The Good News About Social Security

Democrats created Social Security in 1937 over the usual Republican opposition. People with jobs put money in while they work and take money out (usually more than they put in) when they retire. The program has been in the news lately because President Biden pointed out that at least one leading Republican had suggested Social Security and all other government programs should cease to exist every year unless the president and Congress agreed to renew them in some form or other (he seems to have backed away from that position after more people heard about it).

Since Social Security and its finances are a big deal, it helps to know the truth. Josh Marshall of Talking Points Memo explains:

Political reporters remain way behind when it comes to seeing through the flimflam of Republicans’ schemes to cut or dismantle Social Security. [Too often,] press accounts of the financing of the program [aare] trapped in Republican talking points. In X number of years, we hear again and again, Social Security will become “insolvent.”

But this isn’t true. At best, it’s a totally misleading way to describe how the federal government pays for things.

Social Security and Medicare are funded (almost entirely) by a payroll tax of approximately 15% on wage and salary income up to a statutory cap, which currently stands at $160,200. That tax is split between the employer and the employee. It funds the two programs. A couple generations ago, Congress increased the tax to build up a surplus to pay for the benefits of the Baby Boom generation. That’s the “trust fund.” Social Security “lent” that extra money to the rest of the federal government, i.e., it purchased government bonds. Eventually the Trust Fund will run out of bonds to cash in. The current estimate is that it will happen in the mid-2030s. This is when Social Security supposedly becomes “insolvent.”

But that’s a meaningless term. The federal government has to pay its promised benefits. If they can’t all be paid out of payroll taxes, the remainder can and will be paid out of general revenues. This was actually the assumption about what would eventually happen back when the program was founded almost a century ago. (Look it up.)

This doesn’t mean it’s a non-issue. It means there will be a funding gap and that’s a budgetary issue to be resolved. It’s not “insolvent.” That’s just scare talk. Now, how can the funding gap be resolved? You could just pay the remainder out of general revenue (the general tax base of income, corporate, capital gains and other taxes that are not tied to any specific program). But there’s another more straightforward approach: just rejigger the payroll tax.

You could simply raise the payroll rate. But that’s a bad idea….Payroll taxes are really regressive. You’re paying about 7.5% on the first dollar you make up to $160,200. No deductions or anything. Every dollar. Most economists would say you’re actually also paying the employer side too because that’s money that goes to the cost of employing people that would otherwise go to the employee. So there’s a good argument that low- and middle-income workers are paying a flat tax of 15% on every dollar they make. It makes no sense to raise that rate. The simpler and more equitable solution is just to raise the cap.

It gets raised every year by a calculus tied to cost of living and related measures… But I mean raise it to a higher level, beyond the annual increase. There are various ways to do this. You can just raise the number from $160k to say $200k or $250k. Or, perhaps more equitably, you could leave the cap at $160k and have it kick in again starting at $500k. That way you put most of the burden on very high income earners.

Obviously there are a limitless number of ways you can do this. The point is that there are really basic budgetary changes that solve the problem — the problem being that there is a larger share of retirees to younger workers. (Another way to help with this problem is to welcome more working-age immigrants.)

Of course, you could just start cutting benefits — as Republicans want to do. But that’s a values question more than an economics one. Who should carry the burden of this shortfall, seniors on fixed incomes or the people getting rewarded most in the current economy? Income inequality is a key part of this equation on every front, both as a matter of equity and adjusting Social Security finances and because rising income inequality has itself weakened Social Security financing. As more income has been pushed into the higher tax brackets, more income has been removed from the Social Security tax base.

The global point is that there’s no “insolvency” or “bankruptcy.” That makes the whole thing sound like some looming crisis, which it’s not.

For example, Senators Elizabeth Warren and Bernie Sanders have proposed changes that would keep Social Security fully funded for 75 years (and increase benefits).

More from Mr. Marshall:

Since we’re talking about whether Social Security survives for future generations, we should start with understanding the various ways the program’s foes propose to limit or get rid of it. Since Social Security is one of America’s most popular government programs, virtually no one says they want to get rid of Social Security…. Plans to cut it or phase it out entirely are almost all framed as ways to “improve it” or “save” it….

For years, the Republican policy of choice was converting Social Security into a 401k-like system of private accounts. This was billed as a way to avoid the program’s inevitable “bankruptcy” and make it “better”…. This is what President Bush tried and failed to do in 2004 and 2005. There’s nothing wrong with a 401k….But it’s not Social Security. [A] 401k places the risk on the individual rather than socializing the risk, which is the heart of what social insurance [like] Social Security is….

The other approach Republicans look toward is to leave the structure of the program more or less as it is and just reduce the benefits. There are three different ways benefit cuts are usually proposed…

The first is simply to increase the age of eligibility [since] people live longer than they did when the program was first created… Regardless, it’s still a cut. Fewer years of eligibility means fewer total dollars you receive. It also means needing to work longer [note: which is fine for people in Congress but not so great if you work in construction or some other physically taxing job].

The second approach is to change the formula that determines the annual increases that allow security benefits to keep up with the cost of living… There is actually some real debate about whether the current cost of living formula is the most “accurate” way to calculate cost of living and purchasing power. It’s highly, highly technical, but the technical issues are mostly beside the point… It’s still a cut from the current formula. A beneficiary in 2060 will get a smaller check than they would have with the current system…

The third broad category is what’s called “means testing”. You save money by seeing how much people really need the money when they retire. Advocates of this approach point out that Bill Gates doesn’t need his Social Security check….In practice, of course, [means testing would have] to apply to a lot more people than  Bill Gates… Otherwise you’re not saving any money….

This very broad overview leaves out a lot of detail, and not just technicalities. Social Security supports a lot of people across the age spectrum [including the disabled], not just retirees. Because my mother died when I was a child, my father (or whoever had been my legal guardian) received Social Security checks to support the costs of raising me until I turned 18….

No one is going to argue with “making Social Security better”. But it’s hard to see how cutting benefits make it better….The only way you can make the argument that cuts make Social Security “better” is if you start with the claim that it’s currently “going bankrupt.” But it’s not.

And one last thing:

Despite the fact that Republicans have been demanding cuts and a phase-out for years and despite the fact they will continue to do so after the current burst of media attention abates, they are now demanding that President Biden not say what their policy is….Indeed, what’s especially weird is how many Republicans can’t help restating their demand for cuts [such as increasing the age of eligibility and means testing] even while denying their demand for cuts….