Have you heard that Social Security is going bankrupt? By 2033, some say. I will still be 30+ years from retirement in 2033 (hopefully), which doesn’t bode well for me. But wait a minute. What does “going bankrupt” even mean? Why 2033? What happens in 2034? Is it too late to do anything?
Before I attempt to answer any of those questions, I will provide a brief overview of what Social Security actually is for those people (like myself before I started this post) who know little more than the name, how much money gets taken out of their paychecks, and when they are allowed to start recollecting, assuming it still exists, by that point, that is). Social Security began on August 14, 1935 (almost 83 years to date) with the passing of the Social Security Act. Since then, it has undergone numerous revisions. One of the more significant ones is the 1965 revision that added Medicare, government-sponsored health insurance (“Historical”).
The program works though a pay-it-forward system. People working today provide funds for people who are currently retired with the trust that their successors will do the same. From around 1983 to the early 2000s, Social Security generally collected more money than it dispensed. As a result, a trust fund built up a sizable supply of government bonds. By 2005, investments totaled over $1.8 trillion (Hungerford, “Better”). However, that trend has since reversed. The large generation of people born immediately after World War II (the “Baby Boomers”) is aging out of the workforce, leaving behind a smaller labor supply to pay for their Social Security. Thus, the trust fund is now shrinking. Economists estimate that by 2033 the fund will be completely depleted. The income generated at that time is expected to cover only three quarters of promised benefits (Hungerford, “Better”).
Social Security is funded by a payroll tax, that is, a tax on job-related income. Although there is some flexibility depending on income, generally people pay 12.4 percent of covered earnings for Social Security, although employers pay half of their employees’ taxes (Hungerford, “Increasing”). That said, only income up to $128,400 (in 2018) is taxable. Capital gains and other income that is not job-related are also exempt. As a result, in 2012, households in the lowest economic quintile (lowest 20 percent of earners) were paying around 10.44 percent of total family income in payroll taxes while those the highest quintile (highest 20 percent of earners) were paying around 8.54 percent. Households in the top one percent payed even less: 3.19 percent (Hungerford, “Increasing”).
One of the causes exacerbating this disparity is the growing wage gap between wealthier and poorer people. As wealthy people get wealthier, more of their income becomes tax exempt (as a person with a salary of $130,000 contributes as much as one with a salary of $600,000 does). This process has resulted in a greater portion of the tax burden falling on the shoulders of less-prosperous people (Hungerford, “Increasing”). While the income cap fluctuates from year to year as average income changes, a smaller amount percentage of total household income is taxed over time as average income does not take into effect the polarization of income levels (or wage inequality) over time. In 1982, 90 percent of covered earnings were taxable. By 2010, that number had fallen into the low 80s, indicating a greater percentage of income is above the cap, and thus untaxed (Hungerford, “Increasing”). This problem combined with an aging population, threatens Social Security’s long term health.
A variety of solutions have been proposed to address the Social Security funding problem. However, the largely come in two flavors: cutting benefits or increasing savings. One example from the first approach is the suggestion to raise the age people start receiving benefits. The logic is that since Social Security was passed (over 70 years ago), the life expectancy for the average working American has risen 20 years (Burnett). Thus, Social Security payments last much longer than they were originally intended to. The fault with this solution, however, is that life expectancy for racial minorities and blue-collar workers in strenuous jobs has not increased (Burnett). Thus, raising the age of qualification would only cut benefits for many working Americans.
The other suggestion for cutting benefits is changing the way benefits are calculated. Currently, in order to adjust for inflation when computing how much money Social Security should dispense, the government uses the Consumer Price Index (CPI), a measure of average price change in consumer goods. However, in 2002, the Bureau of Labor Statistics released a new metric called the Chained CPI. The Chained CPI reports lower inflation than the CPI because it assumes that consumers will buy an alternative good when one gets more expensive (such as Granny Smith apples instead of Fiji apples) (Chandra). If Social Security benefits were calculated using the Chained CPI, eligible people would see smaller increases in benefits as prices increased. Thus, switching to Chained CPI is simply a benefits cut.
From the standpoint of raising money instead of cutting benefits, one suggestion is to privatize the Social Security trust fund. Currently, the trust fund is held in the form of government securities, a reliable but slow-growing investment. By investing in the market, the government could turn less money into more money (theoretically). The problem with this theory is major market fluctuations. The second Bush Administration tried for almost eight years to privatize Social Security, unsuccessfully. In 2006, Thomas Hungerford, an economist at the Congressional Research Service, wrote a paper titled “A Better Way to Invest the Social Security Trust Fund.” In it, he advocated moving some investments to mortgage-backed securities. Barely two years later, the housing market collapsed as those very same mortgage-backed securities turned out to be riddled with risky, worthless loans. If the Social Security fund had been privatized (particularly in the form of mortgage-backed securities), billions of dollars would have evaporated, leaving the funding problem worse off than it started.
One of the simplest and, in the blog, the best solution to funding Social Security is to reduce the amount of untaxed income by raising (or eliminating) the income cap. One way to do this, as suggested by Hungerford (in 2013), is to change the metric for calculating the income cap so it is always equivalent to 90 percent of covered payroll (job-based income). To raise further revenue, Hungerford also proposed a two percent tax on all income above the income cap (instead of the 12.4 percent tax below the cap) (“Increasing”). This solution would not raise taxes for most of the lower four economic quintiles, thus relieving some of the burden of supporting the system that has been placed on them over the past few decades. Even with this approach, The top quintile would be paying a lower percentage of total income than the rest of Americans (10.10 percent compared to an average of 10.47 percent) and the top one percent would only be paying 6.51 percent of total income (Hungerford, “Increasing”).
This approach also addresses the concern that a tax hike could result in a decline in the labor supply. Some economics theorize that raising taxes on workers is like a pay cut, and motivates them to work less. While recent studies have disputed this claim, under the above approach, only around nine percent of families would be affected, minimizing any decline. Other economists suggest that when taxes are raised on wealthier individuals, they will divert income to untaxed forms (such as investments). While this was generally accepted as true before 2000, more recent studies have failed to tie tax increases to lower wages (a sign of diverting assets) or other methods of tax evasion (“Hungerford”).
Social Security is an excellent program facing a difficult future. However, it is nowhere close to beyond saving. Lawmakers should make a concerted effort to guarantee that the program continues to provide Americans retirement security long into the future. Further, they should do so in a manner that does not put further financial burden on the working class of America. Everyone should have to pay his or her share of protecting retired Americans. That is what society is about. We help each other to secure a brighter future for all of us.
“Benefits Planner.” Social Security Administration, https://www.ssa.gov/planners/maxtax.html. Accessed 8 Aug. 2018.
Burnett, Bob. “What’s Wrong With Social Security.” The Huffington Post, 26 Apr. 2013, https://www.huffingtonpost.com/bob-burnett/whats-wrong-with-social-s_b_3162372.html.
Chandra, Sho. “What You Need to Know About ‘Chained CPI.'” Bloomberg, 20 Nov. 2017, https://www.bloomberg.com/news/articles/2017-11-20/why-chained-cpi-has-links-to-u-s-tax-debate-quicktake-q-a.
“Historical Background And Development Of Social Security.” Social Security Administration, https://www.ssa.gov/history/briefhistory3.html. Accessed 8 Aug. 2018.
Hungerford, Thomas. “A Better Way to Invest the Social Security Trust Fund.” Challenge, vol 49 no 3, May-June 2006, pp. 90-104. https://www.jstor.org/stable/40722383.
—. “Increasing the Social Security Payroll Tax Base: Options and Effects on Tax Burdens.” Congressional Research Service, 5 Feb. 2013, https://fas.org/sgp/crs/misc/RL33943.pdf.