As a new administration prepares to take power in Washington, I want to revisit a topic that long-time readers know I like to address every few years: Social Security. It’s an evergreen topic for me, since I can count on Congress and the White House continuing to refuse taking any steps to obviate the problems that are growing worse by the day.
And judging from the campaign rhetoric of both President-Elect Trump and Hillary Clinton, the incoming White House would not have been likely to take a different tack, no matter who won the election.
Let me start by saying that I am a big fan of Social Security. I have no interest in “killing” it. Since it began in 1935, Social Security has been a tremendously valuable program, greatly reducing poverty rates among retirees, those with disabilities, and their dependents. Today, more than 60 million Americans (almost 1 in 5) receive benefits from Social Security’s programs.
It’s a program that truly affects us all. Every worker (and employer) in the United States contributes to the program through payroll taxes. This well-known fact leads most of us to think of Social Security as a kind of investment, or possibly insurance, program.
After paying into Social Security all our working lives, we might well think of those monthly retirement or disability checks as benefits we have earned, perhaps increased by interest over time.
Social Security could have been set as such a program, with each worker’s payments earmarked for later disbursement.
But for very practical reasons, that’s not how the system works. Since benefits were paid out in the early years of the program to beneficiaries who had paid hardly any payroll taxes prior to retiring, it was the taxes paid by those still working that paid for their benefits.
And that’s the way the system has continued to operate ever since. This works as long as current workers are paying in sufficient taxes to cover the benefits paid out to current retirees. But demographics are working against us.
In 1940, there were 159 workers paying taxes towards the cost of each beneficiary. In 1960, there were 4.9 workers for every recipient. Today, there are about 2.8 workers per recipient.
And by the time all the Baby Boomers have retired (and an estimated 91 million Americans will be collecting Social Security), there will be only about 1.9 workers per recipient.
That’s clearly going to present a problem.
Well, what about that Trust Fund we hear so much about whenever this topic comes up? Aren’t there trillions of dollars owed to Social Security that will cover any arrears?
Unfortunately, no. First of all, the Trust Fund isn’t what you and I mean by “trust fund.” The trust fund represents the total of excess payroll taxes collected over disbursements. At present, they amount to about $2.5 trillion.
But that excess money wasn’t put in a bank, or invested in stocks. It was borrowed by Congress and spent on the rest of the government’s bills (thus reducing the annual deficit in those years). In return, Social Security was given special interest-bearing Treasury Notes payable by the U.S. at a future date.
I’m not suggesting T-bills are insecure investments, and surely this money will indeed be made available to Social Security when needed. But those notes (and the hundreds of millions in interest they have earned over time) will be paid off with money acquired in the same way the government acquires all its money: through higher taxes or further borrowing from domestic and foreign sources.
In other words, each year the trust fund is tapped, the federal deficit (which I trust we will still be running) will be enlarged by that amount. Effectively, we have traded lower deficits in earlier years for higher deficits in future years.
Whatever you think of that as an “investment,” it’s clear that the trust funds won’t make paying future Social Security beneficiaries any easier than it would have been without them.
And it doesn’t address our problem in years to come of needing to pay out billions more than we take in.
Did I say billions? Oh, silly me. I meant trillions. The projected shortfall, assuming no changes are made to the program between now and then, will reach $1 trillion in 2045 alone, and nearly $7 trillion in the year 2086.
Over the next 75 years (the period the Social Security Trustees are charged with securing the program’s liquidity), it’s estimated that the shortfall will total a staggering $134 trillion.
A problem indeed.
Now, is this a problem that is difficult to solve? No, not really. Economists and politicians have proposed a number of quite practical steps that could, individually or together, address the shortfall and turn the system back into a pay-as-you-go one without deficits.
Here are just a few: How about increasing the payroll tax rate, gradually, by a percent or two? What about raising the cap on salaries subject to Social Security withholding? That was an idea Hillary Clinton championed.
What about slowly raising the retirement age? Wait: aren’t we doing that now? Yes, but that will stop when the retirement age hits 67 (something that was decided back in 1983).
We could continue that gradual rise to reflect our rapidly expanding longevity and increasingly healthy lifestyles — something not anticipated to this degree back in 1983, but clearly evident now.
We could also impose a “means test” for recipients (that is, reduce benefits paid to wealthier retirees), or change the formula for the annual cost of living increases, or impose an across-the-board decrease in benefits, or...
How much good would each of these potential steps do? Glad you asked.
Last June, the Penn Wharton Public Policy Initiative, a nonpartisan research group, unveiled an online program that allows users to apply the six types of changes mentioned above, in any of 4,000+ combinations, to see how they would affect the 75-year solvency of Social Security.
Not surprisingly, a little bit of a lot of different steps — each of which would gore a different ox — implemented gradually over a period of many years would produce a perfectly reasonable solution. See http://bit.ly/SocialSecuritySimulator
But we’re talking about Congress and the White House here, which are very sensitive to the fact that many of those variously gored oxen are quite powerful politically and vociferous in opposing any harm to themselves.
It seems to me that, while imposing most of the burden on any one group (current workers, seniors, employers, the affluent, etc.) would justify loud objection, it should be much easier to accept if a small bit of pain were imposed on all potential beneficiaries.
The longer we wait to act, the more painful those solutions will be for all of us. The sooner we solve this very solvable problem, the more we and our progeny will benefit.
I urge you to encourage your congressional representatives to take this issue seriously — and to let them know you won’t vote them out of office if they do so.