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Focus on the causes, not the symptoms.
There’s been a heap of handwringing this year over both federal government borrowing and possible cuts in Social Security benefits, and the current budget bill before Congress is only exacerbating those fears. But I worry folks are focusing on the wrong things.
As Adam Grossman noted recently, the federal government collects $5 trillion in revenue each year and spends $7 trillion. Why? You might point the finger at Medicare, Medicaid and Social Security, which account for almost half of federal spending.
But why do these three programs cost so much? You could rail about fraud or overly generous benefits. But the reason is far simpler: America is getting older, and that’s driving up the cost of these three programs. Two not-so-fun facts: Nearly half of Medicaid spending is devoted to seniors and those with disabilities, and Medicaid covers more than 60% of nursing home residents.
What about making spending cuts elsewhere? If defense spending, interest on government debt and programs like Social Security, Medicare and Medicaid are off limits, that leaves just 15% of federal spending available for possible cuts.
Meanwhile, there are lots of complaints about tax cheats, along with complaints about tax breaks that only benefit low-income households, or hedge funds, or college borrowers. But again, there’s a much simpler explanation for skimpy government tax revenue: When folks retire, they no longer pay Social Security payroll taxes, and their income-tax bill also typically declines. A third of federal government revenue comes from payroll taxes, and more than half from individual income taxes.
In other words, the widening of the federal budget deficit is a symptom of a larger issue: the aging of America, which is leaving us with fewer workers and more folks dependent on the goods and services they produce.
The aging of America can also partly explain inflation and our persistent trade deficit. If we have fewer Americans producing goods and services, it’s more likely that demand will outstrip supply, pushing up consumer prices and prompting companies to import even more to satisfy the demands of U.S. consumers.
And let’s not forget the silliness of the Social Security trust fund, which is merely an accounting ploy, where Uncle Sam takes money out of one pocket and puts it in another. The trust fund’s depletion is, of course, another symptom of our aging population.
But its shrinking, by itself, shouldn’t be cause for alarm. After all, when the trust fund cashes in some of its special Treasury securities, where do you think the Treasury Department gets the necessary money? Social Security has always been a pay-as-you-go system, where this year’s benefits are paid with this year’s tax revenue and this year’s borrowing—the same way the government pays for everything else. That said, it’s conceivable that one day Congress might use the emptying of the trust fund as a cudgel to force through cuts in Social Security benefits.
What’s the solution to all this? As I’ve argued before, the answer isn’t to raise taxes or slash spending, but rather to use tax incentives to make it attractive for folks to stay in the workforce for longer, while also encouraging immigration.
But as you follow the debate over this year’s budget bill, don’t expect to hear such things mentioned. It strikes me as strange, but it seems Congress would prefer to quibble over tax rates and spending cuts, rather than ease the need for both by expanding the working population. Are you happily retired? You may hate the idea of ever holding down a job again, but—for the sake of your Social Security check, your tax burden and more—you should hope and pray that we find a way to persuade those in their 60s to work just a few years longer.
Or, as they say, we can do this the easy way or we can do it the hard way. If we don’t persuade folks to stay in the workforce for longer, we’ll end up in the same place, thanks to financial bullying. Folks may find themselves compelled to work longer—or to return to the workforce—because of some combination of higher consumer prices, higher taxes, and cuts to Social Security, Medicare and Medicaid. Doesn’t that sound like fun?
This piece made me think that, with the demise of most members of the Baby Boom generation in the next 20 years, tax rates at the low end might have to go up. While total Federal spending on favored senior citizens as a group might finally go down after we pass away, it may also be that the total tax revenue we elders provide as a group might also go down, perhaps more than offsetting the benefit change. If that is the case, the deficit might continue to get worse, rather than better.
Why is cutting or trimming defense spending off the table? Cutting funding for veterans is on the table.
Peace is cheaper than war yet we seem to have unlimited funds for war, bombs, tanks, jets, drones, interfering in the politics of other nations, and being the world police.
A first step could be to increase FICA for all income, instead of stopping it at certain income levels.
As long as the PIA is based on the same earnings as it is today.
Social Security “revenues” and other taxes collected should be considered as separate buckets. The accounting trick in articles, such as this, is lumping all taxes together.
They are.
Congress is discussing something? Really? This article may have applied to 1940 through 2024, but the US government’s fundamental behaviors have changed.
Amen Jonathan. 69 and still working part-time (consulting) since retiring from megacorp at 62. Our financial planner, whom we have worked with for 8 years, recently published our personal data projection which suddenly shows a significantly widening cap between between nest egg an liabilities going forward. Part of it of course is there are fewer years to support and some of it is due to the continued income in the bridge years to delayed SS.
The elephant in the room is AI As it replaces a multitude of jobs, the stats for SS get even worse. Argument in favor of things like tax reform become moot in the jobs environment that is around the corner, even if Congress could act.
deleting post
A bit of history –
The Economic Security Bill President Roosevelt transmitted to Congress in January 1935 contained the following language: “No person shall receive such old-age annuity unless . . . He is not employed by another in a gainful occupation.” This was the retirement earnings test (RET) provision.
So the original proposed RET provision would have allow no social security benefits regardless of age if the wage earner had any earned income.
Sixty five years later after numerous amendments through the years President Clinton signed, in 2000, a bill that eliminated the limits on what seniors on Social Security can earn when they reach their full retirement age.
My understanding is the current RET is the result of the law congress has passed.
I’m reading this post after the weekend during which there were massive protests in Los Angeles regarding immigration enforcement. We also don’t have a tax bill in hand, nor any meaningful immigration plan in the last generation. I have real doubt that our polarized Congress can put together any thoughtful taxing / spending / immigration reform as the HD community proposes.
Bleak translation: we know the problems, but may not be able to get solutions.
Dr. Munnell has an 1/29/2025 article on the Boston College Center for Retirement Research on this topic titled “Here’s a Proposal to Fix Social Security that We Could Enact Today”.
Of the many provisions to fix the shortfall in future benefit funding three of the key recommendations not often discussed are –
Increasing the taxable wage base back to the 90% of earnings level where the program was in the past.
Increasing the the full retirement age for the top 40% of earners.
Increasing the social security averaging period from 35 to 40 years.
A number of the provisions call for matters to be phased in slowly which seems to me to be unlikely. I would also note the Byrd Rule which is currently law, as I understand, provides that certain provisions are considered to be extraneous if they include changes in Social Security law, thus any such provision would require 60 yea votes in the Senate for social security to be changed.
Bill, thanks for the reference and the link. It was an interesting review of a detailed proposal to fix SS. I followed the link to another article that provided the background on the proposal to increase full retirement age for the top 40% of wage earners. The article discusses the growing disparity in life expectancy between higher and lower wage earners. It made me wonder if this provision would help address some of the concern of raising retirement age for this engaged in strenuous physical labor.
I would not call the SS trust a ploy. It is accounting of course, but it has done the job since 1936 and isolated the funds from the general revenue and budget nonsense which was the intent.
Raising the payroll tax by 1.75% on employer and worker keeps SS going for 75 years. I think employers should be paying more than half of the cost.
“I think employers should be paying more than half of the cost.”
Good idea Dick, since employers dumped most of the responsibility for funding a safe retirement income almost entirely on their employees and the US government when they significantly decreased, or entirely dropped their pensions.
Sound good in theory but my guess is that employers would cut back in other areas (401(k) match, benefit decreases, etc.) to offset any increase.
That may be true in some cases, but it would leave the possibility of improving the SS benefit.
The aging process is inevitable, and cognitive decline can impact performance. Ageism, in many cases, may be a reaction to this reality. One proposed way to reduce ageism in the workplace is for individuals to recognize their own limitations and step back before decline becomes a burden to others.
However, this is easier said than done. Most people are blind to their own cognitive decline, making it nearly impossible to know when to self-select out.
As humans, we tend to make one of two mistakes:
It’s wise counsel: “Either you decide when to go, or someone will decide for you. And if someone else decides you should go, you probably won’t like how it happens.”
There’s also the issue of pride. Taking a lower position with less responsibility and lower pay during the later stages of one’s career can feel like failure, even if it’s a wise and honorable transition. That pride can become a barrier to making the graceful exit everyone hopes for.
Or 3. we are kicked out for the new younger model….and no one will hire an old guy with tons of experience .
A few years ago, when I was looking ahead to the possibility of a phased retirement, I sent an article or two from a human resources journal to an HR administrator. The articles highlighted hospitals that were retaining the knowledge of older staff by giving them shorter, more flexible schedules. I don’t think my effort made much impact.
At the beginning of this year, I’d had my “belly full” of my full-time, full plate described below, but wanted to continue part-time indefinitely. My boss and administration were cold to the idea at first, but I used my patient loyalty and shortage of available replacement staff to leverage things my way. Or maybe my boss really does love me and wants the best for me. Either way, a new job was created that makes it easier for me to stay.
Ed, half a pie is better than none at all. From what I have gleaned of your personality from the tone of your posts I would think that your employer would bend over backwards to keep you for as long as possible.
Your kind words are very welcome on a Monday morning, David. Thanks!
Encouraging people to remain in the workforce longer is very politely poised, but… Do you as an employer actually want an employee who doesn’t want to be there? Most people retire because they’ve had a bellyful of “work” and want out. Isn’t it called “work” because no one would do it if they weren’t paid?
The people who have “had a bellyful of work and want out” should get out. I’m not suggesting otherwise. But how about those who want to stay, continue to be productive and make a little money? Should we also insist that they retire — or should we find ways to make it easier for them to stay in the workforce, rather than throwing up our hands and looking at options like slashing Medicare, slashing Social Security and jacking up taxes?
Because as an employment lawyer for 35 years, I can attest most, not all, employers kick out older employees the moment they can, for lots of reasons, but age discrimination is real.
There’s another side, too. Many age 58 and older are being let go by their company in favor of an employee (or an H1B employee) with a lower salary.
In many cases, transitioning to part-time work is a welcome option, or if the company doesn’t want to pay benefits, they could offer consulting work on a project by project basis.
Do you have any data to back up your claims about H1B employees taking “many” (definition please) jobs from employees 58 and older (why this age range)?
The age range related to when companies start replacing higher paid employees. As to the H1B program, that is a longer subject and it has a number of issues. I included an article that discusses the issues and offers some solutions. There’s also a 60 minutes segment on the issues. I’ve managed or worked with H1B engineers since the 90s and enjoyed working with them.
https://www.compactmag.com/article/no-there-arent-good-h-1b-visas/
If this plan is to succeed, you need to work two sides of the issue:
Lastly, I can’t understand why employers in the U.S. largely fail to offer older staff a chance to work fewer hours for the last few years of their career. We go from 40 hours, in most cases, to zero, overnight. This is not ideal for the employer or the employee. If this approach would be adopted more widely, it would provide a partial solution to the problem Jonathan cites.
I don’t think your first option is called “incentivizing,” I think that’s called “forcing.” I also think we need more information about how and why older employees leave the workforce, especially those that fully jump ship (40 hours to 0 hours) before we could properly offer solutions and incentives.
Regarding your second point, a first step might be to stop dunning older workers and their employers for Social Security payroll taxes. That would be 7.65% less in taxes paid by both employees and employers, or 15.3% for those who are self-employed. If these folks would otherwise be retired, there’d be no revenue loss for the federal government and probably a gain, once regular income taxes are figured in.
I find it interesting that Jonathan is concerned about a shortage of workers, when I am already reading articles, and have books on order, about AI taking jobs away from existing and would-be workers. It is apparently already an issue with this year’s graduates. I see rationalizing the tax system, and raising tax rates, as a better solution, but don’t expect it to happen, any more than I expect to see ageism in employment disappear. Tech workers are already “old” in their 50s.
I think we need to wait and see if AI reduces jobs as predicted. Not too long ago it was predicted that the internet would put realtors, travel agents, retail, education, and bricks and mortar retail and the music industry out of business. It made changes in these industries, but created opportunities as well.
I totally agree. I remember all the dire predictions about the internet’s impact. Yes, it changed how we do countless things. But mass unemployment has not been a problem.
“I find it interesting that Jonathan is concerned about a shortage of workers, when I am already reading articles, and have books on order, about AI taking jobs away from existing and would-be workers.”
Sure, AI is thinning the ranks of some workers, but does AI paint houses, remodel kitchens, or trim trees?
No, but immigrants do
Those are precisely the kinds of jobs less suited to older workers.
“Those are precisely the kinds of jobs less suited to older workers.”
True. But don’t forget the immigration side of the equation, which is precisely why thoughtful, humane, immigration reform is needed: so we have the workers we need for the jobs that many Americans either can’t or won’t do. Let’s not discount the taxes those younger workers would pay.
100% correct, yet we are going in the opposite direction and shooting ourselves in the foot or wallet for that matter.
I agree with you.
I was thinking about this too. It’s already very hard for adults just beginning their careers to find jobs, and with all the chatter about AI increasing worker productivity, or rendering certain jobs redundant, I think it will be challenging to expand the workforce if there’s no significant financial benefit for individual companies. Tech especially has been laying off people since they’re hiring sprees from COVID, and they’ve seen that they don’t need these people to get the their work done.
More of my former colleagues and team members have been recently RIF’d. All are late 50s or 60. In tech companies, AI productivity gains plus ageism is more rapidly thinning older staff ranks.
There are two sides to staying in the workforce longer:
Working longer is often easier said than done.
What we need are not just tax incentives to make working longer attractive to employees, but also tax incentives that’ll make it attractive for employers to retain them.
I’d argue what we need is elimination of ageism, plus new health policies which help older Americans make it to 70 in better health (as Finland did years ago). Many who use their back, feet, knees, and hands, more than their head and mouth, experience daily agony working in their late 50s or early 60s.
Encouraging people to stay in the workforce is fine, but a bit of a dream, (look at the comments supporting FIRE 😎) encouraging immigration is more practical and necessary. Needless to say, Americans don’t get it..
We also don’t get the concept of paying for what you want and need, that is, taxes. We couldn’t afford tax cuts in 2017 and we sure can’t afford them now.
The support for no tax on this or that, even no tax on seniors because “they paid their dues” is a sign of how ignorant people are about taxes and spending.
Social Security funding should have been and should be adjusted regularly and automatically to reflect changing demographics, etc. Instead, we look the other way because higher taxes upset voters.
A person on X not long ago posted that SS would be fine “if the government had contributed its share.” How do you deal with that level of ignorance?
We can’t simply cut spending to solve the problem without serious damage to tens of millions of Americans.
Yes, immigration is another lever to pull in order to alleviate this funding pressure. Great point! Offering work to older people who want to keep working is fine, but it’s probably not nearly enough on its own. It will likely take a whole raft of different solutions working in concert to stabilize SS and its associated programs. Tax increases, encouraging longer workforce participation, higher immigration, possibly minor cuts, too. Or we could just keep borrowing and avoid all that…
Encouraging people to stay in the workforce longer isn’t a dream, it’s a necessity. We’re not talking coercion We’re talking incentives. Yes, some folks are physically unable to do their job after a certain age, but many are — and at least some would appreciate the financial and psychic benefits of working.
Check out this chart from Boston College’s Center for Retirement Research:
https://crr.bc.edu/average-years-in-retirement-men-1962-2050/
A male retiring today is expected to spend 20 years in retirement, up from 15 years in 1975. It seems that, as a society, that’s something we simply cannot afford — and fiddling around with Social Security funding isn’t going to fix the problem.
Can we create enough jobs to accommodate longer employment and also meet the needs of the upcoming generation? I don’t know, but that is part of the equation I should think.
Unless the law is changed we could end up with older workers also collecting SS as I did.
I don’t know what employer incentives you have in mind, but employers want new blood, turnover in the workforce, new ideas. Would financial incentives overcome that? I don’t know.
Jonathan, thanks for a very thought-provoking article. It reminds me of a presentation I attended some 25 years ago in Philadelphia by U Penn economist Jeremy Siegel. He discussed many of the same issues related to the aging of the US, as well as the inter-generational wealth transfer that would occur as the baby boomers retired and sold their assets to the ext generation. As I recall, his analysis showed that, to make the math balance, it would take immigration and international buyers. His analysis and consolations certainly support the idea of people working longer.
Somewhat in contrast to this, I just finished a book on AI which discussed the potential productivity enhancements of AI, and the fear of job elimination (as well as some more sinister concerns). This week I observed 2 aspects of construction that showed the productivity value, and reduction of hard labor, that technology can provide. A house across the street from our beach house was knocked down and a new house is going up. The contractor installed over 2 dozen pilings in 3.5 hours using 2 pieces of heavy equipment and 4 men (including the drivers). The only manual labor involved was one man with a large lever / hook device rolling the pilings over a chain. He was the oldest person in the crew. Everything else was done by machines. Another new house nearby is almost complete. An electrical contractor connected the new electrical service to a pole-mounted transformer. The electrician was well into his 50s. He used a bucket truck and modern interconnects and the whole thing was done in 20 minutes. No ladders, no carrying heavy cables. I understand this is not every construction task, but there might be enough of this kind of technological improvement to address some of the very real concern about workers in the construction and labor trades working longer.
Years ago I remember a piece written by one of your former employer’s tax writer Laura who described the United States of America’s fiscal situation as being the equivalent of ” an insurance company with an army,navy and air force”, highlighting the fact that discretionary spending after Medicare, Medicaid, Social Security and defense was about 15%.
raising the age of retirement is easier for office workers, white collar jobs and professionals but tougher on construction workers, laborers and jobs requiring physical stamina. Some tough choices to be made by a tough choice avoiding Congress.