[ All the talk of Social Security “going bankrupt” or becoming
“insolvent” is just plain wrong. This is just scare talk designed
to convince people that big cuts to the program are necessary and
inevitable. It’s simply not true.]
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HOW NOT TO GET HOODWINKED ABOUT SOCIAL SECURITY GOING “BANKRUPT”
 
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Josh Marshall
February 13, 2023
Talking Points Memo
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_ All the talk of Social Security “going bankrupt” or becoming
“insolvent” is just plain wrong. This is just scare talk designed
to convince people that big cuts to the program are necessary and
inevitable. It’s simply not true. _

Social Security Administration's main campus, Woodlawn, MD., AP
Photo/Patrick Semansky // Talking Points Memo

 

It seems like every decade or so we have to suit up to defend Social
Security from its (mostly) Republican foes. And it seems that way
because it is that way. This will be a major political and policy
issue for the next two years at a minimum. So I wanted to start us off
with a basic explanation of why all the talk of Social Security
“going bankrupt” or becoming “insolvent” is just plain wrong.
This is just scare talk designed to convince people that big cuts to
the program are necessary and inevitable. It’s simply not true.

DeBamboozling the Social Security Scare Talk
­

I mentioned a few days ago
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political reporters remain way behind when it comes to seeing through
the flimflam of Republicans’ schemes to cut or dismantle Social
Security. I was reminded in a TPM Reader email a few mornings ago how
often the press accounts of the financing of the program itself remain
trapped in GOP 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 that 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 and if they can’t all be paid by 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 just 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. One
of the first articles I ever wrote
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journalist — 25 years ago — was on this point: payroll taxes are
really regressive. (The linked article says 2001 but it was actually
published in 1998.) 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, sort of like an inverse cost of living adjustment.
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. But that’s a solution for
another post.) 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 also 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.

THE VARIOUS WAYS TO ELIMINATE AND GUT SOCIAL SECURITY

By Josh Marshall

February 13, 2023
Talking Points Memo
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President Franklin Delano Roosevelt signing the Social Security Act of
1935. (Social Security administration photo)
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. (Except Sen. Mike Lee
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Plans to cut it or phase it out entirely are almost all framed as ways
to “improve it” or “save” it.

So for instance on CNN this weekend Sen. Mike Rounds (R-SD) compared
Social Security to defense spending. “We’re never going to not
fund defense. But at the same time we — every single year, we look
at how we make it better. And I think it’s about time we start
talking about Social Security and making it better.”

So what are the options?

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.” In reality it was a plan to scrap the program and, as
I said, replace it with a slighted more regulated system, like 401ks.
This is what President Bush tried and failed to do in 2004 and 2005.
There’s nothing wrong with a 401k. You probably have one yourself.
But it’s not Social Security. Technically it’s the difference
between a defined benefit and a defined contribution retirement plan.
More simply, a 401k places the risk on the individual rather than
socializing the risk which is the heart of what social insurance is.
Social Security is a form of social insurance.

In modern thinking, ideally you want to retire with three things:
Social Security, savings in a 401k or other tax deferred system and a
pension. Few people have pensions these days, so it mostly comes down
to one and two.

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,
though the third I’ll discuss gets talked about less these days than
it did one or two generations ago.

The first is simply to increase the age of eligibility. This has at
least some surface logic because people live longer than they did when
the program was first created — though there are complexities that
make that less clear cut than it may seem. Regardless, it’s still a
cut. Fewer years of eligibility means fewer total dollars you receive.
It also means needing to work longer.

The second approach is to change the formula that determines the
annual increases which allow security benefits to keep up with the
cost of living. (In all of these discussions I’m omitting various
details. Because the details get really complicated. I’m keeping it
broad strokes.) This actually got some tentative support from people
in the Obama administration when they were looking for a potential
“grand bargain” with Republicans on fiscal policy. One of the
roots of that openness is that 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. If you’re curious to learn more
look up “chained CPI” and Social Security.

But the technical issues are mostly beside the point. There’s no
absolutely “right” way to measure the purchasing power required to
provide a ground level baseline of retirement age support. Even if you
convince yourself that “chained CPI” more accurately reflects need
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.
(Small formula changes compound over time and thus have big effects in
future decades.)

This episode highlighted the more technocratic thinking that still
reigned in the Obama years. These were people who cared a lot about
Social Security. But they were able to convince themselves that this
could be an ingenious fix. You save money but it’s not really a
“cut” because it’s a more “accurate” formula. In fact, a cut
is a cut.

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 presumably everyone
agrees Bill Gates doesn’t need his Social Security check. They argue
that this approach protects the people who really need it while saving
a lot of money. The general argument against this is that it changes
the perception of the program into something more like welfare and
thus reduces support for it. So the arguments are as much political
— preserving broad based support for the program — as purely
economic.

In practice of course, it has to apply to a lot more people than just
Bill Gates, otherwise you’re not saving any money. It likely
reserves the program for people who have no private savings or means
of support and would be literally destitute or starving without their
monthly check. That’s not how most people see Social Security.
Ideally, it’s part of a mix of income sources that allow people to
live comfortably if not lavishly during their retirement years.
Regardless, a cut is a cut.

For various reasons, people talk less about means testing these days.
Phasing out Social Security and replacing it with private accounts
still has supporters. But it took a beating in 2005. So it has less
support than it used to. These days just plain old cuts are the
approach of choice, spun as “saving” the program.

Once again, 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, 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. But, big picture, this covers most of the key
ground.

To go back to Sen. Rounds’ comments, no one is going to argue with
“making Social Security better.” But it’s hard to see how
cutting benefits make it better. It may or may not be necessary. But
that’s not 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 as we discussed yesterday
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it’s not. These are simply fiscal and values decisions that should
be approached on that basis.

_[JOSH MARSHALL (@joshtpm) [[link removed]]  is the
founder and Editor-in-Chief of TPM [[link removed]].]_

* Social Security
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* Social Security Cuts
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* Medicare
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* Attack on Medicare
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* Congress
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* Republican Party
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* Freedom Caucus
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* MAGA
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* Budget Crisis
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* Debt Ceiling
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* payroll taxes
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* Biden Administration
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