The Social Security program has been one of the largest sources of mandatory spending in the US Federal Budget since the 1960s. However, its reserves are projected to run out by 2035 due to the generous benefits of the program combined with higher life expectancy rates.
Over time, the program has strayed from its original intent of protecting the elderly from poverty and now provides the majority of Americans above age 65 with partial retirement funds. The US could benefit from looking to the Australian model of compulsory saving and means-tested retirement benefits as a solution to its impending social security funding crisis.
Original intent
The Social Security Act was signed into law in 1935 on the back of Franklin Roosevelt’s sweep of “New Deal” reforms to provide provisions for general welfare with an emphasis on providing protection against poverty to retired workers over the age of 65. Over time, the act has increased its benefits to other disadvantaged groups like those with disabilities.
The Social Security program is funded through the Federal Insurance Contributions Act (FICA) taxes. Parts of these provisions are paid for by taxing and earmarking American worker’s earnings for Social Security.
Old age benefits are distributed to those that have worked - and thus have paid into the system - long enough to gain credits and who are over the age of 62. Those who wait until 67 to retire receive a greater payout and those who defer until age 70 are paid out even more again.
The system is built around the expectation that people will also save money throughout their lives.
The problem with social security old age benefits
Social Security’s old age benefits are increasingly viewed as a way to almost single-handedly for retirement instead of as a safety net from poverty in old age. The fact that social insurance programs in the US provide assistance largely independent of financial need has led the government to support most elderly Americans, including those in non-poor households and those who may have already saved for retirement.
In fact, according to economic historian John F. Cogan, over 90 per cent of social insurance paid to over 65s exceeds the amount needed to protect them against poverty.
With this mindset, the program has become a strain on the economy. It is the young and working-age population that will be affected by this the most.
Social Security’s cost is projected to exceed its total income in 2020 and will continue to run a deficit until its reserves run out, which is predicted to happen by 2035.
Americans are not eager to cut benefits or make fewer people eligible because they believe that they’ve “earned” their benefits and consider them a right, despite the fact that the program has strayed from its original intent. In fact, Social Security is not a contractual right in the United States, according to a 1960 US Supreme Court finding.
Nevertheless, policymakers have not made any drastic policy shift as there has been strong, consistent, public support for social security, particularly regarding retirement.
But positive public sentiment won’t fund the program. To continue the Social Security coverage of retirement, reforms are needed. This is where the Australian model can help.
The Australian system
The equivalent retirement programs in place in Australia are a combination of the Age Pension, superannuation, and voluntary savings.
The Australian Age Pension has helped to reduce old-age poverty with relatively low cost to the government compared to other developed countries. Unlike US retirement benefits, it is means-tested. As a result, an Australian citizen that exceeds a certain income threshold could have their age pension decreased or eventually receive none at all.
The Superannuation Guarantee program has led to high levels of saving by almost the entire Australian workforce. This requires employers to contribute at least 9.5 per cent of employees’ earnings between ages 18 and 70 years old to a retirement plan. Therefore, unlike the US, Australia has achieved nearly full pension coverage of workers.
Additionally, Australians have a considerably more robust healthcare system which means Australians experience less of a healthcare burden than Americans do in later life.
While Australia has used social assistance to try to alleviate poverty, the US has tried to use social insurance to prevent poverty which has led to many non-poor American households receiving benefits.
What’s politically feasible?
Ultimately, to restructure Social Security, Americans have to change their view of the program and its purpose.
If there was a push to reframe this entitlement program in line with its original intent – to provide protection against poverty for the elderly rather than a way to pay for retirement regardless of need – then a means-tested program would be the path to take.
Another possible solution could be to promote similar programs to superannuation such as “automatic 401(k) enrollments and simplified 401(k) plans for small employers” which could help to broaden retirement coverage and savings for the American workforce.
Nevertheless, it would be difficult to sell the American people on this targeted system when there has been a greater push, particularly in the media recently, to frame welfare programs as something that hurts the economy and creates lazier workers.
But by using models of means testing, compulsory saving, and major disincentives of early retirement the US could mimic aspects of Australian policy to better shift the goals of old age benefits while ensuring that social security remains economically feasible.