Social Security

During the last debt ceiling crisis, Secretary of the Treasury Jack Lew said that unless the debt ceiling was raised, he would not be able to write social security checks. Why did he say that when there is $2.8 trillion dollars in the Social Security Trust Fund?

Every month, the government collects Social Security taxes from your paycheck. That money is then used to pay benefits to Social Security recipients. Any surplus funds are stored in the Social Security Trust Fund. However, the law requires that those leftover funds be used to purchase bonds from the U.S. Treasury. So the Social Security Fund consists of bonds instead of hard cash.

The surplus used to purchase the bonds enters the U.S. general fund and is spent on whatever budget Congress appropriates. The problem is that in 2010, the government stopped taking in a surplus every month. In that year Social Security began paying out more each month in benefits than it was collecting in taxes. This is because of retiring baby boomers.

When the benefits paid are higher than taxes received, the Social Security Trust Fund takes bonds to the U.S. Treasury to have them redeemed. Since the government typically runs budget deficits, there is no money to fund the bonds that Social Security holds. Jack Lew has to go out into the market and borrow that money. If the debt ceiling was not raised, he could not do so, and so Social Security could not get the funds it needed to write recipients’ checks.

Part of this problem is demographic.  Americans are living longer.  Average life expectancy in 1940 was 62.  Today it is almost 80.  We are an older society. In 1950 there were 16.5 workers for every senior.  Today there are 3 workers for every senior.  In 20 years there will be 2.

Another part of the problem is economic.  In 1983 Congress enacted the Greenspan commission’s “fix” for Social Security which increased the payroll tax and raised the retirement age to 67 by 2026.  Two major economic shifts have conspired to frustrate these adjustments:  The growth of U.S wages has slowed and income inequality has soared.  (John Bivens, Economic Policy Institute, 2005)

How does that affect Social Security?  The cap on taxable income for 2014 is $117,000.  The unanticipated growth in prosperity among higher income earners has pushed a larger share of our collective payroll earnings above this cap.  The Greenspan commission under Ronald Reagan had intended to collect payroll taxes on 90% of payroll earnings in our country, but today we are collecting taxes on only about 85% of payroll earnings. Stagnant wages for most of us and rising incomes among top earners have allowed too large a share of our nation’s overall income to escape the system. Not only are there more Social Security recipients compared to taxpayers, but we are taxing a lower percentage of our collective income. The result is under funding of Social Security.

 

Possible Adjustments

 

The proposed solutions are not new to anyone who has followed the debate:

Slow the benefits growth for more affluent Americans.  This is where I would put the greatest emphasis.  Even David John of the conservative Heritage Foundation accepts that, “For low income people, Social Security is not enough and high income people don’t need it.”

One suggestion is to gradually increase the retirement age.  This simply reflects the longevity improvements that have already taken place.  We are already in a phased increase leading to retirement at 67 in 2022.  There are suggestions the target age should be 68.  That decision can wait.  It also raises issues for workers with physically demanding jobs or health problems.  They should not be penalized by higher age requirements.  Instead, they should receive benefits through Social Security Disability Insurance until they reach any newly required retirement age.

Another suggestion is raising the cap on taxable income.  If we raise the taxable income level so we are again taxing 90% of payroll earnings as intended in the 1983 “fix”, estimates are that we would plug 40% of the long run Social Security deficit hole.  I support this change as part of a package of adjustments to Social Security.  I don’t know exactly what that rebalanced wage cap would be today – perhaps $150,000 (Currently, it is $117,000 for 2014).  Annual adjustments should then be made so as to continue taxing 90% of our collective payroll income.

Some propose private Social Security accounts; I don’t support private accounts.  I am open to being persuaded as a few countries are experimenting with private accounts.  However, I don’t see how that would not jeopardize the larger system. I would have to see the math that proves they don’t jeopardize the larger system.

One of Simpson-Bowles core principles for their deficit reduction proposal was “to protect the truly disadvantaged”.  I wholeheartedly embrace that baseline.  However, I can’t pretend to follow everything Simpson-Bowles proposed for Social Security.  The analysis that I have looked at claims that the lowest 20% of income earners is reasonably well protected, but benefits for the next 20% drop off sharply. I need to understand the Simpson-Bowles proposal differently before I could advocate for it regarding Social Security.

People have told me, “That is my money.  I have paid into it all my life.  Nobody is going to take away what I have coming.”  That is the same sentiment and expectation I have had all my working life.  But make no mistake about it, Social Security is a pay-as-you-go system.  We can’t change now how it was set up.  It needs to be made solvent and sustainable over the long term.

Relatively small changes now (raise the caps, slow benefit growth for the more affluent, establish a minimum flat level of benefit to protect all seniors from poverty in retirement) will extend Social Security considerably.  Congress knows someone will have to do something, eventually.  But their attitude is, “Just not them.  Not just now.” I say nonsense. I say now.