They’re Coming For Your Social Security |
Seven years from now, more or less, the Social Security system will go bust. There isn’t enough coming in from people still working to cover the benefits going to people who are retired.
For now, the Social Security Administration is using a credit balance it has at the U.S. Treasury. In 2033 or, possibly, a year earlier, that checking account will be empty. Absent corrective legislation, which Congress is in no hurry to enact, all benefits will be sliced 23%.
The government can create a temporary patch by just borrowing more money and adding to the budget deficit. A little bit of help would come from having the old-age fund, the one that pays most benefits, snatch the assets of the fund that covers disabled workers. But at some point legislators will have to correct the imbalance in the system.
The problem is that people are living too long and there aren’t enough young people chipping in. We’re short of babies and immigrants.
Some unpleasantness in inevitable. Either old people will get less, young people will pay more or, very likely, both groups will suffer. This survey looks at different proposals for setting Social Security on the right path. You can gauge what they will do to your pocketbook.
Is Social Security a Ponzi scheme? Not exactly. A Ponzi scheme has money from new victims covering the payouts to earlier ones. That’s how Social Security worked until 2021. Now there isn’t enough cash coming in to pay off older people. In other words, Social Security does not have sufficient financial integrity to be considered a Ponzi scheme.
“Insolvency,” often used to describe the system’s finances, doesn’t do justice to the situation, either. A firm is insolvent if its liabilities exceed its assets. But Social Security has always been like that, with benefits already earned at any point exceeding money in the bank.
What is about to happen is better characterized as a bankruptcy, that being the case where a debtor cannot pay bills as they arrive. What will come out of this affair will look like a corporate reorganization. Here are some of the solutions that economists or, in rare cases, politicians are discussing.
1. Postpone retirement.
The last reform scheme, enacted in 1983, gradually kicked up the normal retirement age from 65 to 67. Another round of delay would fill in a big piece of the financial hole.
Raising the age further, beginning with a two-month delay for people born in 1964 and reaching the 70-year mark for those born in 1991, would reduce the system’s long-run deficit by 36%, according to Social Security’s actuaries. They also looked at an accelerated age curve hitting 70 years in 2037; that would cut the deficit by 44%.
Neither of these delays would affect people who were entitled to collect early benefits this past January (those born before 1964). Either would make necessary other means to cover the rest of the long-term deficit.
There are various plans afoot for doing that. One is to raise the wage base on which the existing 12.4% Social Security tax is collected (half from employers, half from workers) from the current $184,500 to infinity.
This plan also calls for making the benefit formula, which is already progressive, even more progressive. The existing formula replaces 90% of the first $15,432 of annual wages but only 15% of pay over $92,988. In the infinite-tax plan workers would get zero credit for wages beyond $184,500. This soaking of the rich would eliminate 67% of the long-run deficit, the actuaries say.
Another recipe calls for leaving wage earners where they are and going after coupon clippers. The existing 3.8% surtax on investment income would be tweaked. Couples with adjusted gross incomes over $500,000 would pay a 12.4% marginal tax on their interest, dividends and capital gains. That $500,000 floor would not get adjusted for the cost of living, so if the Federal Reserve can engineer enough inflation, in time everybody would be paying a 12.4% surtax on investment income. Directing the proceeds to the Social Security system would eliminate 48% of the system’s deficit.
Instant cure for the system’s shortcomings: Raise the payroll tax from 12.4% to 16.4%, beginning tomorrow.
There are downsides. Many workers would be replaced by robots. The ones left would tighten their belts, precipitating a recession.
Congress is unlikely to choose this option at full strength. The four-point hike is perhaps mentioned by the actuaries only as a way to quantify the revenue gap.
4. Shrink starting benefits.
The existing benefit formula looks at pay over the best 35 years of a career, with early-year incomes adjusted to match the growth in average U.S. wages. A reform scheme would, for beneficiaries born after 1969, replace this computation with a stingier adjustment using the growth in consumer prices.
Reduction in the long-run deficit: 74%.
5. Shrink succeeding benefits.
Existing law keeps benefit checks constant in real terms. The proposal here is to chop out 1% of the cost-of-living adjustment, meaning the purchasing power of benefits would decay at a 1% annual rate over the course of a retiree’s life. This would hit everyone, including those already getting Social Security.
Reduction in the system’s deficit: 51%.
6. Eliminate earned benefits.
This one is a doozy. The Congressional Budget Office scoped out the idea of zapping Social Security benefits and replacing them with a flat monthly payout set at 150% of the poverty line. Everyone over 65 would get the same amount. The savings you had built up with 35 years of contributions would vanish. Workers would continue to chip in, at today’s tax rates.
Conclusion: This reform would eliminate the long-run deficit.
Somehow Congress will have to wade through these options, probably emerging with a blend of tax increases mostly falling on the higher-paid and benefit cuts mostly affecting future retirees and tilted toward damage at the high end.
Two themes emerge from legislators’ tangling with budgets and pensions.
One is that debt is a favored strategy. Buy votes now, pay later. This is apparent in New York’s proposal to enrich retirement for government workers. With cheering from both sides of the political aisle, a pending bill would have state and municipal agencies attracting talent by retroactively increasing pension credits. The resulting outlays would show up down the road.
The other theme is that redistribution is appealing. If money is tight, take it from people who have worked and saved and hand it to people who have not worked and saved.
Timetable for a Social Security redo? Congress will probably use the same framework established for enacting TSA budgets.