23 June 2011

David P. Hamilton : How Social Security Works in the U.S. and France

Social Security building at Rennes, France. Image from Wikimedia Commons.

Letters from France IV:
Social Security in the U.S. and France
In France the system is more costly, more complicated, and provides more benefits, but employers and the wealthy pay a higher percentage of the costs.
By David P. Hamilton / The Rag Blog / June 23, 2011

[This is the fourth in a series of dispatches from France by The Rag Blog's David P. Hamilton.]

PARIS -- Social security in France has a wider definition that includes health care, unemployment compensation, family support, disability, and other benefit programs. But in the U.S. social security is generally understood to refer to the federal old-age pension program that protects workers and covers family members against loss of income from the wage earner's retirement.

There are basic differences between the retirement programs in France and the U.S. In essence, in France the system is more costly, more complicated, and provides more benefits, but employers and the wealthy pay a higher percentage of the costs.

There are, however, major similarities between the French and American retirement pension systems. Both are pay-as-you-go systems in which current receipts are used to pay current benefits. Also, both are under attack by rightists because of their projected future insolvency caused by changing demographics.

The ratio of active workers paying into the system relative to retirees receiving benefits is falling in both countries and will fall more quickly with the retirement of “baby-boomers." In France, this “dependency ratio” is already much worse than the in the U.S. Indeed, the U.S. has the best dependency ratio among the G8 nations.

This problem is largely a distraction to focus the debate away from obvious solutions to what Nobel Laureate economist Paul Krugman describes as a “modest” long term shortfall. Krugman notes that “extending the life of the trust fund into the 22nd century, with no change in benefits, would require additional revenues equal to only 0.54 percent of GDP. That's less than 3 percent of federal spending -- less than we're currently spending in Iraq.”

James Roosevelt, a former commissioner for retirement policy for the Social Security Administration, claims that the “crisis” is more a myth than a fact. Nobel Laureate economist Joseph Stiglitz agrees.

Both France and the U.S. have pay-as-you-go systems. Money taken in from payroll taxes is used to pay current retirees. In the U.S., there have been more receipts than payouts since 1983. Excess receipts go into the Social Security Trust Fund. There they are loaned to the U.S. general revenue fund to be used for other governmental expenses.

The U.S. Treasury general revenue fund currently owes the Social Security Trust Fund over $2.5 trillion. In 2009, FICA taxes and interest on the fund took in $120 billion more than it paid out, despite a serious shortfall in payroll tax receipts caused by the subprime mortgage crisis and high unemployment. By 2019, the general revenue fund will owe the Social Security Trust Fund $3.8 trillion.

Unfortunately, the U.S. government has made no provision to repay these “borrowed” surpluses. They have gone most prominently to finance militarism, such as the recently passed 2012 $690 billion “Defense” Department appropriation.

There are various proposals being floated to repay this debt and rectify the shortfall by raising receipts, reducing benefits, or privatizing the system. But there are several other options that don’t ever get discussed. For example, had the government not spent a trillion on imperialist wars in Iraq and Afghanistan and trillions more to otherwise feed the voracious needs of the military-industrial complex, it would have the money to repay the trust fund.

As Ron Paul has suggested, were we to close down most if not all of the over 800 military bases the U.S. has outside its borders and end the numerous wars (all in Muslim countries) in which we are presently engaged, we would have the money to pay back the Social Security Trust Fund.

In other words, we could cut the largest discretionary element in the federal budget, the military/intelligence/homeland security expenditures that are greater than the similar expenses of the rest of the world combined.

But most military spending functions as a transfer payment from the general population to the rich who own and profit from the military-industrial complex. Hence, social security solvency achieved by reduced militarism is out of the question.

Revoking the Bush/Obama tax cuts for the most wealthy would largely eliminate the federal deficit, allowing general revenues to be used to pay back the debt owed Social Security, money owed to those of more humble means. The Center on Budget and Policy Priorities wrote in 2010:
The 75-year Social Security shortfall is about the same size as the cost, over that period, of extending the... tax cuts for the richest 2 percent of Americans (those with incomes above $250,000 a year). Members of Congress cannot simultaneously claim that the tax cuts for people at the top are affordable while the Social Security shortfall constitutes a dire fiscal threat.
This approach is considered politically unviable despite broad popular support among the general population who don’t own a single member of Congress, a president, or a team of lobbyists.

Another option would be to remove the cap on FICA taxes that is currently $106,800. That solution would raise taxes on the richest 6% of Americans and largely restore perpetual solvency in the social security system, providing 1.3 trillion dollars over the next 10 years according to the libertarian Cato Institute.

Although the Wall Street Journal editors believe that lifting the cap would be “one of the greatest tax increases of all time” and “so crazy it’s beyond belief," this richest 6% have seen their inflation-adjusted income increase about 90% over the past 30 years while wages of the less wealthy have stagnated.

A 2005 Washington Post poll found that 81% of Americans would favor lifting the cap altogether and it has been endorsed by those"radicals" at the AARP, the largest seniors lobby in the U.S. The precedent for removing the cap is that in 1993 Congress removed the cap on the tax to support Medicare.

The Social Security Administration's chief actuary stated that removing the cap, even if it included increased benefits for the wealthy paying more, would eliminate 93% of the projected shortfall over the next 75 years.

Unfortunately, elimination of the cap is a non-starter in a Congress owned by the economic elite who might then have to pay the same tax the rest of us pay.

Or the government might tax property income, now exempt from FICA taxes, the same way wages and salaries are taxed. The current rate of taxation on long term capital gains is 15%, while the top marginal tax rate on wages is 35%. Again, such a tax would fall almost exclusively on the very richest Americans, the capitalist class, who derive most of their income from property investments.

Hence, it is politically unrealistic and not considered a viable option.

A much less desirable approach would be to raise FICA taxes on everyone from the current 12.4% (half paid by employees and half by employers) to 14.4%, which would solve the future insolvency problem altogether. This could be done by raising just the employer’s contribution and leaving the employee contribution as it is now. This would still leave the employer contribution in the U.S. below what employers pay in France.

It is argued that such a move would stifle employment, but the latest figures (for April 2011) show the unemployment rate in France only 0.1% higher than the official rate in the U.S. that is widely considered understated.

In addition, we could simply bar the U.S. government from borrowing funds from the Social Security Trust Funds that it has no capacity to repay. But this would mean the deficit problem would become immediate, rather than being delayed by borrowing from the trust fund.

None of these potential solutions are remotely acceptable to the 1% of the U.S. population, the economic elite, who own the U.S. government. Hence, these options are all outside the realm of possibility within the capitalist hegemony in the U.S.

The demographic squeeze used to justify the insolvency argument is based on several factors, primarily greater longevity, declining birth rates, higher unemployment among the youngest and oldest workers, and unemployed older workers taking early retirement.

In 2010, French president Sarkozy’s government, despite massive protests by the Left that brought millions into the streets, raised the early retirement age from 60 to 62 and full retirement from 65 to 67. These changes are not fully applicable until 2018.

The U.S. system is in the process of a similar transition. In 2018, the retirement age necessary for a pension is projected to be the same in both countries.

This change in the French system is supposed to make their system fully solvent into the foreseeable future. Yet in the U.S., rightists continue to argue that the U.S. system, with the same age of retirement and lower benefits, will not be solvent in the future, despite the fact that the demographics show that France has a greater disparity between active workers and retirees. One might reasonably ask why what works for France isn’t working for the U.S., which has less of a problem.

It is also notable that the solution Sarkozy chose to shore up the French system was considered a relatively moderate one. Given very high levels of public opposition, cutting benefits or raising taxes was considered out of the question and he paid a heavy political price for the measures he took. His subsequent approval ratings set record lows for any president in the post-WWII history of France.

Like in the U.S., social security pensions in France have huge constituencies and massive popular support. When recently polled on how to resolve the “debt crisis” in the U.S., respondents rejected changes in Social Security and Medicare by 68% to 28%. In France, the margin of support for the pension system is even greater.

In France, there are five categories of old age pensions, three of them public and universal, two private but strictly regulated.

First, there is a minimum old age pension one may receive even if you have never been employed. It is means tested and to qualify you cannot earn more than roughly $11,000 annually (at an exchange rate of $1.40 equaling one euro). It is also available to those whose qualifying earnings under the state pension system would result in a pension less than this minimum one. It pays about $12,000 annually to an individual or $19,500 to a couple.

The second tier of the French system has 26 compulsory schemes, based on occupational groups largely funded by contributions from both employees and employers. Although schemes are not run or financed directly by the government, they are regarded as public pensions, typically administered by boards composed of representatives of workers and employers, and have to conform to principles determined by the state.

The largest "general" scheme covers all wage-earners in the private sector. This is a mandatory state pension program that aims to provide payments up to a maximum of 50% of the retiree’s highest earning years, with payouts limited to a maximum, of 35,000 euro/$50,000 annually. In contrast, the maximum annual payout under the U.S. Social Security system is only $28,392.

This French retirement program is funded by payroll taxes at a rate of 6.65% paid by employees and 8.3% paid by employers, collectively 1.55% more than is paid by workers and employers in FICA taxes in the U.S.

In comparison, social security taxes in the U.S. are currently 12.4% of wages up to $106,800 per year with employees and employers each paying half. Those making more pay nothing on what they earn above the income cap. Hence, the U.S. system is funded by a regressive tax with those making more than the cap paying at a lower rate than those making less than the cap.

In 2012, the employer contribution is set to be reduced to 4.2%, while the employee contribution stays at 6.2%, a peculiar step given the concerns over the U.S. “debt crisis” and the Social Security system’s long term solvency.

Third, there is a mandatory occupational pension program with separate categories for private sector workers, civil servants and managers/executives. Contributions vary depending on your category, with higher rates for the managers/executive category and lower rates for workers.

Non-managerial workers pay nothing into this fund on their first $50,000 in annual income and 7.7% on earnings above that level. Civil servants pay 1.5% below $50,000 and 4.76% above. Managers and executives pay corresponding rates of 3% and 8%. Their employers pay more: none for workers' wages below $50,000 and 12.6% above, 3% and 9.26% for civil servants, and 3% and 12% for managers.

The goal of this program is to raise the retirement income to 70-80% of the beneficiary’s highest earning years. These programs are now considered solvent despite France’s higher old age dependency ratio and the fact that French retire roughly four years earlier than Americans and live two years longer.

In addition to these public pension programs, France has optional private pension programs, both collective and individual, much like those in the U.S. These are strictly regulated. It is unthinkable that you could loose such a pension if your former employer went out of business. Nobody in France could believe what happened to employees of Enron or imagine that the stock market could have an impact on the pension system.

Because of the adequacy of the public pensions, most people in France do not have private pensions and those who do are mainly at executive level. The UK based Pensions Policy Institute asserts that French pensioners receive 90% of their pre-retirement income from their various pension resources.

In comparing the old-age pension system with that in the U.S., we see a representative example of results of socialism in France. Employers, the wealthy, and managerial personnel pay higher rates and those rates increase with income. Hence, the French system is funded by a progressive tax with the lowest paid workers paying little or nothing to benefit from some components of the system.

In the U.S., FICA is regressive, the upper income brackets paying less or nothing if they derive their income from property. This reflects France’s recognition of the inherently exploitative nature of capitalism that results inevitably in greater economic inequality that the state must ameliorate in order to maintain the equality component of “liberty, equality, fraternity."

In contrast, in the U.S., with a government of, by and for the richest 1%, individualism is glorified, the commons is denigrated, and principles of social solidarity ar deemed unworthy of serious consideration.

[David P. Hamilton has been a political activist in Austin since the late 1960s when he worked with SDS and wrote for The Rag, Austin's underground newspaper. Read more articles by David P. Hamilton on The Rag Blog.]

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