Putting the “Social” back into Social SecurityDispelling the Myths about Social Security, and the Lesson that Paying for it Can Teach Us
By Dylan NezajPublished November 18, 2018
There is widespread fear of Social Security “going broke,” fear that breeds contempt for what many perceive to be an ineffective Congress with skewed priorities. Indeed, no meaningful solution to the program’s funding shortfall has been proffered by the Republican-dominated Congress over the past two years. If anything, the president and Republican leadership in both chambers have threatened to chip away at the program upon which most middle-class retirees depend, and which provides income for millions of disabled workers.
Just relax for a second.
Hear me out.
Social Security cannot, and will not, go broke.
Okay, a caveat: Social Security cannot, and will not, go broke so long as Congress does nothing to cut FICA (Federal Insurance Contributions Act, or “payroll tax”) rates, currently sitting at a 12.4% tax on earned income split evenly between employer and employee. Indeed, claims that Social Security will be broke, bankrupt, or insolvent by 2034 are misleading, as what is truly meant is that the Social Security Trust Fund will be depleted. The Trust, which is currently comprised of more than $2 trillion of US bonds, is set to be completely eroded by sometime in the 2030s because revenue collection has not been appropriately adjusted to account for the retirement of baby-boomers, the generation approximately born between the Second World War and the mid-1960s.
An empty Trust would necessitate that all Social Security disbursements be funded dollar-for-dollar by contemporaneous payroll tax revenue, effectively a transfer from the working-age population to program beneficiaries including retired and disabled workers and the surviving spouses of workers. According to the Social Security Administration, beneficiaries enrolled after the Trust is depleted will only receive just over three-quarters of the benefits guaranteed to current beneficiaries. Consistent benefits cannot be guaranteed because the lower-birth rate generations that make up the labor force will have to sustain a population of future beneficiaries dominated by the higher-birth rate baby boomers.
You might be asking yourself how Congress let this happen. It wouldn’t have taken clairvoyance to predict that the baby-boomer generation would erode the fund’s surplus – which only exists because payroll tax revenue exceeded program costs between the 1980s and the financial crisis. Surely, somebody in Congress took a glance at a population pyramid and saw this coming, so why didn’t our legislators proactively account for this?
UC Berkley Economist Robert Reich believes that Congress and the Social Security administration did, indeed, foresee the fiscal onus posed by the retirement of the baby-boomers, but that it failed to account for rising income inequality before it began to skyrocket. Indeed, a report by the Congressional Budget Office now states that rising income inequality will reduce the percentage of income eligible for FICA taxation by two percentage points by the 2030s. Had Congress proactively accounted for such income trends, it is possible that we wouldn’t be having this conversation. But for thirty some-odd years, the program’s revenues exceeded costs, and Congress took this for granted, choosing to forego making the necessary but unpopular changes necessary to guarantee that the Trust be maintained indefinitely. The Great Recession and the dawn of baby-boomer retirement halted the program’s net positive revenue flow, and now it is trapped in a state wherein revenues are insufficient to catch up to expenses. A few reforms could be considered by Congress, but I will not entertain the idea of privatization, as studies have shown this avenue to be less cost-effective than the current administration.
Say you, like most Americans, believe that future beneficiaries deserve all of the benefits guaranteed to current beneficiaries, period. This comports with the widely held belief of fairness upon which Social Security is believed to be predicated: “I will get out of it what I paid into it.” Unless Congress decides to worsen our national debt by borrowing enough to make up the difference, it will need to expand the program’s revenue stream. Congress could simply expand the tax base by raising the FICA tax rate. The SSA estimates that raising the rate from 12.4% to 15.18% would close the gap entirely, but such a tax would increase taxes on employers and income earners by 1.39 percentage points each, potentially cutting spending and investment. Another way to accomplish this is to increase the maximum income cap or even to eliminate it entirely. Currently, the cap, which is adjusted annually to account for inflation using the Consumer Price Index (CPI), is set at $132,900 for FY 2019. As one can imagine, the FICA tax is regressive, meaning lower- and middle-income earners must pay a larger portion of their income than those earning more than the income cap. That being said, the cap has been justified by some on the basis that Social Security is ultimately a social insurance policy; while those earning more than the cap pay proportionally less into Social Security, they likewise derive less proportional benefit as well. In other words, while payroll taxation is regressive, dispensation of Social Security benefits is progressive.
Alternatively, say you are inclined to think it unfair that the labor force, including the wealthiest of wage earners, should bear the burden of closing the funding gap. You might suggest raising the retirement age, changing how benefits are adjusted for inflation by indexing according to chained CPI, or simply doing nothing and allowing the surplus to deplete at the expense of future beneficiaries, though the first two would not come close to closing the funding gap (unless, of course, the retirement age were to be raised to an unreasonable level) and both measures are widely unpopular. Another option on the table has been to explore means testing benefits further – yes, further. As mentioned, proportional benefit is concentrated on lower- and middle-income beneficiaries, meaning that the program concentrates benefits on those who need them the most. However, there is a widely held belief that Social Security is a universal entitlement whereby everyone pays into equally and derives equal benefits. Not only is this not the reality of Social Security, but current demographic trends preclude this from ever becoming reality in the coming decades. Implementing a formal means test, i.e. excluding potential beneficiaries whose earned income exceeds a certain threshold from receiving any benefits whatsoever, would fundamentally change the character of Social Security from social insurance to public assistance.
Social Security is exactly that: insurance. Not everyone who pays into a health insurance plan derives equal benefit, though members who are likely to be costlier are required to pay more. Likewise, not everyone who pays into social insurance pays equally or benefits equally. It is natural for some of us to receive in a manner not exactly commensurate to our contribution. We make that contribution hoping never to be completely reliant upon the program’s benefits while resting assured that help will be there in case we need it. Social Security’s predicament is such that either future beneficiaries will feel that they received less than their fair share of benefits, or the future labor force will feel unduly burdened by the cost of closing the funding gap.
It is important to remember that we as a society hold a collective stake in each other’s health, success, and wellbeing. The young have an interest in protecting the old, just as the wealthy have an interest in protecting the poor. Apart from the normative good such protection entails, it maintains consumer spending and economic growth. Prosperity ought to beget prosperity and asking the more prosperous, fortunate or able to lend a financial hand to the less prosperous, fortunate or able is not so much a handout as it is an investment in our collective success. A rising tide cannot carry all boats if only yachts are at sea and the dinghies are left dry upon the shore.
By doing nothing to address Social Security’s funding gap, our elected officials have by default chosen to disadvantage future beneficiaries. If they do decide to act, the outcome will likely be a mix of some or all aforementioned measures. But I, like most Americans, believe that so long as the economy is doing relatively well, the solution should primarily aim to increase revenues so that Congress has room to cut taxes and increase expenditures to help the economy bear the brunt of the next recession. Congress should not start to close the funding gap by directing taxes onto businesses and lower- to middle-income workers first, but instead should target those individuals to whom the vast majority of new income has flowed in recent decades, perhaps by raising the income cap, or even by funding the program by taxing alternative sources of income and not just earned wages.
Fiscal common sense holds that the government ought to run a larger budget deficit during recessions in order to stimulate consumption while taking advantage of booms by closing that deficit and curbing excessive growth and runaway inflation through some combination of increasing taxes and reducing spending. If Congress’ actions during the past two years have indicated anything, it is that raising taxes on the wealthiest of Americans, despite rising income inequality and the great gains made by the wealthiest in our society, is anathema to the ruling party. If the economy is really performing as well as Trump and the Republicans in Congress have boasted, then they should have spent these past two years closing the deficit, not exacerbating it. So much for fiscal responsibility, but I digress.
Hopefully, a Democrat-controlled House will act as a check against cuts to Social Security and any further handouts to the extremely wealthy at the expense of the middle class while enacting some common-sense solutions to fund the Trust. Democrats, Republicans, and Independents alike will attest to the importance of the program's continued health. Social Security is one of the greatest policy experiments upon which the United States has ever embarked, having lifted millions of elderly and disabled Americans and their dependents out of poverty while providing income security to many millions more. But its continued success requires that we ask what outcome is fair, that our elected officials decide who will have to bear the greatest cost, and that the program be tweaked accordingly. Our continued dedication to this experiment, tasking though it may be, is as imperative as it is emblematic of our commitment to one another and to our collective future.