Sunday, November 18, 2007

The Social Security "Debate"

Revised November 29 - see additional information at end.

I am furious about this "crisis" in Social Security "debate" going on among politicians today, and here is why:

1. There is no immediate crisis in Social Security, yet the politicians keep arguing over how to fix it. I am really tired of this “debate” and I am very concerned that it will lead to higher taxes on my income. Social Security was “fixed” in 1983. The fix included an increase in the payroll tax that I have been paying virtually my entire professional career. In addition to that tax, the self-employment tax on small business and professionals was increased to over 15%, and I have paid that on many occasions as well. (Next time you hear anyone talking about how Democrats are against small business ask yourself how that can be true when it is the Republicans that placed this burden on these sacred cows.)

Here are some of the changes from the 1983 law from the Social Security Administration’s summary of the legislation:

Advances scheduled increases in Social Security tax rates. Social Security tax rates (which include the Hospital Insurance tax rates) for employers and employees will increase to 7.0 percent in 1984, {1} 7.05 percent in 1985, 7.15 percent in 1986-87, 7.51 percent in 1988-89 and 7.65 percent in 1990 and thereafter.

Provides for cost-of-living increases based on prices or wages--whichever is less--if the trust funds fall below a specified level.

Increases tax rates on self-employment income equal to the combined employee-employer rates and provides credits against tax liability to offset part of the increase.

Beginning in 1984, includes up to one-half of Social Security benefits as taxable income for taxpayers whose adjusted gross income, combined with half their benefits and any tax-exempt interest they may have exceeds $25,000 for a single taxpayer and $32,000 for married taxpayers filing jointly. Benefits received by married taxpayers filing separately are taxable without regard to other income. Appropriates amounts equal to estimated tax liability to the Social Security trust funds.

Raises the age of eligibility for unreduced retirement benefits in two stages to 67 by the year 2027. Workers born in 1938 will be the first group affected by the gradual increase. Benefits will still be available at age 62, but with greater reduction.

(Yes, it was RONALD REAGAN who first taxed social security benefits, NOT Bill Clinton.)

This is the deal we made, and the deal we have paid for dearly over the past 24 years. This is the deal we should get, and if we don’t get it then the funds we have paid in for our future benefits will have been confiscated and used for some other purpose. In other words, we will have actually had a regressive tax system placed on many of us for 25 years while taxes on high incomes have been cut (sold to us via the trickle down theory). In the end, those who went for the high incomes will not need social security and those who did not (the teachers and such) will be living in substandard conditions. This is the primary reason I am furious about this “debate”. There should be no debate. I have paid for my Social Security benefits and I want what I paid for, and if it means bringing tax rates on high incomes back to where they were because we have some larger fiscal problem then that’s exactly what we should do. (You can read my opinion about why tax increases should be on higher incomes here.) This means I want the payments I should get at the age I am entitled to get them under the current rules (the ones in effect while I have been paying for them).

2. There is no immediate crisis in Social Security and I am tired of the fear mongering being used to scare more tax revenue out of the middle class and upper-middle class. There is plenty of surplus in the Social Security system, and the only reason it would be in “crises” is if the United States Government decided not to repay the treasury securities owned by the Social Security fund. In fact, according to Social Security Administration data the combined OASI and DI funds have run a surplus since 1984. Here is what the OASDI Trustees Report has to say about the short term situation:

Both the OASI and the DI trust fund ratios under the intermediate assumptions exceed 100 percent throughout the short-range period and therefore satisfy the Trustees' short-term test of financial adequacy. Figure II.D1 below shows that the trust fund ratios for the combined OASI and DI Trust Funds reach a peak level in 2014 and begin declining thereafter.

In fact, in 2016 the fund represents 400% of the annual need. It should decline thereafter because us boomers will be dying off.

What about in the long term? This is what those using Social Security to scare us always point to. Here are some of the details:

Another way to illustrate the financial shortfall of the OASDI system is to examine the cumulative value of taxes less costs, in present value. Figure II.D4 shows the present value of cumulative OASDI taxes less costs over the next 75 years. The balance of the combined trust funds peaks at $2.6 trillion in 2017 (in present value) and then turns downward. This cumulative amount continues to be positive, indicating trust fund assets, or reserves, through 2040. However, after 2040 this cumulative amount becomes negative, indicating a net unfunded obligation.

If you count boomers to include all of those born between 1946 and 1963 (which is stretching it), then the youngest boomer alive in 2040 will be 77 years old, and the vast majority of us will be long dead. In other words, the Boomers will have paid for their benefits. How big a problem is the projected deficit for future generations? If all of the assumptions of The Social Security Administration turn out to be correct, then the total deficit after the fund “runs out” will be 0.7% of GDP through the end of the projected period ending in 2081. Now, until we fixed the system in 1983 we ran deficits all the time (that’s what happens when you have a large population of kids relative to working adults). In addition, one has to question the assumptions of the Social Security Administration that project increasing costs AND declining tax revenue after the boomers are all dead (go figure that one). So I don’t care about these projections of future deficits because (i) they are small, and (ii) they are unlikely. If the boomers will have saved and paid for their benefits through 25 years of payroll taxes, then the next generation can figure out how to do it for themselves. Does this sound like a crisis to you?

It seems to me that the crisis is a figure of someone’s imagination. If there is a crisis, it has to do with the overall fiscal health of our economy, and not Social Security. I want all politicians to stop using Social Security as a “crisis” that is in need of fixing as a way of garnering support from lower and middle class voters. We have real issues right now, including things like health care costs, deficits, wars, dismantling of constitutional protections, and so on. The real crisis for boomers is in health care costs, and we need to be doing more about that. So the next time you hear any politician campaigning on a Social Security plan, send them an email asking why they are spending time solving a problem that does not exist while ignoring the true problems we face. If enough people do this, then perhaps the politicians will think it’s a movement (a Thanksgiving reference for the boomers out there).

For those who are looking for clarity on the political obfuscation front, you can get a list of the changes to Social Security under the Clinton Administration by going here. Some changes include:

Contract With America Advancement Act of 1996 (P.L. 104-121).

This bill, signed by the President on March 29, 1996, made a change in the basic philosophy of the disability program. Beginning on that date, new applicants for Social Security or SSI disability benefits could no longer be eligible for benefits if drug addiction or alcoholism is a material factor to their disability. Unless they can qualify on some other medical basis, they cannot receive disability benefits. Individuals in this category already receiving benefits, are to have their benefits terminated as of January 1, 1997. Previous policy has been that if a person has a medical condition that prevents them from working, this qualifies them as disabled for Social Security and SSI purposes--regardless of the cause of the disability. Another significant provision of this law doubled the earnings limit exemption amount for retired Social Security beneficiaries, on a gradual schedule from 1996 to 2002. In 2002, the exempt amount will be $30,000 per year in earnings, compared to $14,760 under previous law.

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996.

This "welfare reform" legislation, signed by the President on 8/22/96, ended the categorical entitlement to AFDC (Aid to Families with Dependent Children) that was part of the original 1935 Social Security Act by implementing time-limited benefits along with a work requirement. The law also terminated SSI eligibility for most non-citizens. Previously, lawfully admitted aliens could receive SSI if they met the other factors of entitlement. As of the date of enactment, no new non-citizens could be added to the benefit rolls and all existing non-citizen beneficiaries would eventually be removed from the rolls (unless they met one of the exceptions in the law.) Also effective upon enactment were provisions eliminating the "comparable severity standard" and reference to "maladaptive behavior" in the determination of disability for children to receive SSI. Also, children currently receiving benefits under the old standards were to be reviewed and removed from the rolls if they could not qualify under the new standards.

More data on SS:

The shortfall to "pay back" the trust fund: according to the Trustees Report referenced above, the largest annual amount required between now and 2040 is approximately $150 billion (see the link from "Figure II.D4.-Cumulative OASDI Income Less Cost, Based on Present Law Tax Rates and Scheduled Benefits"). That really isn't a problem for two reasons. First, the Office of Management and Budget projects fiscal 2008 total receipts of $2,574 billion, so the $150 billion is not a lot. But, it gets better. The OMB also projects that the budget, including all of these transfer payments, will be balanced by 2012. So, if the White House is correct, there is absolutely no issue.

The issue is health care, not SS.

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dd said...

First of all, this idea that government needs to take care of us from "cradle to grave" needs to end. Social Security was a bad concept to begin with. Most of us wont see the benefit of such payroll deductions in the future anyway - I wish I could opt out. If I were to place the amount into my 401K I would be much better off.

The idea that the government forces me to pay into a savings system it manages and promises to pay me back in the future completely obfuscates what the role of government should be.

I don't care if Boomers don't receive the benefits they paid for. They should've done something to correct this failure of a system and that's what I intend to do now. If there's enough money to pay your benefits back I'm fine with it, but if I have to fund your retirement on the premise that someone else will eventually fund mine is a pyramid scheme which will eventually collapse.

Your assumptions are based on the premise that what is a $100 today will be equivalent to a couple of bucks in the future. This is unsustainable economic policy in my view.

Palermo's Blog said...

dd - I would not mind having to save on my own, and I do anyway. The problem is when you are forced to pay a lot into a system for decades on the promise that you will have benefits later and there is no way to get that money back. Some day I will go through all of my contributions and figure out how much that would be worth if I had invested it all on my own. It's way too late for people getting ready to retire to go and change all the rules now, unless they could get all of their money back with interest. That will never happen.

Thanks for your comments.

Anonymous said...


is seriously wrong. he has combined a couple of lies he has heard with his own fantasies about how SS works, and the evils of government.

the government does not take care of you, in detail, "from cradle to grave," but human beings invent government in order to accomplish some things that they cannot accomplish as individuals. and since we left the age of stout yeoman farmers and small tradesmen 150 years ago there has been a need for government to buffer the swings in the national economy.

all social security does is to provide a way for working people to save a part of their own income for their own retirement, safe mostly from inflation, but also from market swings, and personal bad fortune. you aren't paying for anyone else's retirement. rich people do not contribute to social security at all. those who end up a little better off after a life time of work get a slightly worse "return" on their social security investment, in the same way that people who do not have a fire get a worse return on their fire insurance than those people who do have a fire.

meanwhile all the hysteria is about nothing. Social Security can continue to pay benefits forever. if we want the benefits to remain at the same percentage of lifetime earnings as they have been over the longer life expectancy we should enjoy in the future it makes sense to raise the amount we save while we are working. this would amount to a tax increase of less than a dollar per week each year from 2016 to 2036, while the average wage is going up ten dollars per week each year.

the fact that the money you pay in each month is taken out to pay for current retirees is no more significant than the fact that any money you put in the bank, or use to buy a stock, is taken out that same day and used by strangers for their own purposes. all that matters is that when you need to get your money out you can.

it turns out that with stocks there is no guarantee. with banks there is a modest guarantee...underwritten by the bad old government... and with Social Security there is a perfect guarantee... unless you are stupid enough to let the stock brokers stampede you into "fixing" what aint broke.

and you need to find out what a pyramid scheme is, and what Social Security is before you run around making a fool of yourself in front of people who can tell the difference.

Anonymous said...

I remember when I was dd's age. A fierce capitalist, with nothing but wild success before me and the ability to take care of myself completely until the end of my life. I also wanted to opt out of SS and use my money as I saw fit. 30 years later, I find that life doesn't often turn out to be what you thought it was going to be. (Not to mention that our 'capitalist' system is already wildly compromised, not least by handouts to the wealthy and to very profitable corporations...and very stupidly managed financial institutions...)

Through the questionable investments, ups and downs of life, good and bad luck and the usual human failings--which I shockingly discovered that I, too, was not immune to--I kept paying into SS. Now that I can see the finish line in sight, I am very glad that I did.

Ah, poor dd. So much to learn, and such a cold, callous and empty heart and head with which to learn it. Hope you grow up someday and find out that other people are just as valuable as your special, privileged, little self.