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The Social Security trust fund is a foolish piece of accounting nonsense—and the blathering about how the trust fund is running out of money is just a gigantic distraction from the Social Security system’s fundamental problem. To understand why, ask yourself two questions.
First, when the trust fund cashes in some of the special Treasury bonds it holds, where does the Treasury Department get the money to buy back those bonds? The same place that money comes from to fund all government operations: by levying taxes and by issuing more debt.
In other words, the Social Security trust fund isn’t comparable to a mutual fund that you or I might hold in our brokerage account. There’s no money saved up from years ago that’s now slowly getting spent. Instead, those special Treasury bonds are just an accounting mechanism to cover up the transfer of money to and from the rest of the federal government. Got a $5 bill in your left pocket that you then move to your right pocket? That’s what Uncle Sam is doing.
That brings me to the second question: What would happen if Congress voted to add billions to the trust fund, so all retirees could receive $100,000 a year in benefits? Those retirees would merrily spend their fat checks—but the economy would struggle to provide the goods and services that folks want to purchase, likely resulting in soaring inflation.
Now imagine that, instead of a massive boost in monthly Social Security benefits, all retirees were given private Social Security accounts holding $1 million in stocks. What would happen when these seniors sell their stocks and go to spend the proceeds? It would have the same result. Remember, in the end, both cash and stocks are just mediums of exchange. If folks try to exchange these financial instruments for goods and services, and those goods and services aren’t readily available, we’ll see inflation spike.
The bottom line: The fundamental problem with Social Security doesn’t have anything to do with the trust fund. Instead, it’s a basic demographic and economic problem, the result of too few workers and too many folks dependent on their labor.
Want to “fix” Social Security? What we need to do is persuade folks to stay in the workforce for longer, so they produce the goods and services that the U.S. population wants to buy. If Congress wants to “shore up” Social Security, it should be crafting tax and other incentives so folks want to work past age 65 and employers want to retain these older workers.
One indication that we’ve achieved a better balance between those who work and those who don’t: The federal budget deficit would shrink because the government would be collecting more in taxes from those in the workforce—even if the tax code was tweaked so older workers were taxed less heavily. Indeed, like inflation, the federal budget deficit isn’t the problem per se, but rather a symptom of our fundamental economic problem—too few workers producing the goods and services we’re all demanding.
Want to put Social Security on a sound financial footing? Come up with a plan that’ll encourage older folks to keep working. Anything else is like the Social Security trust fund—a financial fig leaf that hides the real problem.
If you want to see a system that works, take a look at the Railroad Retirement System. Founded before Social Security, it has dealt with declining employment in the railroad industry, but still pays out benefits without government subsidy or accounting tricks. 30 years of service gets you a full pension at age 60. An actuarial study is done every 3 years, adjustments are made to employee and employer contributions, and the benefits are paid with COLA’s on both Tier 1 (Social Security equivalent) and Tier 2 (private pension equivalent.) There is even a REAL pool of investments that fund the benefits. Look at rrb.gov to learn more.
My spouse was a railroad employee and received his retirement through the RRB.
Another difference between RRRet and SocSec. There is a whole separate category of Social Security recipients, SocSec disability beneficiaries. While ordinarily, Social Security recipients must have 40 quarters of work credits (and many have 60 to 80 quarters, representing 30 to 40 years of full-time labor), disability eligible persons need no more than 20 quarters of work credit; if a person is 28 or younger, only 6 quarters of work credit is required. RRRet does not have a commensurate pool of recipients with disability claims, if I understand correctly.
(Up to 85% of Social Security benefits can be taxable, so people with traditional defined benefit pensions are essentially means-tested already with a clawback of a portion of their Social Security. Similarly, retirees with higher incomes can be paying as much as $594 a month for their Part B Medicare premiums. Retirees living mainly on Social Security checks do not face these reductions in their benefits.)
Many distinctions in Railroad Retirement. If I hadn’t had a substantial Social Security benefit due to my own work record, I might have filed for spousal benefits with the Railroad Retirement board.
It’s funded just like SS, but at higher rates with higher benefits.
Revenues in excess of annuity payments are invested to provide additional trust fund income. The National Railroad Retirement Investment Trust manages and invests railroad retirement assets. It invests these funds in non-governmental assets, as well as in governmental securities.
Additional trust fund income derives from the financial interchange with the social security trust funds, revenues from federal income taxes on railroad retirement benefits, and appropriations from general treasury revenues provided after 1974 as part of a phase-out of certain vested dual benefits.
Excellent article Jonathan. It reminds me of a lecture I saw Jeremy Siegel give in Philadelphia some 20 years. He explored many of the same concerns you discuss – changing demographics in the developed world. His solution was a “global solution” – an integration of the productive capacity of the younger, developing world with the aging capital rich developed world. His analysis showed the math worked, but only when including global economic integration. It was an interesting presentation, but I’m not sure we’ve made any progress, or that we even want to. I found this article from your old paper discussing the issues.
Excellent post, but I am curious why you didn’t mention both working longer and increasing legal immigration as ways to “fix” SS.
Indeed, immigration is absolutely part of the solution.
I’d love to see increased legal immigration, and I should have mentioned it. But from what I gather, more immigration would only be a partial solution to the U.S. demographic imbalance. Moreover, an aging population is a global issue, and — to state the obvious — more immigration can’t help all countries.
here’s the problem with “…persuading folks to stay in the workforce longer”. most companies have a silent ageism discrimination. the minute an employee reach 50’s, management tend to focus on those old persons during enterprise reorganization (read: layoff).
Can’t deny that. But as the labor market gets tighter with the baby boomers retiring, and if there were government incentives, management attitudes could change.
This is a great topic and as usual you have done a good job with your comments. Just my opinion, but a good deal of the current set of problems stems from moving away from the pay-as-you-go basis for funding in 1983. It is true that the Baby Boomers (including me) were a huge funding bubble that would have to flow through the system beginning in 2012 when we began to hit 66. But, adding to the Trust Fund via taxes that were higher than what was needed to pay the then current system costs just created an increased pool of funding that the government could spend without increasing its deficit. (WHICH IT DID!)
One of the fundamental tenets of SS that sold it originally, was that everyone who paid the tax would benefit. The benefits weren’t proportionate to what people paid into the system, being loaded to pay more to those who were in the lower levels of income. This next comment won’t make some readers happy, but I wonder if part of the solution is further reducing or eliminating benefits for those who are wealthy. In my own situation, SS might be around 30% of our income, and we could easily get by without it.
In high cost-of-living areas, the lower 50% of the population can’t afford to live let alone save for retirement. Those of us who have navigated our capitalist economy very successfully don’t really need this lifeline. Perhaps there could be some amount of benefit for all, but at a much reduced level for the well to do……
Phasing this in over some number of years would allow the highly compensated to adjust their own saving and investments to the new reality.
While the notion of “means testing” may look good on paper, we’ve had a difficult time enacting it.
One reason may be that the Social Security program, as envisioned by it’s creators, was meant to be regarded as another inalienable right. All Americans were to benefit from this program, giving them a sense of entitlement to their government pension.
Were means testing to deny the wealthy SS benefits, the program would lose it’s status as an inalienable right of all Americans, and become just another welfare program subject to political tinkering—something FDR was adamantly opposed to.
If the lower 50% can’t afford to live, who is it keeping all the businesses selling and providing none essential goods and services open? It sure isn’t the upper 50% percent alone.
Absolutely, there should be a means test. Those who have the means should receive no more than what they paid in. OK if there is an adjustment for the time value of money.
Means testing is a bad idea, it turns SS into a form of welfare. Keep in mind all benefits are limited by the taxable wage base and the benefits formula favors lower income workers.
Don’t forget, those funds purchased special treasury bonds paying the trust interest – I know, it’s all government accounting – but the funds were still isolated for SS.
There is no relationship between the taxes we pay and the benefit we collect. One is simply taxes and the other governed by a law containing a benefit formula.
Using means testing fundamentally changes the program into a new form of welfare and place more control over tinkering into politics, something FDR was trying to avoid.
If the funding was simply adjusted regularly over the years to account for changing demographics we would not be facing the issues we are now.
“If the funding was simply adjusted regularly over the years to account for changing demographics we would not be facing the issues we are now.”
Oh there you go again trying to confuse us with the truth!
You are fundamentally correct, but that solution will not happen. Instead we keep seeking ways to make it easier to retire.
The idea of retirement before around 65 is hard for me to understand, but it sure gets a lot of press. There are some jobs where early retirement is a physical necessity, but even that seems to be declining as work changes.
The other side of the coin is finding a way to grow our population and that requires a sound and effective immigration policy working in everyone’s best interests.
Jonathan, I totally understand why it’s necessary to expand the work force, but based on my two dissimilar careers I am of two minds regarding SS fixes.
First as a driver-salesman delivering beverages for 30 years, physically I’d have been lucky to even make it to age 60. That’s also true for other brutal occupations such as construction trade workers. And I don’t know how you would convince an auto-worker to stay on the job beyond 30 (or more) years of 6 day, 60 hour weeks inside a factory to stay on longer.
In my second career as a tax preparer I easily worked to age 70. This would also be possible for other less physical occupations. For me the carrot was that I basically earned a year’s wages in only 3 months. I’m not sure what a motivating carrot would look like for other workers, but I agree with the concept.
Dan how did you become a tax preparer?
It’s a problem with many variables. Many companies absolutely discrimate against older workers in favor of cheaper younger ones,
and most manufacturing has shifted overseas, very hard for a US company no matter how well run to compete with China paying $.30/hour and they’re not exposed to our high overall cost structure. Small US manufacturers compete for workers with big boxes like Amazon, etc paying $24/hour and China paying $.30/hour. That dog don’t hunt.
Having grown up in England and watched the government constantly try to preserve old, dying industries against foreign competition, I can assure you that’s a road that leads nowhere. Instead, the focus should be on nurturing new businesses where American innovation gives companies an edge.
I think your prescription for dealing with what is essentially a math problem exacerbated by longevity and demographics is on target. Am I optimistic that either political party would take it up? Nope. I think Ed’s insightful comment below touches on one of the reasons. Again, we are amusing ourselves to death-in more ways than one.
Nah, sorry I don’t buy that keeping older already stressed workers at work is the approach of recommend. I am age 53.and i have no interest in working past 57 although i might push it out to 60 but I have no interest in working longer, not full time anyway. I do think expanding and incentives.for work in general is a sound idea so that we can expand the labor force and bring in more taxable revenue. I also think that finding away to guarantee a certain level of benefits once you hit a certain age is something that should be explored. I dont see how we have older folks who may or may not have planned properly living in poverty. This a politically sensitive topic but I’m open to hearing other thoughts.
I wish I had a smart comment on this piece, but work is out of style these days. The work ethic is seen as old-fashioned at best, and more often just part of a misguided religious doctrine. In its place, pursuit of leisure is the new ethos. I’d like to see a plan for enticing social levers to encourage better behavior, but I fear the lifelong marketing of play over work will continue to win out.
Ed – excellent post. I too wish I had good answers for my children whenever we discuss these conundrums. They observe peers “working from home” who send out one or two emails a day from the beach, lake or when traveling. Our kids’ jobs are more demanding as are all those workers who must be fully present at their work.
Our children also remember that both Mom and I commuted every day to work, missed dinners, traveled on weekends, and regularly had to grind out deadlined work with longish hours. Still, we try not to fuss as we remind our kids of our two hard-working contractor friends without 401ks who, in their early 70’s, still have to sling around heavy construction materials with their broken bodies. Technology has changed the working game for many, but I’m uncertain of the sustainability of seemingly undemanding remote work.
It’s fine for folks to choose play over work, but there is a price to be paid and that price may grow. If we continue as is, we’ll likely end up with higher inflation, or higher taxes, or reduced benefits — and the resulting financial pressure will drive some folks back into the workforce. That’s a necessary end result overall — but it would be far better if we got there with carrots rather than sticks, and with a public discussion about why the typical retirement age needs to rise.
I agree with you. I just think the idea is pushing against a big headwind. The appetite for work has decreased, except for necessity’s sake. I’d like to be wrong.
Why should people work when politicians encourage people not to. There is even talk of a guaranteed yearly income for all. Actually, paying people not to work.
The “price to be paid” will be our freedom. Those who have no self esteem want everything to be government centered…to be taken care of from cradle to grave. the result will be that We will have no say in how we are governed. Our hard won freedom is being decimated.
I pray for our beloved country.
The “price to be paid” will be our freedoms.
Well said Marjorie!