The last several months have overflowed with news stories about 2021’s high pace of inflation and its potential political impact: Inflation concerns could spell trouble for Democrats. Will Joe Biden pay the price for rising inflation? Inflation is heaping pressure on Biden.
There have been a vanishingly small number of pieces, however, about a basic fact connected to inflation — one that will help shield tens of millions of Americans from it and that should be seen as a historic victory for Democrats: Social Security benefits are adjusted upward in step with inflation at the beginning of each year, so even as prices rise, recipients lose little purchasing power.
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 an extraordinarily good deal for them, especially in periods like these. Instead, as recently as the Obama administration, they seemed embarrassed that they ever came up with it in the first place. President Barack Obama’s main focus regarding Social Security appeared to be finding politically palatable ways to cut benefits (although he did change course at the end of his presidency). And while Hillary Clinton and Joe Biden both formally ran on expanding Social Security, they never pushed it with the kind of fervor and clarity needed to make their policies clear to regular people. While in office, Biden has done little even as congressional Democrats are attempting to generate momentum for significant improvements to the program.
But if top Democrats won’t educate us about why Social Security is a huge boon for Americans, and therefore why we have to defend and improve it, we should educate ourselves.
The most important thing to understand about Social Security for retired workers is that it is an inflation-adjusted lifetime annuity.
The inflation-adjusted part means that Social Security benefits go up automatically each year by the same rate as inflation. For 2022, Social Security’s 66 million recipients will see a 5.9 percent cost-of-living adjustment, or COLA, starting this month. The average monthly Social Security payment for retired workers was $1,565 in 2021; thanks to the 5.9 percent COLA, it is now $1,657.
This means that retirees are protected from inflation to the degree that their income comes from Social Security. This generally means that the poorer a beneficiary is, the more inflation protection they’ll get. Thirty-seven percent of older male recipients and 42 percent of older female recipients get at least half of their income from Social Security; 12 percent of men and 15 percent of women count on Social Security for 90 percent of their income or more.
(In addition, while payments to older people are the best-known and largest aspect of Social Security, it is officially the Old-Age, Survivors, and Disability Insurance program. Other recipients receiving the 5.9 percent bump include people with disabilities that prevent them from working, as well as the children and surviving spouses of workers who’ve died. For instance, Paul Ryan, Sen. Mitt Romney’s running mate in the 2012 presidential election and a former Speaker of the House, received survivors payments for several years after his father died when Ryan was 16. He was so grateful that he spent his career obsessively trying to slash Social Security.)
The lifetime annuity part means that once you start collecting Social Security’s retirement benefits, you will continue to receive the same amount (adjusted for inflation) every month until your death. Almost everyone as they grow older becomes concerned about outliving their money. But Social Security provides a guarantee that at least some of it will last as long as you do.
Once you understand these aspects of Social Security, you’ll see why it works so incredibly well for so many people. If Social Security were eliminated, 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, all in all Social Security combines features “that you can’t get in the private sector.” Here’s why:
• Annuities bought from insurance companies generally don’t offer any kind of inflation adjustment. As time goes on, their purchasing power erodes, and the longer you live, the worse it gets. It is possible to pay more — much more — for annuities that will go up to some degree with inflation, perhaps up to 2 percent or 4 percent or sometimes higher. But Altman points out that Social Security’s COLAs were 9.9 percent in 1979, 14.3 percent in 1980, and 11.2 percent in 1981. No insurance company would offer that kind of inflation protection and would go bankrupt if it tried.
• Social Security is designed so that the less a retiree made during their work life, the larger the percentage of their wages are replaced by the program. This is the formula as of this year:
(a) 90 percent of the first $1,024 of their average indexed monthly earnings, plus
(b) 32 percent of their average indexed monthly earnings over $1,024 and through $6,172, plus
(c) 15 percent of their average indexed monthly earnings over $6,172.
This means that the cost of buying an annuity on the private market would be proportionately much higher for lower-earning workers than for higher-earning ones.
• Social Security does not engage in any kind of underwriting: i.e., evaluating beneficiaries and charging them differently based on risk. But private insurance companies absolutely do. In particular, private market annuities are more expensive for women than for men the same age because women live longer on average.
• Women also benefit from the fact that Social Security pays 100 percent survivor benefits to spouses even if the marriage ended in divorce, as long as it lasted at least 10 years. This means that when a former spouse dies — which is statistically more likely to be the man in a heterosexual marriage — and the former spouse made more money during his career — also statistically likely — the former wife will receive the same level of benefits he did. This is difficult or impossible to find in the private market.
• Perhaps most importantly, the government can’t go out of business. Private corporations absolutely can. For instance, American International Group, often shortened to AIG, is one of America’s largest sellers of annuities. During the 2008 financial crisis, it would have collapsed entirely if it hadn’t received a gigantic government bailout.
Lastly, if you’ve made it all the way to the end of this and are worried about Social Security’s potential financial shortfall in the 2030s, don’t be. You may have noticed that the people telling you about Social Security’s impending doom are exactly the same figures who told us to be terrified about Iraq’s weapons of mass destruction 20 years ago. The danger in both cases is exactly as real and frightening: i.e., effectively nonexistent. There are entire books that delve into detail about how the propaganda campaign against Social Security has functioned and why you don’t need to be concerned about its future. But the simple explanation is that Social Security’s financing has been adjusted many times before and inevitably will be again, and the U.S. generates more than enough wealth for retirees to get their full, promised benefits even as working-age adults grow richer.
What’s happening with Social Security today is therefore a government insurance program doing exactly what you would want it to do. Life is full of risks that are largely outside any one person’s control, from unemployment to illness to living an unexpectedly long life. The point of a program like Social Security is to spread the costs of these risks across all of society rather than pile it on the shoulders of individuals who got a bad roll of the dice. Let’s make sure we notice this — a true victory for people working together to make the world better for everyone — rather than take it for granted.