Social Security is an important program. Millions of Americans rely on it and millions more will in the future. At the same time it is widely misunderstood. Rumors of its demise are exaggerated. Some people unfortunately act on such misinformation by starting benefits early.
Making the program solvent for the foreseeable future is actually quite easy and relatively painless using a combination of changes For example, just making Section 125 employer cafeteria plans subject to the payroll tax would reduce the funding gap by 10% according the the Committee For a Responsible Federal budget calculator – but every year we delay it becomes more difficult.
A viable fix in my opinion requires future funding be adjusted automatically each year as necessary to account for demographics and benefit changes.
Social Security is an insurance program designed to be self-funding for good reason and in my view it is important to keep that design – in part that means not making the program dependent on general revenue which currently is illegal.
But finding a solution means Americans need a better understanding of Social Security.
- Nobody stole the trust money- SS has been funded the same way since the beginning by investing in special treasury bonds
- Interest paid on the bonds are a important, but declining source of trust income
- Social Security contributes to the federal deficit only in the sense that government borrows to give cash to the trust when bonds are redeemed, but government would have to borrow in any case.
- The trust is not just a bunch of IOUs – any more than the US savings bonds you may own
- Yes, all the above is intragovernmental accounting and debt
- The program can’t go broke as long as there is income payroll tax revenue
- The benefit formula already favors lower income workers
- The benefit is based on taxed earnings of the worker, not taxes paid.
- The program provides benefits to many people who never paid taxes – spouses, ex-spouses, dependents, disabled, survivors.
- Most people receive in benefits all they and their employer paid in taxes after six to seven years or less of starting to collect benefits.
- Some people feel that if instead of paying taxes, they were allowed to invest that money, they could do better than SS. In theory that may be true, but considering the vicissitudes of life along the way and the poor retirement planning of most Americans, it is hardly practical.
- As much as we like to think so, we did not pay for our own benefits.
- On average, workers end up paying about 15% of all benefits collected, hence why up to 85% of benefits may be taxable
- The income taxes paid on 50% of benefits go to the SS trust, the taxes on the extra 15% go to Medicare
- Social Security is a Ponzi scheme only in the sense incoming revenue is used to pay current benefits
I am not intelligent enough to understand all about S.S. but I have always wondered why government employees don’t pay into it. Couldn’t we start by enrolling all new government employees into paying S.S. and grandfather the rest under their current status? And for full disclosure my wife and I are both school employees not paying into S.S.
According to SS site
The Social Security Act of 1935 excluded all federal, state, and local government employees from coverage because of constitutional ambiguity over the federal government’s authority to impose Federal Insurance Contributions Act payroll taxes on public employers and because these employees were already covered by defined benefit pensions (Internal Revenue Service [IRS] 2014). Beginning in the 1950s, a series of amendments allowed governments to enroll some of their employees in Social Security, so that by 1991 the program covered all federal employees and most state and local government employees. Today, state and local government employers may continue to exclude some employees from Social Security coverage, but only if these employees are enrolled in a retirement plan that meets federal regulations requiring sufficiently generous benefits.
If they were added gradually as new hires it would reduce SS shortfall by about 5%
I believe the reforms passed in 1983 were
supposed to be adequate to fund the system
for 75 years. But now it seems that they will
barely make it to about 50 years. One of
the reasons I understand is that revenue
forecasts were based on payroll tax revenue
covering 90Pct of wage income but SS funding
has been running in the 83 Pct range as
a result of long term changes in wage
distribution.
is this the main reason for the 1983 failure?
How should it be addressed ?
If you go to the Committee for a Responsible Budget CRFB website they have an easy modeling tool where you can see the impact of scores of changes and combine them. A combination of pretty minor changes will do the job. Raise the tax rate by a percent or two, but more on employers and raise the taxable wage cap and it’s fixed is one option to model.
The Congressional Research Service wrote a report on this topic in 2022. My understanding is congress knew from the outset that the 1983 “fix”, when they were weeks away running out of funds, was inadequate under the 75 year standard. Congress has kicked the can down the road every year starting in 1984.
Here is a link to the report. Please see Figure 2. Social Security 75-Year Actuarial Balance, 1982-2021
as a Percent of Taxable Payroll
https://crsreports.congress.gov/product/pdf/R/R47040
Best, Bill
Making Section 125 employer cafeteria plans subject to payroll taxes would make them useless.
Why? 401k tax-deferred contributions are taxable for Social Security payroll taxes. The 125 plans would still escape income taxes.
Oh yeah! Forgot about that 🙂
I just shared this one on my Facebook page.
without being political, both parties should work on fixing this but neither party is equipped to work together
Congresses for the last 20 years have been warned in every Trustee report to take action sooner than later all have ignored the warnings.
Just listened to a deep dive on this @ “New Retirement” podcast. A fair bit of stats and myth busting. The general gist is that people, in general, are better off than you would infer from news reporting (imagine that !). Some discussion of how other countries (Australia) hande things. Interesting facts along the way, in the “good old days” when “everyone had a pension”, “everyone” topped out around %35. Participation in current (401k etc) plans much higher. Good listen.
https://cdn.simplecast.com/audio/b35c85ac-2339-4383-8975-c1981dfd32e8/episodes/3df847d8-f75e-4d4b-9611-23e677240c44/audio/0875fd64-0e4c-47f6-a25a-d60114cda891/default_tc.mp3?aid=rss_feed&feed=v1X3IRZq
Of course we know, there were no good old days, barely 50% of Americans ever had a pension
Kotlikoff and Burns wrote The Coming Generational Storm about two decades ago where they described the then urgent need to revamp Medicare and Social Security. Now twenty years later the financial condition of the programs have moved from urgent to critical.
The basic problem is too many retirees dependent on too few working-age people. I think the future of our children and grandchildren is at stake if we fail to solve the problem.
Which is why we need more immigrants working, legal yes, but we need the tax revenue.
I have many friends that refuse to believe me when I tell them that SS would be worse off without immigrants paying in. The math is pretty simple; An aging population combined with lower birthrates equals not enough workers.
Even illegal immigrants are estimated to pay $13 billion in SS taxes each year using fake SS numbers or other ID, but don’t collect benefits.
Here was my take on that book: https://humbledollar.com/2023/12/longtime-worry/
Good review then and now.