The Party’s Over
It’s all downside for Social Security as we know it
A few days ago, I watched a panel of experts discuss options for addressing imminent insolvency of the Social Security and Medicare trust funds. I was encouraged that they identified alternatives to those presented in the new trustees’ reports — immediately raising the payroll tax by 28 percent or cutting all benefits by 21 percent— and by an apparent consensus that solutions should focus on general revenue. There is no easy way out of this jam, and all options require greater contributions by those with means.
The Medicare trust fund is projected to reach zero first (2031). However, its problems may be more easily solved because it is already supported by general revenues and high level earnings are already subject to the Medicare portion of the payroll tax. It should be much easier to raise existing taxes than to create new revenue streams. Finally, there are options on the cost side (reducing reimbursement rates).
My beat is Social Security, though, because it is key to anything we might attempt to do about income inequality. We should be more concerned about the distributional effects of this program than its solvency. And we will not make any progress on this front until we sever the link between “earned” benefits and “contributions.” This means eliminating payroll tax funding for the program.
The ideas discussed by the panel were all good, and they recognize the political reality that large majorities of the public reject cuts to benefits, including raising the retirement age, especially for low income workers. However, none of them present upside potential for the people who really need Social Security.
That is not their fault. Congress is to blame for neglecting this poorly designed program for so long that all options involve how to distribute significant pain. And that’s just to keep promises already made. We need to go much further to shore up income support for the poor — working or not.
To illustrate, I created a simple table indicating whether effects of each idea would be positive (green arrow pointing up) or negative (red arrow pointing down) compared to the status quo. The first two (A and B) are the trustees’ projections of across-the-board (ATB) percentage adjustments, and the last (F) one is my own. These are not mutually exclusive, i.e., combinations with varying details and features are worth considering. And of course, this is not a comprehensive list of reform proposals.
Perhaps the most important thing about this table is its structure, which is a reminder that as soon as we begin to think about the impact of changes on people’s incomes, we have to distinguish those paying into the system from those receiving payments (shown here as working and retired). Less straightforward but just as important is the distinction between low income and high income households. Here is my brief explanation of each solution and the arrows I’ve associated with them.
A. Nothing (ATB benefit reduction). As noted at the outset, drastic action is needed now. If Congress does not act before the fund balance reaches zero (projected in 2034), the Social Security Administration will have to cut all benefit payments by 25 percent. This will annoy wealthy retirees, but it will be catastrophic for those completely dependent on this monthly check. It is not hard to imagine very angry mobs of seniors. They cannot afford to march in Washington, but they will all be contacting their Congressmen.
B. Raise tax rate ATB. Likewise, raising the tax rate for everyone (by 33 percent if nothing is done until 2034) will hit low income households hardest. Workers will demand higher wages, but such a steep increase (4.2 percentage points) in the cost of virtually all labor will have serious consequences for our economy. Workers will march on the Mall in protest.
C. Capping maximum benefit. Freezing maximum payments at their current levels ($2572/mo. at age 62, $3627/mo. at full retirement age, and $4555/mo. at age 70) would not cause nearly the financial pain as either ATB option. It may not be sufficient, but it is a step in the right direction.
D. Removing cap on taxed earnings. This is easy to do, but it may prompt creative compensation arrangements to avoid salaries subject to the payroll tax. In addition, it perpetuates the inter-generational inequity of taxing younger workers to pay benefits to older non-workers. Since taxes on this group of people are unlikely to affect benefits, anyway (due to the maximum), taxing their incomes (as in E and F) makes more sense.
E. Designate and transfer income taxes on high earners to the trust fund. This is a very good idea because it taps non-wage income, which not only expands the tax base but includes wealthy retirees who can afford it.
F. Replace payroll taxes with surtax on higher incomes. If we can only fund current obligations by supplementing payroll taxes with income taxes, why would we incur new obligations by continuing to levy payroll taxes? Those taxes actually hurt low income workers and could be put to better use by middle income workers. So I say cut the cord and pay all “earned” benefits from income taxes. Ideally, only those with incomes several times the poverty level (e.g., $50k for singles, $100k for married couples) would pay. Everyone below those thresholds would benefit and most of those above would not pay much more than they are now.
This conversation is overdue and likely to last a decade or longer. If you have read this far, you may be interested in more I have to say. My essay called The Wrong Tax is a good place to start.
