the future? Don’t those balance out to zero and thus there is no net increase in stability of the Trust Fund? Thanks, David

    • John Burbank says:

      That’s a good question. In general, faster wage growth helps Social Security’s finances because while it increases both payroll tax revenues and benefit outlays, it still increases the ratio of wages to benefits at any given point in time. Further, the increases in revenues are immediate and continue into the future, while the benefit outlays begin significantly in the future — so the net present value of revenue minus the future cost of benefits is much greater than a simple cash flow analysis would suggest. ~John

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