Social Security Isn’t the Key Fiscal Issue
February 25, 2011
By Tom Maertens
from The Mankato Free Press
A Gallup poll recently found that 90 percent of Americans ages 44 to 75 were more fearful of depleting their assets than they were of dying. For many of these people, Social Security is literally a life-saver. According to the Center on Budget and Policy Priorities, Social Security, with an average yearly benefit of just $14,000, provides a majority of income for more than half of the elderly.
Meanwhile, the people who saddled the country with a mountain of debt because of Bush’s tax cuts for the rich, the unpaid wars in Afghanistan and Iraq, and the unfunded Prescription Drug program, are spreading deficit hysteria. Their goal is to cut Social Security, Medicare, and Medicaid by running up the debt and then proclaiming a debt crisis. But the “debt crisis” is not so severe as to reduce Republicans’ demand for $200 billion more in unwarranted tax cuts for millionaires in the recent tax bill; only severe enough to necessitate benefit-cuts for everybody else.
As the Economic Policy Institute has explained, Social Security “is emphatically not the cause of the federal government’s long-term deficits, since it is prohibited from borrowing and must pay all benefits out of dedicated (payroll) tax revenues and savings in its trust funds.”
Franklin Roosevelt decided to use payroll taxes to finance Social Security because they gave the beneficiaries a “legal, moral and political right” to collect their benefits, he said. “With those taxes in there, no damn politician can ever scrap my Social Security program.”
The program has been adjusted over the years to account for changing demographics, especially increases in longevity. Over his two terms, Ronald Reagan raised the FICA tax from 6.65% to 7.65% and the SECA (self-employed) rate from 9.3% to 15.3% (while simultaneously cutting taxes on capital gains, dividends and interest -- rich people’s income).
Average life expectancy in 1935, the year Social Security was passed, was 61 years; it is now 78. The program will need to be adjusted again because of this greater longevity and because high unemployment resulting from the Great Recession is reducing payroll tax collections.
In addition, the December tax cut bill reduced the payroll tax by one-third, which will reduce Social Security Trust Fund income by another $200 billion.
These factors increase the need to raise the retirement age for full benefits – by one or two years -- and to reduce benefits for the very wealthy in order to ensure long-term solvency for Social Security.
Even as presently projected, however, the Social Security trust fund should remain solvent another 26 years. After that, it will continue to pay 75% of the current payout level.
Nonetheless, as Peter Orszag, the former Budget Director, wrote in the New York Times last November, Social Security is not the key fiscal problem facing the nation. Payments to its beneficiaries amount to 5 percent of the economy now; by 2050, they’re projected to rise to about 6 percent. Over the same period, federal health care costs will increase six times as much.
Conservatives argue that “doing something” about the deficit involves cutting Social Security—by as much as 41% according to the Bowles-Simpson Commission.
So far, the public has not been rolled. In a 60 Minutes/Vanity Fair poll that asked, "What would you do first?" 61 percent of respondents said raise taxes on the wealthy; twenty percent said cut military spending, and only three percent said cut Social Security.
Another recent poll showed that eight out of 10 Americans oppose cutting Social Security to reduce the deficit. That includes 78% of independents, 82% of Republicans, and 74% of Tea Party supporters.
Conservatives like to claim that the Social Security Trust Fund is broke; that it contains nothing but IOUs. Those “IOUs” are sovereign debt obligations of the U.S. government, the same as the trillion dollars of Treasury obligations that China holds, and are backed by the full faith and credit of the U.S. Government. Failure to pay them would be defaulting on the government’s obligations.
Measured over the next 75 years, the Social Security shortfall is expected to amount to 0.7 percent of the economy, a very small deficit compared to the cost of Bush’s wars or his tax cuts.
People who have worked their entire lives shouldn’t have to worry about how they will survive when they get old. Representative governments that are moral and benevolent must see to the welfare of their people, including by ensuring some modest level of security in retirement for their old and infirm citizens.
By Tom Maertens
from The Mankato Free Press
A Gallup poll recently found that 90 percent of Americans ages 44 to 75 were more fearful of depleting their assets than they were of dying. For many of these people, Social Security is literally a life-saver. According to the Center on Budget and Policy Priorities, Social Security, with an average yearly benefit of just $14,000, provides a majority of income for more than half of the elderly.
Meanwhile, the people who saddled the country with a mountain of debt because of Bush’s tax cuts for the rich, the unpaid wars in Afghanistan and Iraq, and the unfunded Prescription Drug program, are spreading deficit hysteria. Their goal is to cut Social Security, Medicare, and Medicaid by running up the debt and then proclaiming a debt crisis. But the “debt crisis” is not so severe as to reduce Republicans’ demand for $200 billion more in unwarranted tax cuts for millionaires in the recent tax bill; only severe enough to necessitate benefit-cuts for everybody else.
As the Economic Policy Institute has explained, Social Security “is emphatically not the cause of the federal government’s long-term deficits, since it is prohibited from borrowing and must pay all benefits out of dedicated (payroll) tax revenues and savings in its trust funds.”
Franklin Roosevelt decided to use payroll taxes to finance Social Security because they gave the beneficiaries a “legal, moral and political right” to collect their benefits, he said. “With those taxes in there, no damn politician can ever scrap my Social Security program.”
The program has been adjusted over the years to account for changing demographics, especially increases in longevity. Over his two terms, Ronald Reagan raised the FICA tax from 6.65% to 7.65% and the SECA (self-employed) rate from 9.3% to 15.3% (while simultaneously cutting taxes on capital gains, dividends and interest -- rich people’s income).
Average life expectancy in 1935, the year Social Security was passed, was 61 years; it is now 78. The program will need to be adjusted again because of this greater longevity and because high unemployment resulting from the Great Recession is reducing payroll tax collections.
In addition, the December tax cut bill reduced the payroll tax by one-third, which will reduce Social Security Trust Fund income by another $200 billion.
These factors increase the need to raise the retirement age for full benefits – by one or two years -- and to reduce benefits for the very wealthy in order to ensure long-term solvency for Social Security.
Even as presently projected, however, the Social Security trust fund should remain solvent another 26 years. After that, it will continue to pay 75% of the current payout level.
Nonetheless, as Peter Orszag, the former Budget Director, wrote in the New York Times last November, Social Security is not the key fiscal problem facing the nation. Payments to its beneficiaries amount to 5 percent of the economy now; by 2050, they’re projected to rise to about 6 percent. Over the same period, federal health care costs will increase six times as much.
Conservatives argue that “doing something” about the deficit involves cutting Social Security—by as much as 41% according to the Bowles-Simpson Commission.
So far, the public has not been rolled. In a 60 Minutes/Vanity Fair poll that asked, "What would you do first?" 61 percent of respondents said raise taxes on the wealthy; twenty percent said cut military spending, and only three percent said cut Social Security.
Another recent poll showed that eight out of 10 Americans oppose cutting Social Security to reduce the deficit. That includes 78% of independents, 82% of Republicans, and 74% of Tea Party supporters.
Conservatives like to claim that the Social Security Trust Fund is broke; that it contains nothing but IOUs. Those “IOUs” are sovereign debt obligations of the U.S. government, the same as the trillion dollars of Treasury obligations that China holds, and are backed by the full faith and credit of the U.S. Government. Failure to pay them would be defaulting on the government’s obligations.
Measured over the next 75 years, the Social Security shortfall is expected to amount to 0.7 percent of the economy, a very small deficit compared to the cost of Bush’s wars or his tax cuts.
People who have worked their entire lives shouldn’t have to worry about how they will survive when they get old. Representative governments that are moral and benevolent must see to the welfare of their people, including by ensuring some modest level of security in retirement for their old and infirm citizens.
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3 Comments:
Tom,
A couple of thoughts.
The question : “Will Social Security be around when you retire?” has been asked by every worker for decades … and that what makes it such an easy target for exploitation.
Social Security solvency should not be a problem – if Congress did not use the reserves to pay for other spending (which you have correctly identified as the Global War on Terror, tax cuts, Medicare-Part-D) instead of making the responsible decision of affecting other taxes.
I note that the Red/White/Blue USA Corp article that is cited below has this interesting assessment :
Since Social Security's creation in 1935, life expectancy has increased 26 percent, to age 78, while the system's normal retirement age has gone up just 3 percent, to 67.
And that leads to one aspect that leads to confusion … retirement safetynet versus medical care. The FICA tax rate, which is the combined social security tax rate of 6.2% and the Medicare tax rate of 1.45%, equals 7.65% … the retirement portion of Social Security itself is not the problem but Medicare is. Once again the USA Corp article has the key comment that Medicare expenses are heaviest in the last year of life.
While Republicans like to magnify the Social Security problem, I never hear any discussion of changing retirement benefit age for the military. This Defense Business Board report states : Paying the military and their families for 60 years to serve for only 20 years -- Military “entitlements”, which have expanded rapidly, have become part of the nation’s mandatory spending problems.
Specifically, 47 percent of new officers and 15 percent of new enlistees attain 20 years of active duty service. It should be noted that some military personnel who begin their careers on active duty move to the reserves and retire there.
In 2010, 1,905,074 individuals were projected to receive benefits (of those 751,913 have exactly 20 years of service; at 21 years it drops to 162,672; at 22 years it drops to 134,317; at 23 years it drops to 79,723, etc. … clearly people are focusing on 20 years and then leaving for other careers.
The cost to taxpayers … $46,710,544 for 2010 but will grow to $59,325,445 in ten years.
That’s a huge problem.
Plus the military has TRICARE health coverage … which has not had contribution rates changed in years.
Soon-to-be-Presidential-candidate Tim Pawlenty has talked about “means testing” for social security … let’s see how that goes when he talks to military families.
And how about changing the retirement program for Congress ... how many of our current benificiaries receive benefits outside of Social Security. I thought I heard somewhere that John McCain received a military pension while still serving in the US Senate.
P.S. Regarding Reagan increasing the Self-employed Tax Rate, by including Schedule SE and recording the amount on Line 27 of Form 1040, one-half that self-employment tax is used to reduce the amount of taxable income … so the self-employed are not hit as bad (plus they have many other favorable tax treatments such as self-employed health insurance deduction).
Very good analysis Tom. The Republicans keep throwing up false issues to persusde(scare) the people. If we can convince more people to get involved with the current demonstrations by pushing "Un Cut" we might get a progressive Tea Party started. Peace, Joe Mayer
Social Security may not be the key fiscal issue, but it is definitely one that can be solved.
But, JesusHChristOnAPopsicleStick, can you stop blaming George Bush for everything? Yes, we know all about your centrist opinion about illegal wars, blah, blah, blah as if your sacred Democrats have been innocent bystanders for decades. But, politicians have been raiding Social Security surpluses for 50 years and replacing them with treasuries. When Congress sees a pot of money sitting out there, they can't help themselves but take the money and spend it on a program that will help them with their re-election. 401k's might be next!
And, yes, the Social Security Trsut Fund are IOUs. Mark Dayton's Trust Fund, for instance, is real dollars bequeathed him by his rich family. But the Social Security Trust Fund is, as you correctly say, treasury notes. When Social Security goes to Treasury to redeem one of their treasuries from the Trust Fund, the Treasury Department has two options - lobby Congress for more tax dollars to pay the note or borrow more money to pay it.
So, we get pay for the same dollars twice!! What's more, Social Security is just a government run Ponzi Scheme using new investors to pay off old investors. And, as Tom Pedders or Bernie Madoff can attest, every Ponzi Scheme eventually collapses because we are running out of new investors in the United States. In Europe, the problem is ever worse.
The good news is, there is hope to fix Social Security, but the political will isn't there to address it.
We can do one of two things to permanently fix Social Security:
Over the next 20 years, transition Social Security from pay-go to an IRA system. If you are under 45 when the transition starts, you contribute a 5% increment of FICA to their own IRA account. In year 1, the IRA/SS break down would be 5/95, year 2 it's 10/90, year 3 it's 15/85 and so on so that after 20 years you are paying 100% of your FICA to an IRA account. Of course, there are transition costs and we would either tax or borrow to cover the beneficiaries in the old system to make up for FICA diverted to IRA accounts. Once the system is transitioned, if there is anyone left on the old system, we would tax or borrow to fulfill those obligations until no one is left in the old system. Over the same 20 years, we could close Social Security offices and sell land and buildings and put that money in the old system to pay beneficiaries.
The other option is to introduce the IRA system I mention above, close Social Security today, and pay back to everyone what they paid in giving everyone their FICA taxes back. The government would require that this money must be saved in an interest bearing account and the government would pay the interest on an escalating scale. The more you contribute, the more interest you are paid, so the government would subsidize you at a higher rate for saving more and more money (up to a max amount of course). Your FICA would go to your IRA.
But, as I said, there is no political will to permanently fix the system. The only political will is tell you who is to blame for it and this passes as 'centrist' pragmatism in the local newspaper opinion columns...
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