The Fiscal Cliff and Social Security

Post election analysis has turned to discussion of economic issues put off before the election. Health care expansion will go forward and tax and budget disputes will be settled by default with the fiscal cliff, or by compromise in the Congress. A recent article by Robert J. Samuelson [“It’s the Welfare State, Stupid,” Washington Post, November 12, 2012] includes the claim that Social Security and Medicare are part of the welfare state that undermines incentives to work and devalues “earned success.” He thinks these shortcomings justify using Social Security as a target for cut backs in the fiscal cliff settlement.

In spite of the fact that all of us working for a living have to pay social security taxes under threat of IRS reprisal, the claim that Social Security recipients receive welfare subsidies requires explanation in light of the many changes to Social Security passed by Congress. Start with the steep Social Security tax increases Congress passed during the early Reagan years. Along the way the retirement age was raised and two full years of benefits were canceled, and then Congress started to force social security recipients to pay taxes on their benefits. In 2011 taxes start for single people who earn other income greater than just $25,000, and for joint filers at just $32,000. Recently there were unfavorable adjustments to the cost of living formula. The idea social security recipients receive welfare subsidies after as many as 50 years (50=67-17) of payroll taxes require financial examples and documented proof that Samuelson fails to give.

We might also remind Mr. Samuelson that the social security tax has an income cap at $110,100, meaning that those with very high wages have a tax preference: their tax rate drops to zero after the cap. While the rest of us pay 7.65 percent on all our wage income the wealthy get all wages over the cap exempted. If he thinks this preference should be eliminated as an unjustifiable subsidy to the wealthy he did not say.

Medicare and Medicare payroll taxes were added to Social Security in the Johnson Administration because more and more private insurance companies refused to insure retired people who lost their tax subsidized employer health care benefits. Now Samuelson suggests Medicare recipients are getting a subsidy they don’t deserve when all those receiving employer sponsored health care share in tax subsidized health care they do deserve.

After attacking Social Security and Medicare Samuelson concludes Social Security benefits undermine work incentive that “devalues” the work ethic. He tells readers “If eligibility were higher, people would work longer.” What Mr. Samuelson would find if he bothered to look at the U.S. Bureau of Labor Statistics, Current Population Survey is that older people are already working longer, much longer, and they have been doing so for two decades.

Americans over the age of 55 entered the labor force at a growth rate of 3.49 percent per year over the years 1990 to 2011, a rate one and half percent above their population growth rate in the same years. Those from the ages of 25 to 54 entered the labor force looking for work at a growth rate of .68 percent per year for the years 1990 to 2011, a rate more than two percent below their population growth rate in the same years.

People entering the labor force at any age have no guarantee of finding work: they could find employment or be unemployed. Unemployed Americans over the age of 55 had an annual growth rate of 7.03 percent in the years 1990 to 2011, more than double the growth rate of those aged 25 to 54. If Americans at or near retirement age lack incentives to work because the benefits of Social Security make life so easy then Mr. Samuelson needs to tell us why so many people at or near retirement age keep working, or looking for work, so long and so hard.

Mr. Samuelson did not question if those over age 55, but not eligible for Medicare, keep working because they can only get affordable health care through a job. He did not question if the gradual end of defined benefits pension plans and replacement with defined contribution pension plans makes it harder to retire and gives incentives to work longer. He did not question why older Americans need incentives to work longer when younger Americans struggle to find self supporting jobs. The rest of us should question whether Mr. Samuelson wants to make excuses to cut Social Security, or find solutions that work for everybody.