2021 Inflation Proves How Valuable Social Security Is
You might assume that Democrats would constantly publicize how their party created Social Security and help voters understand how it works and why it’s a great deal for them, especially in times like these. Instead, as recently as the Obama administration, they seemed embarrassed that they had ever come up with this in the first place. President Barack Obama’s primary focus on Social Security appeared to be finding politically acceptable ways to cut benefits (although he changed course late in his presidency). And although Hillary Clinton and Joe Biden have both officially come forward to expand Social Security, they have never pushed it with the kind of fervor and clarity needed to make their policies clear to ordinary people. During his tenure, Biden has done little even as congressional Democrats attempt to generate momentum for meaningful program improvements.
But if top Democrats won’t tell us why Social Security is a huge boon to Americans, and therefore why we need to defend and improve it, we should find out.
The most important thing to understand about social security for retirees is that it is a inflation-indexed life annuity.
The inflation-adjusted part means that Social Security benefits automatically increase each year at the same rate as inflation. For 2022, the 66 million Social Security recipients will see a 5.9% cost of living adjustment, or COLA, starting this month. The average monthly Social Security payment for retirees was $1,565 in 2021; thanks to the 5.9% COLA, it is now $1,657.
This means that pensioners are protected from inflation insofar as their income comes from social security. This generally means that the poorer a beneficiary is, the more inflation protection they will receive. Thirty-seven percent of older male beneficiaries and 42% of older female beneficiaries receive at least half of their income from Social Security; 12% of men and 15% of women rely on Social Security for 90% or more of their income.
(Furthermore, although payments to the elderly are the best-known and most important aspect of Social Security, it is officially the Old Age, Survivors, and Disability Insurance program. Other beneficiaries receiving the top-up 5.9% include people with disabilities who prevent them from working, as well as children and surviving spouses of deceased workers.For example, Paul Ryan, Senator Mitt Romney’s running mate in the 2012 presidential election and former Speaker of the House, received survivor benefits for several years after his father died when Ryan was 16. He was so grateful that he spent his career obsessively trying to cut Social Security.)
The life annuity portion means that once you start collecting Social Security retirement benefits, you will continue to receive the same amount (adjusted for inflation) each month until you die. Almost everyone, as they get older, worries about outliving their money. But Social Security offers a guarantee that at least part of it will last as long as you do.
Once you understand these aspects of Social Security, you’ll understand why it works so incredibly well for so many people. If Social Security were taken away, it would be prohibitively expensive or impossible for older people to get anything similar from an insurance company. As Nancy Altman, president of the advocacy organization Social Security Works, says, overall, Social Security combines features “that you can’t get in the private sector.” Here’s why:
• Annuities purchased from insurance companies generally offer no inflation adjustment. Over time, their purchasing power erodes, and the longer you live, the worse. It is possible to pay more – much more – for annuities that will rise to some extent with inflation, perhaps as much as 2% or 4% or sometimes more. But Altman points out that Social Security COLAs were 9.9% in 1979, 14.3% in 1980, and 11.2% in 1981. No insurance company would offer that kind of inflation protection and would go bankrupt if she tried.
• Social security is designed so that the less a pensioner earns during his working life, the more percentage of his salary is replaced by the program. Here is the formula since this year:
(a) 90% of the first $1,024 of their indexed average monthly income, plus
(b) 32% of their average indexed monthly earnings above $1,024 and up to $6,172, plus
(c) 15% of their average indexed monthly earnings over $6,172.
This means that the cost of purchasing an annuity in the private market would be proportionally much higher for low-income workers than for high-income ones.
• Social Security does not engage in any type of underwriting: ie assess beneficiaries and bill them differently based on risk. But private insurance companies absolutely do. In particular, private market annuities are more expensive for women than for men of the same age because women live longer on average.
• Women also benefit from the fact that Social Security pays 100% survivor benefits to spouses, even if the marriage ended in divorce, as long as it lasted at least 10 years. This means that when an ex-spouse dies – which is statistically more likely to be the man in a heterosexual marriage – and the ex-spouse has made more money in their career – also statistically likely – the ex-spouse will receive the same level of benefits as him. . It is difficult or impossible to find on the private market.
• Perhaps most importantly, the government cannot go bankrupt. Private companies absolutely can. For example, American International Group, often abbreviated as AIG, is one of the largest sellers of annuities in the United States. During the financial crisis of 2008, it would have completely collapsed if it had not received a gigantic bailout from the government.
Finally, if you’ve made it all the way and are worried about the potential shortfall in Social Security in the 2030s, don’t be. You may have noticed that the people telling you about the impending Social Security disaster are the exact same people who told us they were terrified of Iraq’s weapons of mass destruction 20 years ago. The danger in both cases is equally real and frightening: that is, effectively non-existent. There are entire books that detail how the propaganda campaign against Social Security worked and why you don’t have to worry about its future. But the simple explanation is that Social Security funding has been adjusted many times before and inevitably will be again, and the United States is generating more than enough wealth for retirees to get the full promised benefits. , even if working-age adults get richer.
So what’s happening with Social Security today is a government insurance program that does exactly what you want it to do. Life is full of risks that are largely beyond anyone’s control, from unemployment to illness to a surprisingly long life. The purpose of a program like Social Security is to spread the costs of these risks across society rather than piling them on the shoulders of individuals who have had a bad roll of the dice. Let’s make sure we take notice – a real win for people working together to make the world a better place for everyone – rather than taking it for granted.