Setting the Record Straight on Social Security

Recently, many policymakers and commentators have called for expanding Social Security benefits rather than slowing the program’s costs, suggesting that the program’s current shortfalls are modest and easily addressed. Below, we answer some questions about Social Security to help explain why many of these calls are misguided.

Is Social Security's Financing Problem Real?

Unfortunately, suggestions that Social Security does not face a financing problem are not based in fact. Already, the costs of benefits are well in excess of revenue from payroll taxes. Social Security’s cash-flow deficit will add $75 billion to the deficit in 2014, $1.0 trillion over the next decade, and $3.8 trillion in the decade following. As we've explained, the program's past surpluses do nothing to change its very real current cash deficits. Regardless of whether past surpluses were saved in an economic sense or not, the federal government will have to borrow more to make up for the Social Security system’s cash flow deficit.

Social Security is also in trouble in its own right. The program faces a 75-year shortfall of 2.7 percent of payroll, with annual shortfalls reaching 3.9 percent in 25 years and 4.8 percent in 75 years. According to official estimates, the program’s trust fund will run out of money either in 2031 or 2033. Although these estimates are subject to some uncertainty, the CBO is 95 percent certain the trust fund will run out within a quarter century. At that point, all beneficiaries will face an immediate 23 percent across-the-board benefit cut regardless of age, income or status.

There is no question that this abrupt benefit reduction needs to be avoided, but doing so will require tough choices. As we’ve explained before, the longer we wait to act, the tougher those choices will be. The actions of those who are downplaying the magnitude of the problem and the need for action to address the shortfalls now will actually lead to deeper cuts in benefits for all beneficiaries or greater increases in payroll taxes for all workers than would otherwise be the case.


 

CRFB Social Security Resources



Should We Expand Social Security Benefits?

In recent weeks, some have called for expanding Social Security benefits. Although there is a strong case for targeted benefit enhancements, it would be imprudent and irresponsible to enact broad-based benefit enhancements before the program’s finances are under control.

The old-age bump up provisions and minimum benefits in the Simpson-Bowles and Domenici-Rivlin plans, which would enhance benefits for low-income workers and the very old most at risk of poverty, are sensible additions to any reform plan. It is questionable whether the same is true about the across-the-board increase in initial benefits and adoption of the CPI-E proposed in legislation sponsored by Senator Tom Harkin (D-IA).

We’ve already written about the numerous flaws of CPI-E, which has been deemed an inaccurate measure of inflation by both the Congressional Budget Office and Bureau of Labor Statistics.

In addition to these concerns, broad-based benefit increases like those in Senator Harkin’s bill are incredibly expensive. When fully phased in, his proposal would increase costs by about 1.2 percent of payroll, resulting in a 30 percent increase in the shortfall. Rather than focusing on low-income seniors who may need support, these increases would go to everyone. For example, under his plan a 38-year old today with income in the top five percent of earners would receive a $2,200 benefit increase (in 2012 dollars) in 2050 alone.

With the Social Security program already underfunded, substantially adding to the shortfall by increasing benefits on seniors that may not need these increases would be unwise. It would be would be far more responsible to identify other approaches to encourage savings and improve retirement security, and to focus Social Security reforms on making that system solvent while providing targeted enhancements to those most in need.

Can Social Security's Finances Be Solved Through Higher Taxes on the Most Wealthy?

Rather than heed warnings from the Trustees and others about Social Security’s financial state, many have claimed that its shortfall could be easily closed by eliminating the $117,000 cap on wages subject to the income tax.

Yet while increasing or eliminating the cap could be part of the solution (as in Simpson-Bowles and Domenici-Rivlin), it is not sufficient to make Social Security solvent, let alone pay for benefit enhancements, and raises concerns of its own.

According to the Social Security Chief Actuary, repealing the taxable maximum would close about seven-tenths of the program’s 75-year shortfall, and only about one-third of the gap in the 75th year. Senator Harkin’s legislation on the whole would close only one-half of the 75-year shortfall and one-fifth of the shortfall in the 75th year. The legislation would lead to cash surpluses between 2016 and 2023, but deficits would return by 2024 and continue to grow thereafter.


Part of the reason raising the taxable maximum does so little over the long-run is that new revenue would be accompanied by higher benefits for the very wealthy. This problem could be reconciled by not crediting income above the current taxable maximum toward benefits, but that solution also raises concerns. Strong supporters of Social Security like Former Social Security Commissioner Bob Ball have argued the link between benefits and contributions is among the most important features of the program, and others like CBPP’s Bob Greenstein have argued that “breaking Social Security’s link between payroll-tax contributions and benefits… [would risk] undermining public support for the program.”

Eliminating the taxable maximum entirely would also have profound effects on the rest of the budget, especially when added to the Medicare payroll surtax and income tax rate increase that went into effect this year. In addition to the potential economic consequences of a 12.4 percent rate hike, a tax increase that large would make it politically challenging to raise more revenue from the wealthy, if it all. The government has many important needs, from financing growing health care costs to investing in infrastructure and education to keeping debt levels under control. Raising that much revenue to fund Social Security (including higher benefits for wealthy seniors) would suggest that spending more money on retirement benefits for seniors is a higher priority than other options including new investments or spending on children.

*****

There is no question that the United States could benefit from improvements to its retirement system, including regulatory, tax, and spending changes across multiple programs.

But one of the major threats to retirement security is the looming insolvency of the Social Security program. The program’s finances must be fixed in order to fully fund benefits and give workers the ability to plan and prepare. Such a fix could increase revenue coming into the system, slow the growth of benefits being paid out, and even offer some targeted benefit enhancements to those who truly need them. (Try to improve the program by using our Social Security Reformer).

But "retirement security" cannot be used to offer everything to everyone at little to no cost. That type of thinking will lead to stalemate; and as we've explained before, the longer we wait to reform Social Security the bigger the problem becomes and the harder it is to fix it. Eventually, the “do nothing plan” would result in a 23 percent across-the-board benefit cut. That's a threat to retirement security that we ought to avoid.

Social Security

 The article is based on the false belief that the federal government is short of dollars and in danger of being unable to pay its bills, while the private sector has plenty of dollars and easilyn can pay its bills.

 

So, the private sector is told to send more dollars to the federal government, while the federal government is told to send fewer dollars to the private sector.

 

This all is known as "austerity" or deficit reduction, the process that is destroying the populations of Greece, Italy, France and the rest of the EU. Austerity widens the gap between the rich and the rest.

 

The fact: The U.S. government, being Monetarily Sovereign, never can run short of dollars and never can be unable to pay its bills.  Even if all federal taxes and all federal borrowing fell to $0, the federal government could continue to spend and pay its bills.

 

The U.S. state and local governments, like the euro nations, are monetarily non-sovereign, so do not have this ability.  Unfortunately, blogs like this one do not recognize the fundamental differences between Monetary Sovereignty and monetary non-sovereignty, so continue to spread what has become known as "The Big Lie," the myth that the federal deficit and debt are too high, and will be paid for by our children.

 

The damage to America in incalculable.  

 

Rodger Malcolm Mitchell

 

Rodger Malcolm Mitchell

  "the myth that the federal deficit and debt are too high"  If you are being satirical then forgive me. You are correct in hte fact that we can alsways print more money. You are wrong if you think it is sustainable. Wiemer, Zimbabwe, etc. all found out there is a limit. America is no different.

Sorry elites, Social Security NEVER can go 'Bankrupt'

 When will the Department of Defense 'run out of money?' When will the Department of Commerce run out of money? When will the US Supreme Court run out of money? When will the White House run out of money? When will the US Congress run out of money? When will the FCC run out of money? When will the myriad of over 600 federal agencies all run out of money? The answer is NEVER-unless Congress wills it. A sovereign currency issuer never borrows or taxes to 'obtain' money. NEVER.

 

Therefore, the 'solvency' of Social Security  is contingent upon only two things:

 

 1. The ready availabilty of goods and services that SS recipients can purchase/consume without crowding out consumption for the rest of the economy (actually that is all the FICA tax is for-that is, to smooth demand for goods/services in our economy).

 

2. Inflation. Dollars are NEVER an issue for a currency sovereign-only inflation is. (Inflation is always based upon both supply and demand for both dollars AND goods/services, it is not just 'money printing'.)

 

Any effort to reduce Social Security benefits is for one reason and one reason only-the increase the wealth gap. You'll notice that this 'website' dresses itself up with essentially a rip-off logo/font emulating some sort of 'official' federal agency. This is a devious attempt to make you believe these disingenuous power grubbing elites actually know what they are talking about. THEY DON'T. 

Reasonableness and Balance

I do not think it is worth commenting on those that believe we can just print more money to pay our bills.

I believe, like many others that we can make changes to Social Security to make it more viable over the long term. The analysis on this blog makes it obvious that we should do that sooner than later.

What most people fail to realize is that the Social Security "IOU's" held by our government needs to be paid back. Some current deficits and debt totals include this "internal" borrowing and many do not.

The bottom line is that the government spent the surplus and funds will need to be found to pay it back. Some argue that the rich need to pay more. The truth is that the rich are already paying for a greater portion of current taxes than they have historically. In addition, the overall tax burden, with recent tax changes, is near where it has been historically. The tax burden, as a percentage of GDP, could be increased marginally but not sufficiently to take care of all our problems.

We have to start getting realistic about how much Medicare, Medicaid and Social Security burden our economy can afford.

Austrialian Plan

Congress needs to study a successful plan like the Austrialian private pension plan.  Adjust it to work in the U.S.

Social security

To all you so called elites, the only problem with social security is not being under funded, but keeping welfare and any other money grabs out of it. How about government places the four trillion dollars plus interest that you stole, back into SS and leaving it the hell alone.

Anonymous

You only get what you put in.  If you don't work and don't pay, you don't get.  That fixes the issue of disability fruad, people that hide thier income to avoid taxation and perpetuating the welfare state.  If you never work or at least claim not to, should you recieve a retirement benefit?  Retirement from what?  If you eliminate the fraud then the problem is more manageable to solve and the payers will be more willing to do thier part to fix it.  Do nothing about the fraud and it will be met with resistance.

RE: Anonymous, June 3rd

Actually, no. You can work, and you can pay in, but that does not mean you will get. Social Security can (and does) drag out disability claims until your SSDI-eligible period runs out, then guess what you get? Nothing...Oh, sure, you can try for SSI, but again...good luck proving it. There's just way too many hoops to receive the benefit, assuming you're willing to try to go the distance, then to get told in the end that you're not really sick. All your doctors are wrong, go back to work...

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