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, Congress has produced no meaningful solution to the program’s funding shortfall over the past two years. If anything, congressional leadership and the administration 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 not cut FICA (the Federal Insurance Contributions Act, or “payroll tax”) rates, currently sitting at a 12.4% tax on earned income split evenly between the employer and the 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 by then. The Trust, which is currently comprised of more than $2 trillion in 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 born approximately between the Second World War and the mid-1960s.
An empty Trust would necessitate that all Social Security benefits be funded dollar-for-dollar by contemporaneous payroll tax revenue, effectively acting as a transfer from the working-age population to program beneficiaries, such as retired and disabled workers and the surviving spouses of workers. These are some of the most vulnerable members of our society, and according to the Social Security Administration, such beneficiaries enrolled after the Trust is depleted will receive just over three-quarters of what current beneficiaries are guaranteed. This is 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. Surely, somebody in Washington took a glance at a population pyramid and saw this coming, right?
UC Berkley Economist Robert Reich believes that lawmakers did, in fact, foresee the fiscal onus posed by the retirement of the baby-boomers, but failed to account for rising income inequality. Indeed, a report by the Congressional Budget Office states that rising income inequality will reduce the percentage of earned 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, Social Security’s revenues exceeded its costs. Congress took this fact for granted and chose to forego the necessary but potentially unpopular changes that were 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. We now find ourselves trapped in a state wherein Social Security’s expenses are simply too high for its revenues to catch up.
We can fix this, however, and there are many reforms that Congress should consider. Privatization should absolutely not be one of them, as studies have shown this avenue to be less cost-effective than the current administration. But 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 supposedly predicated: “I will get out of it what I paid into it.” Well, unless we want Congress to worsen our national debt by borrowing enough money 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 earners by 1.39 percentage points each, potentially cutting spending and investment.
Another way to reduce the funding gap would be to increase, or even eliminate, the maximum income cap subject to FICA taxes. 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. The very existence of this cap makes the FICA tax what’s called a regressive tax, meaning lower- and middle-income earners must fork up 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. In other words, while payroll taxation is regressive, favoring the wealthy, dispensation of Social Security benefits is progressive, favoring the not-so-wealthy.
One the other hand, 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, reducing the program’s added costs by adjusting benefits for inflation according to chained CPI instead of the CPI, or simply doing nothing and allowing the Trust’s surplus to deplete at the expense of future beneficiaries. Right off the bat, the first two, apart from being widely unpopular, would not come close to closing the funding gap (unless, of course, the retirement age were to be raised to an unreasonable level).
Another option on the table has been to explore means testing benefits further – yes, further. As mentioned, the program’s benefits are proportionally concentrated on those who need them the most, meaning wealthier beneficiaries don’t feel the same benefit as their less-wealthy counterparts. However, there is a widely held mischaracterization of Social Security as a universal entitlement into which everyone pays equally, and from which everyone derives equal benefit. Not only is this not the reality of Social Security, but current demographic trends may preclude this from ever becoming reality in the coming decades. If we hope to close Social Security’s funding gap, it is imperative that we alter our understanding of the program according to what it is, and not what we believe it to be. 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 true character of Social Security from social insurance to public assistance.
Such a change, and any changes predicated on closing the Social Security funding gap by increasing its revenues, is not so outlandish if we try to think of Social Security as though it were any other form of insurance. Not everyone who pays into, say, a health insurance plan derives equal benefit. However, plan members who are likely to be costlier are required to pay more. The same is supposed to be true of social insurance. All workers pay into social security, and it is natural for some of us to receive in a manner not exactly commensurate to our contribution. However, while we make that contribution hoping never to be completely reliant upon the program’s benefits, we can rest assured knowing 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. Keeping the premise of social insurance in mind, is it really fair to deny future beneficiaries their fair share?
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, which leads to further spending and further growth. Prosperity begets 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 failing to address Social Security’s funding gap, our elected officials have, by default, chosen to disadvantage future retirees, disabled workers, and the widows of workers. If Congress decides to act, the outcome will likely be a mix of some or all of the aforementioned measures. But I, like most Americans, believe that while 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. In other words, Congress should not start not by forcing higher taxes upon businesses and lower- to middle-income workers, but by instead targeting those individuals to whom the vast majority of new income has flowed in recent decades. This could perhaps be done by raising the income cap, or even by taxing alternative sources of income to fund the program, and not just earned wages.
Hopefully, Congress will refrain from enacting any cuts to Social Security and enact some common-sense solutions to fund the Trust moving forward. Republicans, Democrats, and Independents alike will attest to its importance, but its continued success requires that we ask which outcome is fair, that our elected officials decide who will have to bear the greatest cost, and that the program be tweaked accordingly.
Social Security is one of the greatest policy experiments upon which the United States has ever embarked. Our continued dedication to this experiment is emblematic of our commitment to one another and to our collective future.