The meltdown of private pension plans, 401(k)s and Individual Retirement Accounts during the recession demonstrates that Social Security is more essential than ever, says Merton C. Bernstein, LLB, the Walter D. Coles Professor Emeritus at Washington University in St. Louis School of Law.
Bernstein discussed the crucial role of Social Security in a report for the university’s Weidenbaum Center on the Economy, Government, and Public Policy.
“Private-defined benefit pensions — already a disappearing breed — buckled further under the stock market meltdown,” Bernstein says, “and the newly dominant 401(k)s plans lost, on average, a quarter of their value during the four years starting in 2008.
“But Social Security, not dependent on market performance, didn’t miss a beat as the principal source of retirement income. Indeed, with the faltering of private plans, it contributed an even larger share than ever to retirees and survivors.”
According to Bernstein, Social Security is on course to provide full benefits to its expected beneficiaries through 2036 due to its multi-trillion dollar trust fund.
“Raising or removing the cap on earnings subject to the Federal Insurance Contributions Act (FICA) could ease or erase the projected longer-term funding shortfall, depending on how it is constructed,” he says.
“Such a measure has widespread support, including from the co-chairs of the Commission on Fiscal Responsibility.”
Critics frequently argue that Social Security is headed for bankruptcy because of the more rapid growth of the benefit recipient population than the working population. But Bernstein says that assumption is based on a 1950s worker.
“It is noted that in 1950, 15 people were at work for each recipient and that the ratio will decline to 2.2 people per recipient,” he says.
“This analysis mistakenly assumes that the 1950 worker was as productive as his or her successors. Each successive wave of working people uses more advanced technology. Therefore they will produce more, earn more and generate more FICA per capita than individuals in 1950.”
The Fiscal Commission co-chairs target Social Security benefits for reduction and urge supplementary private accounts. “Those accounts would cost more and generate less income than Social Security,” Bernstein says.
Despite promises to spare current Social Security recipients any benefit reductions, the chairs and others advocate a new cost-of-living adjustment (COLA) that would reduce benefits every year. Any benefit reductions would reduce business income and thereby cost jobs.
Read Bernstein’s full report for the Weidenbaum Center Forum, “A Fateful Choice For Our Future Economy — The Crucial Role of Social Security.”