There’s No Need To Panic About Social Security

Prof. Paul Krugman explains a few things about Social Security:

The thing about Social Security is that from the beginning it was designed to encourage misconceptions. It looks, on casual inspection, like a giant version of a private pension plan. You pay into such a plan during your working years, contributing to a pension fund, and when you retire, you receive payments from that fund in proportion to the amount you put in….

I haven’t studied the detailed history of the program’s origins, but I’m pretty sure that it was set up to look like an ordinary pension fund because that made it politically easier to sell. But in reality, Social Security has never been run like a private pension plan.

For one thing, for the first half-century of the program’s existence, it had almost no assets; in 1985, the trust fund was only large enough to pay around two months’ worth of benefits. So it has always operated mainly on a pay-as-you-go basis, with today’s payroll taxes paying for today’s retiree benefits, not tomorrow’s.

I often get mail from people claiming that this makes Social Security a Ponzi scheme. But it isn’t. It’s just a government program supported by a dedicated tax, which is fairly common — for example, that’s how we pay for roads and bridges, which are funded by gas taxes.

The other way Social Security is unlike a private pension is that what you get out isn’t at all proportional to what you put in. Workers with low earnings get a much higher share of those earnings replaced than higher-wage workers. In the past, this made the program strongly redistributive — a much better deal for workers with low pay than for workers with high pay.

By the late 1970s, it was clear, however, that Social Security was facing financial trouble down the road. The baby boom ended in 1964, so the working-age population, which grew rapidly as long as boomers were still entering the labor market, would grow more slowly in the decades ahead; this meant that the program’s tax base would grow more slowly than the number of beneficiaries, especially once the boomers began retiring.

So in 1981 a bipartisan commission set out to secure Social Security’s future. It tried to do so with two measures. First, it increased the payroll tax rate; the idea was to make Social Security a bit more like a “real” pension fund by taking in more than it was spending, building up a serious trust fund that could help defray costs once the baby boomers hit the system. It also set in motion a gradual rise in the age of eligibility for full benefits, which started at 65 and will reach 67 for those born after 1960.

All of this was supposed to secure the system’s finances until 2060. It did, in fact, buy the system a number of decades, but the Social Security Administration currently expects the trust fund to be exhausted by 2035. The main reason for the shortfall, as I understand it, is that taxable wages have grown more slowly than expected, which in turn is largely the result of rising inequality: A growing share of overall income has gone to people with really high earnings, and much of that income [anything over $160,200] isn’t subject to the payroll tax….

So what happens once the trust fund is exhausted? The system doesn’t collapse — but payroll tax receipts are expected to be only about 80 percent of promised benefits. So if nothing is done, benefits will suddenly have to be slashed by 20 percent.

That, however, almost certainly won’t be allowed to happen. These programs are both immensely popular and deeply relied on, after all.

One obvious course of action would be to provide the system with more money. I get a lot of mail from people saying that we should simply eliminate the upper limit on the payroll tax. That would certainly raise a lot of money. But bear in mind that there’s no fundamental reason Social Security has to be financed with payroll taxes; we do it that way only because back in 1935, F.D.R.’s advisers thought it would be a good idea to dress Social Security up to look like a private pension fund. And Social Security isn’t the only program that’s going to need more money unless we cut expenses. So we should be trying to figure out the best way to raise a few more percentage points of G.D.P. in taxes. To achieve that, raising the payroll cap may not be the best way to go.

The other idea I hear a lot is that we should raise the retirement age — which has already been increased, from 65 to 67. After all, people are living longer, so they can work longer, right?

Well, some people are living longer. But one key point in thinking about Social Security is that the number of years you can expect to spend collecting benefits has become increasingly linked to the income you earned earlier in your life. Here’s a chart everyone discussing retirement ages should know about, although many don’t. It shows how life expectancy at age 65 has changed for Americans with different levels of income.


:…. Life expectancy has indeed risen a lot for the affluent, but for the less well-paid members of the working class, it has hardly risen at all.

What this means is that calling for an increase in the retirement age is, in effect, saying that janitors can’t be allowed to retire because lawyers are living longer. Not a very nice position to take.

Growing disparities in life expectancy also mean, by the way, that Social Security isn’t as redistributive as it used to be. Low earners get more of their income replaced than high earners, but this is increasingly offset by the fact that they have fewer years to collect benefits.

In any case, I hope we don’t raise the retirement age further. As I wrote last week, what we need is medical cost control plus moderate tax hikes.

And meanwhile, don’t worry too much about your future benefits. Social Security isn’t a Ponzi scheme, it isn’t going bankrupt, and it will probably continue much as it has.

Meanwhile, an article for Politico suggests a way to protect Social Security that nobody seems to mention.

There are a lot of strange aspects about [the Social Security] debate, but perhaps the oddest is that [everybody acts] as if Social Security is the only part of the U.S. old-age benefit system. The other parts of the system — including defined-benefit (DB) pensions, defined-contribution (DC) plans like 401(k)s, and individual retirement accounts (IRAs) — are rarely mentioned and completely spared from proposals to cut benefits….

According to the Joint Committee on Taxation, the tax advantages for DBs, DCs and IRAs will cost the federal government $371 billion this year…. Given these tremendous [tax breaks], it is initially hard to understand why people who seem so worried about the costs of old-age benefits choose to focus solely on Social Security. But it becomes easier to understand once you realize who benefits the most from the various parts of the old-age system….

According to the Congressional Budget Office, the richest 20% of Americans receive 58.1% of all the government subsidies provided to DBs, DCs and IRAs while the poorest 20% receive just 1.3%….

DBs, DCs and IRAs also provide significant amounts of fee revenue to Wall Street banks and other financial intermediaries who administer the tens of millions of individual accounts and pension funds….

Of course, it doesn’t have to be this way. The rules governing DCs, DBs and IRAs … can be changed just as the rules governing Social Security can be changed. If we are seriously worried about the generosity of old-age benefits or the government’s debt, then everything should be on the table and the part of the system that most favors the rich should be front and center.

For example, … gradually raising the full retirement age to 70 years old … would save $121 billion between 2024 and 2032. However, a similar amount of savings could be achieved by applying an annual 0.03 percent tax on the $34.5 trillion of assets held by DBs, DCs and IRAs…. For a person with a $100,000 IRA, the tax would amount to just $30 per year.

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….

The Plutocratic Party and Social Security

The latest Republican budget plan has a section on Social Security. Ordinarily, I wouldn’t have read it, but Michael Hiltzik, a business columnist for the Los Angeles Times, wrote an article called “Paul Ryan Rehashes An Old Social Security Lie”. 

The lie in question appears in the second paragraph below. I think it’s worth reading the surrounding paragraphs too (all of which appear on page 66 of the Republican’s budget document):

An all-too-common reaction to the fiscal problem in Social Security has been denial that a problem exists. It is claimed that the Social Security Trust Fund will remain solvent for at least a decade, at which point the government could theoretically cover any shortfall by raising taxes. Others downplay the necessity for change, contending that sustained economic growth could take care of the problem all by itself.

Neither is correct. First, any value in the balances in the Social Security Trust Fund is derived from dubious government accounting. The trust fund is not a real savings account. From 1983 to 2010, it collected more Social Security taxes than it paid out in Social Security benefits. But the government borrowed all of these surpluses and spent them on other government programs unrelated to Social Security. The Trust Fund holds Treasury securities, but the ability to redeem these securities is completely dependent on the Treasury’s ability to raise money through taxes or borrowing.

Social Security is currently paying out more in benefits than it collected in taxes–in other words, running cash deficits–a trend that will worsen as the baby boomers continue to retire. To pay full benefits, the government must pay back the money it owes Social Security. In testimony before the House Budget Committee, CBO Director Doug Elmendorf stated that:

“Well, again, Congressman, on a unified budget basis, taking account of just the tax revenues, the dedicated tax revenues, and the benefits, [Social Security] is contributing [to] the deficit now. If one instead looks at just the balance in the Social Security Trust Fund, that balance is, the annual balance is positive now, but will be negative within about a half dozen years.”

Given how difficult it is to predict the future, it isn’t clear exactly when Social Security would have trouble paying 100% of everybody’s promised benefits. As Ryan’s document says, however, the government could “theoretically” raise Social Security taxes at some point to make up the difference. The “theory” in this case is arithmetic.

Not everyone knows this, but as of 2014, Social Security taxes are only applied to the first $117,000 of a person’s income. Here’s what the Center for Economic Policy and Research says about raising that threshold and thereby putting more money into Social Security:

There have recently been several pieces of proposed legislation to raise or do away with the payroll tax cap. Sen. Bernie Sanders and Rep. Peter DeFazio have sponsored legislation that would raise the cap to income above $250,000 while Sen. Mark Begich and Rep. Ted Deutch’s proposal  would fully eliminate the cap, with a small portion of earnings above the current cap going toward benefits. If enacted, proposals like these could almost entirely close Social Security’s projected long-term funding gap without reducing benefits nor increasing taxes on the vast majority of American workers.

Of course, applying the Social Security tax to the highest incomes would also partly address the problem of economic inequality in America, a worthy goal in itself.

The statement in the second paragraph that “any value” in the Social Security Trust fund is “dubious” is the one that Michael Hitzlik called a lie (it’s good that reputable journalists are finally getting around to using that word). I’ve heard this claim before – that somehow the Social Security Trust Fund doesn’t have real money in it – but never understood how such a thing could be true. As Hitzlik explains, the Trust Fund holds almost $3 trillion (not billion, but trillion) worth of government bonds. In fact, as of December 31, 2013, the Department of the Treasury said these bonds were paying an interest rate of 3.626% and were worth 2,765,212,571 dollars (give or take a penny).

So why aren’t these bonds worth anything, according to the Republicans? Their idea seems to be that since the Trust Fund paid cash for those government bonds, and the government used that cash for various non-Social Security purposes like watering the White House lawn and paying Paul Ryan’s salary, the government has already spent the money in the Trust Fund. So it’s gone!

However, in the real world, when someone purchases a bond, whether the buyer is the Trust Fund or an individual investor, the bond pays interest (for example, 3.6%) and can eventually be redeemed (converted back into cash). That’s how investing in bonds works. Whatever the government did with the cash it got from the Trust Fund is irrelevant, so long as the government keeps paying interest and redeems its bonds when they mature.

The second “reason” they offer for saying all those bonds are worthless is that the government could stop paying interest on them and not redeem them when they mature. That’s what’s known as the U.S. government “defaulting” on its financial obligations.

As the Republicans say, the government’s ability to meet its obligations depends on raising revenue, either by taxing or borrowing (or selling stuff like national forests). But that’s what the government has been doing for more than 200 years. Is there any reason to think that the federal government will eventually become unable to pay its debts, including its debts to the Social Security Trust Fund? No, the United States is the richest country in the world. Investors all over the world, including foreign governments, believe our government’s bonds are very safe investments.

In fact, the only remotely likely scenario in which the government fails to pay its debts is if Republican extremists somehow manage to shut down the government again for an even longer period of time, which stops the government from levying taxes and selling more bonds! That’s what the Republicans recently threatened to do, many of them arguing that a government default wouldn’t be a very big deal. So on one hand, the Republicans claim to worry that the government won’t pay its debts to the Social Security Trust Fund, but on the other hand, they think it might be o.k. if the government didn’t pay its debts. (These people truly are amazing.)

The quotation above ends with the Republicans making the point that Social Security is running a deficit and the deficit is expected to get worse. That’s true, and that’s why raising the income cap would “theoretically” be a good idea. They then quote some testimony from the head of the Congressional Budget Office. I had to read that paragraph several times to see if it somehow supported the Republican contention that Social Security is in deep trouble. It doesn’t.

What the head of the CBO is saying is that Social Security is affecting the overall federal deficit now (since the government is paying what it owes to Social Security) and the Trust Fund itself will start running an annual deficit in about six years. What the Republicans don’t bother mentioning is that the Trust Fund is expected to have money in it until 2033 (and that’s if nothing is done in the meantime to put more money into the Trust Fund). Plus, even if the Trust Fund were to run out of money, Social Security would still pay about 75% of everyone’s promised benefit, since working people would still be paying Social Security taxes (reference here).

The Republicans go on to suggest limiting benefits for upper income Social Security beneficiaries (certainly a possibility) and hint that maybe the retirement age should be raised because people are living longer (which is a bad idea, because it wouldn’t save much money and lots of people – unlike politicians – can’t keep working or can’t find jobs by the time they reach 65 or so).

For all their fear-mongering, Ryan and his colleagues don’t offer a solution to this supposed crisis, except to suggest that the President go first by making some specific recommendations (which they can then use to attack him as an enemy of Social Security). The Republicans even suggest that benefits should be increased for low-income retirees (another good idea, but one more often made by us “tax and spend” Democrats). 

Michael Hiltzik thinks this budget document is evidence that Republicans don’t want the government to make good on its debt to Social Security:

When you hear people like Paul Ryan talk as though the country can’t afford to pay back the money by redeeming the bonds in the trust fund, what you’re hearing is the sound of the wealthy preparing to stiff the working class. If the income tax has to be raised to turn those T-bonds into cash for payment of benefits over the next couple of decades, that’s how the rich will be made to repay the people who lent them the money. Some people love to claim that the government has “stolen” the trust fund. The correct reply to that is: “Not yet.” But if Ryan has his way, yes, the money will be stolen. It’s up to you and me to make sure that doesn’t happen.

The idea would be, I guess, that if the Trust Fund doesn’t have any real money in it now, we won’t miss it when it’s gone. I’m not convinced that’s the Republican plan. But I’ve given up trying to understand whether people like Ryan are knaves (unscrupulous and dishonest) or fools or both. What’s clear is that their principal goal as politicians is to serve the needs of the wealthy. The surprising thing is that so many voters, in particular, the Tea Party types who don’t want the government messing with their Medicare or Social Security, continue to vote for the Plutocratic Party. 

For more on Social Security (if you can stand it), there was a recent article at Salon written by a so-called “Millennial”. He rejects what most of his generation believe: that Social Security will go bankrupt before the Millennials can collect any benefits. He also argues that it makes no sense to be a “social conservative and economic liberal”.

PS — Ryan Budget Gets 69 Percent of Its Cuts from Low-Income Programs

More Budget Baloney From a Leading Political Party

Republican Congressman Paul Ryan, chairman of the House Budget Committee, issued his proposed federal budget yesterday. The Republican majority on the Budget Committee is expected to approve it. Fortunately, even if the full House of Representatives approves it, the Senate won’t.

Nevertheless, Ryan’s budget is worth knowing about. It will influence the budget Congress eventually agrees on and it offers yet another clear statement of the Republican Party’s insane priorities. 

In brief, the Ryan budget calls for a big tax cut on high incomes, a lot more spending on the military, and a lot less spending on programs like Medicare and food stamps. In addition, Ryan would repeal the Affordable Care Act, even though there are now some 10 million people who have health insurance because of that law (via private insurance or Medicaid).

Ryan claims his budget will eliminate the federal deficit in ten years, despite the tax cuts and increased military spending, because he makes stuff up.

One part of the Republican budget document deals with Social Security. I plan to write more about that in a future post, but for now, consider this amazing sentence from page 66: 

Any value in the balances in the Social Security Trust Fund is derived from dubious government accounting. 

The Treasury Department says the government bonds in the Social Security Trust Fund were worth almost three trillion (not billion, but trillion) dollars at the end of December and were paying the Trust Fund an average interest rate of 3.6%. But, according to the authors of the Republican budget document, those bonds are basically worthless. They’re an accounting fiction. Such is the financial insight demonstrated by Congressman Ryan and his Republican colleagues as they go about planning our economic future. 

Periodic Update from Krugman the Indispensable

Paul Krugman was right about Bush’s tax cuts and the Iraq War. He was right about the 2009 stimulus. He’s been right about Europe’s austerity program. I’m sure he’s right about this too:

“The latest projections [from the Congressional Budget Office] show the combined cost of Social Security and Medicare rising by a bit more than 3 percent of G.D.P. between now and 2035, and that number could easily come down with more effort on the health care front. Now, 3 percent of G.D.P. is a big number, but it’s not an economy-crushing number. The United States could, for example, close that gap entirely through tax increases, with no reduction in benefits at all, and still have one of the lowest overall tax rates in the advanced world.

But haven’t all the great and the good been telling us that Social Security and Medicare as we know them are unsustainable, that they must be totally revamped — and made much less generous? Why yes, they have; they’ve also been telling us that we must slash spending right away or we’ll face a Greek-style fiscal crisis. They were wrong about that, and they’re wrong about the longer run, too.

The truth is that the long-term outlook for Social Security and Medicare, while not great, actually isn’t all that bad. It’s time to stop obsessing about how we’ll pay benefits to retirees in 2035 and focus instead on how we’re going to provide jobs to unemployed Americans in the here and now.”