It's Time for Young People to Pay Attention to Social Security

When election season rolls around, there are certain topics that are virtually guaranteed to figure prominently: foreign policy, education, the economy, and especially social security. It shouldn’t be any surprise that social security always has such an important place at the table: close to 60 million people currently receive social security benefits in some form, and of those, over two-thirds are retirees and their spouses. And given the fact that the elderly tend to vote at much higher rates than younger people do, it follows logically that a key policy priority of older voters will usually occupy center stage in the quest for votes. Younger voters might be tempted to tune out: they’re decades away from retirement, after all, and it’s hard to see how they could be affected by the debate over social security. But there are plenty of reasons to pay attention.

What is social security and how does it work?

Social security is a social insurance program primarily for the elderly and disabled. It was created as part of Franklin D. Roosevelt’s New Deal during the Great Depression as a way of reducing poverty among the elderly, widowed, and disabled. The stock market crash of 1929, combined with systemic bank failures, had wiped out the retirement savings of many retired people, and they had nothing to fall back on: poverty rates among the elderly had risen to above 50%. Social security fixed that by taxing employers and workers and using that money to fund consistent retirement, disability, and death benefits to reduce poverty and guarantee a modest lifelong income based on how much they earned during their working years.

Currently, employers and workers both pay a rate of 6.2% on payroll checks—but with a catch: only the first $117,000 of income is taxable. So if you make less than that, you’ll pay taxes on all your income. But if you make, say, $250,000 a year, over half your annual income isn’t subject to social security tax. Furthermore, only wage income is subject to social security taxes. The type of income that wealthier people tend to make—capital gains, dividends, and interest income, for instance—isn’t taxed for social security at all. We’ll see why this matters in a bit.

So what’s the debate about?

Quite simply, the debate is about the future of the program, and this is where young people should really start paying attention.

Social Security Deficit

While the details of social security funding are a bit technical, the program isn’t entirely solvent over the long term: not enough money is coming in to fully fund all of social security’s projected expenses into the future. In large part, this has to do with two main factors:

1) life expectancies are increasing; and

2) the Baby Boom generation just started to hit retirement age a few years ago, which significantly increases the number of retirees who will be claiming benefits over the next few decades.

At current funding levels, the social security trust fund is only solvent until 2033. Past that, it would have to cut benefits by 23 percent in order to keep providing benefits for the same number of people it does now. In the long term, then, either tax increases or more gradual benefit cuts will have to occur to avoid a sharp, sudden cut along those lines. And since any reduction in benefits for current retirees is a non-starter, any reduction in benefits will come out of the hides of those who will be retiring in the future: namely, the young.

What are the options?

How to handle social security depends on what side of the political aisle you sit on.

Right-leaning think tanks and organizations like the CATO Institute have long advocated for privatizing social security. As it stands now, people pay taxes into the social security system and get a guaranteed defined benefit from it. Privatization would allow people to invest their social security taxes in the stock market, potentially obtaining a higher rate of return. The problem? The market is volatile and risky, and the entire point of social security was a guaranteed, risk-free retirement income.

Centrists tend to favor benefit cuts, especially by restricting the growth rate of cost-of-living adjustments.

A simple and elegant solution is gaining traction on the left: it’s called “scrap the cap.” Right now, the taxable limit of $117,000 for social security taxes means that the poor and middle class pay those taxes on all their income, but the wealthy only pay on a fraction. Raising the cap, or eliminating it altogether, would keep the program solvent for longer, or even allow for an expansion of benefits down the road. The downside, of course, is that this would raise taxes on some wealthier Americans.

As technology and medical care improves, life expectancies will likely continue to grow—meaning that private retirement savings will cover increasingly fewer of our golden years on average. For many of today’s young workers, the quality of life we get to enjoy in our post-work years could be directly impacted by the tenor and outcome of the debate over social security that’s going on right now. If the current crop of elected officials in Washington decide to cut benefits, they won’t dare do it to current retirees—they’ll do it do us instead because they don’t think we’re paying attention. And now would be as good a time as any to prove them wrong.