FacebookTwitterGoogle+RedditEmail

What Does the Fed Have to do With Social Security? Plenty

by

Most of the people who closely follow the Federal Reserve Board’s decisions on monetary policy are investors trying to get a jump on any moves that will affect financial markets. Very few of the people involved in the debate over the future of Social Security pay much attention to the Fed. That’s unfortunate because the connections are much more direct than is generally recognized.

The basic story of Social Security’s finances is that, while the program is entirely sound for the near future, the program is projected to face a shortfall in the decade of the thirties. Under current law, at that point it would be necessary to reduce benefits from their scheduled level, unless additional revenue can be raised.

Of course the answer from those on the right is to cut benefits, and the sooner the better. Progressives, along with most of the public, would like to see the current benefit level maintained and possibly increased. Most workers are approaching retirement with little other than Social Security to support them, which means that cuts from currently scheduled benefit levels will mean serious hardship for many.

The Fed figures in this picture both directly and indirectly. The Fed is not always able to provide as much of a boost to the economy as it might like. Following the Great Recession of 2008 the Fed wanted to promote growth and employment. It did so by lowering short-term interest rates to zero and initiating its quantitative-easing policy of buying long-term bonds.

These policies helped stimulate demand by making it easier for people to buy homes or refinance mortgages and for businesses to invest. But by themselves, they did not come close to restoring the economy to full employment.

Although the Fed cannot always boost the economy as much as it would like, there is little doubt that it can slow the economy. Higher interest rates would dampen the housing market and discourage other forms of consumption. They would also slow investment. By raising interest rates, the Fed can slow the rate of growth, thereby keeping people from getting jobs, and propping up the unemployment rate higher than it would otherwise be.

If fewer people are employed, fewer people are paying into the Social Security system. This trend, therefore, directly weakens its finances. (The system will pay out less in benefits, but this result will not be close to offsetting.) In addition, lower rates of unemployment strengthen workers’ bargaining position. At low rates of unemployment, workers at the middle and bottom of the wage distribution have the bargaining power to secure themselves a share of the gains from economic growth.

This affects Social Security directly, since one of the main reasons that the program is now projected to face a shortfall in the decades of the thirties is that so much wage income has been redistributed above the cap on the Social Security tax, which currently stands at $117,000. Back in 1983, the last time major changes to the system were instituted, only 10 percent of wage income was above the cap. Because of the massive upward redistribution of the last three decades, 18 percent of wage income is now above the cap.

If the Fed allowed the unemployment rate to fall back to the levels of the late 1990s (@4.0 percent to 5.0 percent) and stay there, the share of wage income going to workers earning above the cap would fall, increasing the revenue going to Social Security.

In addition to the direct Fed policy can affect Social Security’s finances, there is also an important indirect channel. Over the long-term it will likely be necessary to raise tax rates to maintain scheduled benefit levels.  Any substantial increase in taxes would impose a hardship on low and moderate income workers in the current context of stagnant wages. However if wages were rising in step with productivity, workers would be able to pay a somewhat higher tax rate and still have higher after-tax wages.

According to the most recent projections from the Social Security trustees, average hourly compensation in thirty years will be more than 60 percent higher (after adjusting for inflation) than it is today.  If the tax rate were increased by 1-2 percentage points in order to prevent cuts to scheduled benefits, workers would still pocket close to 60 percent more for each hour of work in 2044 than they do today, assuming the gains from growth are evenly shared.

Whether most workers share in the gains from economic growth, or we continue to see the massive upward redistribution of income of the last three decades, will depend largely on the policies of the Fed. If the Fed allows the unemployment rate to fall back to the levels we saw in the late 1990s, then workers could anticipate substantial wage gains in the decades ahead. Covering the cost of Social Security will pose little problem.

On the other hand, if those pushing for higher interest rates now get their way, then most workers will not see their wages rise by much. In that case, paying for Social Security through the current payroll tax can be a problem.

People who are concerned about the future of Social Security, then, should be paying a great deal of attention to what the Fed does. Raising interest rates will not only affect the economy today, but it will also affect Social Security tomorrow.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

This article originally appeared on Al Jazeera.

 

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

More articles by:

CounterPunch Magazine

minimag-edit

Weekend Edition
September 23, 2016
Friday - Sunday
Andrew Levine
The Meaning of the Trump Surge
Jeffrey St. Clair
Roaming Charges: More Pricks Than Kicks
Mike Whitney
Oh, Say Can You See the Carnage? Why Stand for a Country That Can Gun You Down in Cold Blood?
Chris Welzenbach
The Diminution of Chris Hayes
Vincent Emanuele
The Riots Will Continue
Rob Urie
A Scam Too Far
Pepe Escobar
Les Deplorables
Patrick Cockburn
Airstrikes, Obfuscation and Propaganda in Syria
Timothy Braatz
The Quarterback and the Propaganda
Sheldon Richman
Obama Rewards Israel’s Bad Behavior
Libby Lunstrum - Patrick Bond
Militarizing Game Parks and Marketing Wildlife are Unsustainable Strategies
Andy Thayer
More Cops Will Worsen, Not Help, Chicago’s Violence Problem
Louis Yako
Can Westerners Help Refugees from War-torn Countries?
David Rosen
Rudy Giuliani & Trump’s Possible Cabinet
Joyce Nelson
TISA and the Privatization of Public Services
Pete Dolack
Global Warming Will Accelerate as Oceans Reach Limits of Remediation
Franklin Lamb
34 Years After the Sabra-Shatila Massacre
Cesar Chelala
How One Man Held off Nuclear War
Norman Pollack
Sovereign Immunity, War Crimes, and Compensation to 9/11 Families
Lamont Lilly
Standing Rock Stakes Claim for Sovereignty: Eyewitness Report From North Dakota
Barbara G. Ellis
A Sandernista Priority: Push Bernie’s Planks!
Hiroyuki Hamada
How Do We Dream the Dream of Peace Together?
Russell Mokhiber
From Rags and Robes to Speedos and Thongs: Why Trump is Crushing Clinton in WV
Julian Vigo
Living La Vida Loca
Aidan O'Brien
Where is Europe’s Duterte? 
Abel Cohen
Russia’s Improbable Role in Everything
Ron Jacobs
A Change Has Gotta’ Come
Uri Avnery
Shimon Peres and the Saga of Sisyphus
Graham Peebles
Ethiopian’s Crying out for Freedom and Justice
Robert Koehler
Stop the Killing
Thomas Knapp
Election 2016: Of Dog Legs and “Debates”
Yves Engler
The Media’s Biased Perspective
Victor Grossman
Omens From Berlin
Christopher Brauchli
Wells Fargo as Metaphor for the Trump Campaign
Nyla Ali Khan
War of Words Between India and Pakistan at the United Nations
Tom Barnard
Block the Bunker! Historic Victory Against Police Boondoggle in Seattle
James Rothenberg
Bullshit Recognition as Survival Tactic
Ed Rampell
A Tale of Billionaires & Ballot Bandits
Kristine Mattis
Persnickety Publishing Pet-Peeves
Charles R. Larson
Review: Helen Dewitt’s “The Last Samurai”
David Yearsley
Torture Chamber Music
September 22, 2016
Dave Lindorff
Wells Fargo’s Stumpf Leads the Way
Stan Cox
If There’s a World War II-Style Climate Mobilization, It has to Go All the Way—and Then Some
Binoy Kampmark
Source Betrayed: the Washington Post and Edward Snowden
John W. Whitehead
Wards of the Nanny State
FacebookTwitterGoogle+RedditEmail