We just got back from the Women’s March in Washington. The outpouring of people throughout the world was awesome, but it will not mean much unless we take our newfound energy and find a way to channel our hope and fear into actions that will contain the damage that President Trump and the Republican Congress could do. All of us need to do something—whether it is calling our Representatives and Senators on a regular basis, joining local activist groups or anything else.
Looking for something you can do? One critical place to put your energy is joining efforts to save Social Security. Social Security has not been on the radar, and Candidate Trump promised not to touch it or Medicare. Yet consider that Mr. Trump often does not remember the promises he made when it is convenient to him, and the Speaker of the House, Paul Ryan, is an implacable foe of Social Security and Medicare and has been waiting for years for the opportunity to take them down.
Consider this scenario. Congress passes tax reform bills that substantially lower the top rates on individuals and the rates on businesses. The tax cuts lead directly and inevitably to a ballooning federal deficit, which Congress and President Trump blame on Social Security and Medicare among the primary causes. Dismantling the Social Security Trust Fund will put billions of dollars back into the treasury, which could go to cover the budget gap produced by tax cuts.
We have been hearing for years that Social Security and Medicare are going to drain the federal budget or go bust, and so the people currently paying payroll taxes will got nothing back in the future. Many people believe it is true and that has eroded support for Social Security.
But it is a lie that opponents of Social Security have been repeating for years. Social Security is not about to go bust. I’ll talk about Medicare at a later date, but here are the facts about Social Security.
The Facts About Social Security
Social Security, as you all know, is funded by payroll taxes. Workers currently pay 6.2% of their salary into Social Security and their employers pay another 6.2%. And as Judy did for many years, people who are self-employed pay 12.4% of income. People pay the Social Security tax on income up to $118,000/year. Everything above $118,000 is not taxed for Social Security.
Social Security was established in 1935 as a pay as you go system. That is, current workers in 1935 paid the tax and retired persons began receiving payments. So unlike a pension or IRA where you pay into a fund and that money belongs to you, Social Security has never worked that way. It is, instead, a compact between generations that today’s workers will support today’s elders.
That system worked well for a long time because there were lots of working age people paying into Social Security and relatively few retired people receiving benefits. That population balance is changing and that’s why economists and everyone else has gotten worried. As recently as 1970, there were approximately 4 workers for every retiree. As the birthrate has decreased and people are also living longer, there are fewer workers for every retiree. The current ratio is approximately 3 workers for every retiree. The ratio is expected to drop to 2.2 workers to each retiree in 2030 and 2 per retiree in 2050.
What does that mean for Social Security? Remember Al Gore’s lock box? That’s the Social Security Trust Fund, which has a surplus. That is, more money has been collected over the years than Social Security has paid out and the fund currently still runs a surplus. As the number of retirees increases in future years, Social Security will be able to use its surplus to pay them. If we do nothing now, Social Security will begin running a deficit somewhere around 2023, and the surplus in the Trust Fund will run out in 2034 (although some estimates place the date a decade later).
But that does not mean that retirees in 2034 will get nothing. If we do nothing to re-adjust Social Security now, payments by workers to Social Security in 2034 will still be able to cover 75% of retirees’ Social Security income. In other words, Social Security will not go broke. It will just pay out smaller amounts.
Furthermore, it could be fixed so that retirees continue to receive most or all of the money due them. Here are some options. Each has its advantages and disadvantage but a compromise that spreads the cost across some or all of these options would assure a better retirement for everyone without overburdening today’s workers.
1. Increase the Social Security Tax: A small increase in the payroll tax would assure higher payments to recipients in the future. There has been support among the public in the past for a small increase, but this is a regressive tax that falls hardest on poor and middle-income people.
2. Increase the Ceiling on the Amount of Income Taxed: This has been discussed for years, but there has been no action on it. Given the increased wealth held by the wealthiest people in our country, increasing the ceiling of income that is taxed for Social Security from the current $118,000 to a higher amount could cover the shortfall. Some advocates argue increasing the cap to around $215,000, which means about 90% of the population will be taxed on all their income. The last Social Security reform in 1983 actually intended to extend the tax to the 90% level, but that has not happened due to technical reasons for how the cap on the tax is computed. Maybe the cap could even go a bit higher.
3. Invest a Portion of Social Security Funds in Stock Funds or Other Income Funds. This has been a popular option on the political right. It was also the choice of the students Steve taught in recent years. The experience of other countries that have adopted this option is that it works great when the market goes up and poorly when the market goes down. Retirees in the US with the lowest income (the bottom 20%) depend almost entirely on Social Security for income. For them, this would be a precarious option.
4. Decrease in Benefits. A small decrease in benefits today will extend the life of the Trust Fund.
5. Increase the Age for Full Social Security Benefits to 70. Many people currently work to 70 and beyond. People who work in physically strenuous jobs, however, would be disadvantaged by this option.
6. Reduce the Annual Cost of Living Increase. This annual increase is set based on inflation. In recent years, increases have been small or non-existent.
There are other fixes as well. The point is that Social Security is not a cause of budget deficits, and that it could be fixed in ways that future retirees get most or all of benefits that would be due them.
There is one other fix that is not talked about much. We currently have 11 million illegal aliens in our country. Some are probably paying Social Security taxes already, but if we legalize their work status, we bring many young people with many working years ahead of them into the system. This will offset the bulge of Baby Boomers collecting benefits over the next 20-30 years. Instead of building a wall, we would be better off with a planful workers program for immigrants.
So get involved! Here are a couple of organizations devoted to saving Social Security and Medicare. I don’t know these groups, but it is a place to start. Or start a local group that bombards your local representatives and senators on the issue.
National Committee to Preserve Social Security and Medicare
Americans United for Change
A discussion of options for Social Security from the American Association for Retired Persons
Put together a proposal yourself by using the tool created by the Committee for a Responsible Federal Budget