Post Perpetrates Social Security Myths

October 31, 2011
By

The Washington Post ran a series of half-truths about Social Security as its lead story on Sunday. To read a proper skewering of the myths perpetrated by that article, see Dean Baker’s piece here and Paul Krugman’s blog post here.

For my two cents, here were my first immediate reactions to the “fact” that Social Security is now paying out more than it takes in (its “cash flow” to use business accounting terms):

1. The cash flow problem is largely an artifact of the 9.1 percent unemployment rate, which depresses tax collections.

2. The temporary shortfall was exacerbated by the 2 percentage point cut in payroll taxes passed last December to spur economic growth, which BY LAW must be reimbursed by the general fund of the government.

3. The Social Security trust fund contains $2.4 trillion in U.S. government bonds, the accumulated savings of the past three decades (Social Security taxes were raised in 1983 precisely to generate those savings for the Baby Boom’s retirement).

4. The bonds in the Social Security trust fund are counted as part of the national debt. In other words, when Congress refused last July to raise the debt ceiling until it got extensive cuts in the domestic budget, it was counting that $2.4 trillion. To not count it now, as the Post article does not, is to say Congress is playing with two sets of books. Newspapers can play with two sets of books. The government cannot.

5. The long-term actuarial imbalance (actuarial balance, according to the Social Security trustees, requires financing the system so it can pay all current benefits for 75 years, or until 2086) does not occur until the mid-2030s, when the Trust Fund runs out of cash. Obviously, a lot can happen between now and then.

6. The single most important thing to do to reach actuarial balance is to tax at least 90 percent of wages earned by American workers, which was the goal set for the system in the 1930s and reaffirmed in the 1980s. The reason why only 83 percent of wages are taxed today is that people earning over the Social Security wage cap (currently $108,600, about to rise to about $111,000 a year next year) is the growing inequality in society. With people at the top earning a greater share of national income, a reduced share of national income is taxed because it is going to people who earn over the tax cap. Remove the cap, or raise it to about $170,000 a year, and we’ll once again be taxing 90 percent of wages. This eliminates 40 percent of the 75-year actuarial imbalance in the system.

7. Raising the retirement age, the reform often suggested by deficit reduction think tanks, the Bowles-Simpson Commission and others, is an unfair way to reduce benefits. It hits lower wage workers hardest from an actuarial point of view (they die younger), and it is unfair to younger workers who face greater competition in the job market from older, more experienced workers. A fairer way to lower overall system costs is to compress the Social Security payout scale, with people who earn high incomes in retirement (largely due to other payments from pensions, retirement savings, interest and dividends from accumulated wealth) receiving relatively less than now (perhaps by lowering their cost of living increases over the next few decades) and paying people who have no other savings or retirement income relatively more.

Retirement is a serious issue that needs a serious discussion in the nation’s leading newspapers. To run scare stories across the top of page one on a Sunday is a complete disservice to having such a discussion.

 

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3 Responses to Post Perpetrates Social Security Myths

  1. Bruce Krasting on October 31, 2011 at 6:30 am

    1) Yes the problems at SS are a consequence of 9.1% unemployment. But that problem is not going to go away for many years. You think we are going back to 5% unemployment? Wrong!

    2) The 2011 2% reduction in FICA HAS NOTHING TO DO WITH THE SHORTFALL!!! To say that it does proves that you do not understand what is happening.

    3) There is not one penny in those trust funds. If you are able to write about this means you understand this. So you’re selling a lie.

    4) Yes, the Trust Funds are just debt. Not assets as you think they are.

    5) A lot can happen between then and now? Like what? Some miracle? You suggest we wait another decade before confronting this? If that is the result then the people who are 100% dependent will be hurt the worst. That’s what you want to happen? Put your head deeper in the sand if that is the case.

    6) You’re wrong. Increasing the cap will raise more revenue, but it also increases future liabilities. It does not make SS more solvent in the long run. It adds to the future deficit.

    7) Okay. Finally we agree. A means test is required. This is a massive socialization of the system. Yes it would address the problem and yes it would be the end to SS. The program would be dead 5 years after a means test is installed. That would be the best result for the country longer term. Bring it on!

    • Tom Sturm on November 1, 2011 at 6:01 pm

      Capping the wages that are taxed has no effect on the Social Security deficit for the simple reason that no benefits accrue on wages in excess of the cap. You want to tax wages that are not included in the benefit calculation. This has never been done and would essentially make Social Security a welfare program.

  2. Alison Bass on October 31, 2011 at 6:42 am

    Great blog, Merrill! I agree with your commentary about the more equitable solution to Social Security’s financial woes. Why should wealthy seniors receive this entitlement at all? At the very least, give them less than they’re getting now and give poor seniors more. As you say, raising the retirement age will only penalize working-class seniors really need the pension in their mid-60s.

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