Fixing Social Security, A Primer

When I think of the budget and debt-limit negotiations underway in Washington, D.C., I think first about Social Security and how to fix that looming problem. Of all the money the government spends, Social Security amounts to about a quarter. (Defense is the other big item.) That Social Security’s old-age assistance is heading for a crisis has been obvious for the past 30 years.

The difficulty is not imagining reforms that might fix this problem — that’s the easy part — but in agreeing on what’s politically acceptable to the opposed parties. All fixes are painful, to some extent or other, and each side has opponents who declare such solutions unacceptable.

In my time as a journalist at the Seattle Post-Intelligencer and the Seattle Times, I wrote about Social Security many times. (Here I go again!) I interviewed people about it, read up on it, and became an advocate of one of the proposed reforms of it (personal accounts, a.k.a., partial privatization). I remember how much push-back I got from the public.

From the right I heard that Social Security was a fraud, a Ponzi scheme bound to collapse and leave workers with nothing — a gross exaggeration. From the left I heard that Social Security’s “crisis” was a fake, and that the system would be saved by economic growth — nope.

Many times, people told me that Social Security would be in fine shape had the politicians not stolen the trust fund and spent it. Concerning that trust-fund surplus, discussed below, what would you have the government do with $2 trillion ($2.7 trillion at its peak in 2017)? Put it in the banks, so that bankers could spray it out in home mortgages? (We saw how that would work.) Buy $2 trillion in corporate stocks and bonds? (Socialism?!) Buy gold? Oil? Trillion-dollar piles are too high to safely tuck away in a corner.

When it “spent” the trillions in that surplus, the government exchanged it for Social Security Treasury bonds. The bonds were (and are) the “trust fund” — which is not a true trust fund, because a government’s bonds are not an asset to itself. Instead, the bonds are a promise by the Treasury to return the money when Social Security needed it, which it began doing in 2018. The crisis comes in 2033, when the money is paid out and the need for it continues. At that point, old-age benefits will have to be cut about 20 percent unless Congress raises taxes, cuts benefits, or both. Think of this as the next debt-ceiling crunch time.

As for benefit cuts, people object: “I paid in, and I want my money.” When you’re working, you pay a 6.2-percent payroll tax, and your employer pays the same. You have to pay in for 10 years to get anything out. The more you pay, up to a limit, the greater your monthly check when you retire. Social Security feels like an individual insurance contract, but it’s not. It’s social insurance, a transfer program for working people, as a class, to support the old, as a class.

It does work. It’s not a Ponzi scheme, but it does have to be adjusted when birth and death rates change — which they have.

When lots of babies were born and the old didn’t live so long, the system worked fine. For the first generation, Social Security was a fabulous deal. When my father started paying in 1937, the tax rate was 1 percent each for employee and employer. But from the start, the tax rate was set to change, and in the following decades, both taxes and benefits went up. By the time my father retired, the benefit was indexed to inflation. For him the deal got better and better.

For my generation of baby boomers, the deal had to be cut back to make the finances work. In 1983, Congress agreed to gradually raise the age of full retirement from 65 to 67. That was effectively a benefit cut — and the government had the legal right to do it, because it’s the government’s money. And by doing it, Congress fixed the system for the next 50 years.

In the 1990s, when the baby boomers were paying in, there came a point when workers were paying 38 percent more into the system than it needed at the time. That’s what created the $2-trillion surplus. But soon the birth rate went down, and it so the surplus was not going to last. Even then, it was projected that the “trust fund” would be gone by the 2030s, and that Social Security would have to raise taxes or cut benefits again.

In an effort to give workers a better deal, some pension people came up with a proposal for personal accounts. Under this proposal, baby boomers would still have to pay Social Security taxes to support the generation before them, but the money left over — the 38 percent — they could invest for themselves. Left to build up over 20, 30, or 40 years, such investments would give them a more prosperous retirement, and would lower the next generation’s burden of supporting them. Over several generations, the proposed personal-accounts system could be shifted to one in which each generation paid for itself — an investment system rather than a transfer system. Under that proposal, you couldn’t get at your account until retirement, but the money would have your name on it.

To avoid the risk of loss, your investment choices would be limited to a few professionally managed funds — basically index-type funds. Still the personal-accounts idea was a hard sell. Even if the average worker would come out much better, some would end up with more. Two workers earning the same money and working the same number of years would end up with different amounts at retirement. Also, the proposed system wouldn’t shift money toward low-income people, which the Social Security now does with its benefit formula. Another drawback: because women typically live longer than men, they would have to make their individual accounts last longer. The proposal was fraught with fairness issues.

The time to have started with individual investment accounts was 20 to 30 years ago, when the baby boomers were working and the payroll tax was bringing in more money than Social Security needed to pay out. The idea didn’t sell then, despite advocacy from just-reelected President George W. Bush, and it’s too late now. And since then, Congress has done nothing. The system now faces the same unpopular choices it did in 1983: raise taxes, cut benefits, or both.

Even if politicians refuse to make that choice until the last minute, you can roughly estimate the costs and benefits. A group called the Committee for a Responsible Federal Budget has offered an Internet menu of options, with each option showing how much of Social Security’s problem it solves. The idea is to pick from each menu — benefit cuts and tax increases — until you close the gap.

I played the game with these choices: I closed 20% of the gap by indexing the retirement age, now 67, to longevity; 19% of the gap by switching to the Chained Consumer Price Index for cost-of-living increases, and 11% of the gap by slowing benefit growth for the top 20% of earners. Together, those three things solved 50% of Social Security’s problem. Those were benefit cuts. Now, for tax increases. I closed 24% of the gap by raising the cap on taxable wages, 18% of the gap by increasing the employee-employer tax by 0.6 points, and 6% of the gap by requiring new state and local workers to join Social Security. Together those three things solved 48% of Social Security’s problem.

Some explanatory footnotes: “Index to longevity” means letting the retirement age creep up as the average lifespan increases. (But what if longevity falls, as it has done under Covid?) “Index COLAS to chained CPI” means to use a more sluggish Consumer Price Index to calculate Social Security’s annual cost of living adjustments, so that your benefit would grow a bit slower over time. “The cap” is the level of annual pay, currently $160,200, at which the Social Security tax ends. Currently, about 83 percent of all wages earned in America fall under the cap. My proposal would raise the cap until 90 percent of all wages are taxed, as was once the case.

Readers may ask: Why shouldn’t people who earn more than $160,200 pay tax on their whole income? The reason that Social Security’s tax ends at that point is that no benefits are earned beyond it. That doesn’t bother Sen. Bernie Sanders of Vermont, who has a proposal to keep the tax going above the cap. His proposal, the Social Security Expansion Act, would apply the payroll tax to interest income, dividend income, and capital gains, which have never been subject to Social Security tax. Called the Social Security Expansion Act, it would expand benefits a lot, and raise taxes much more — with all of the increase on high incomes. (Its sponsors in the House include Washington Democrats Rick Larsen and Pramila Jayapal.)

The “tax on wages” refers to the 6.2 percent that Social Security takes out of your pay (not including the Medicare tax) and the same 6.2 percent the employer pays. You can solve all of Social Security’s problem by raising the tax on workers, but it would be a painful bite. Over a 40-year work life, you’re already working more than four and a half years to pay for your Social Security retirement benefit.

I make no claim that my choices above are the best ones. I chose quickly, and aimed for a 50-50 split between tax increases and benefit cuts just to be even-handed. Calculating a solution doesn’t have to be done quickly, or be even-handed, either. It doesn’t have to be only the specific choices listed by the Committee for a Responsible Federal Budget, though in general those are the main ones. (For another set of choices,  here’s how the editorial board of the Washington Post solved the same puzzle.)

Congress will have to take action by 2033 — and the sooner it rises to the occasion, the better. It’s also the same sort of thing negotiators over the debt ceiling ought to do. Yes, the debt ceiling is an artificial barrier, and it would be stupid to bring on a bond default, even one of only a few days. But the deficits and debt are real, and looming. Every president of this century — Bush, Obama, Trump, and Biden — is guilty, along with every Congress, of procrastination.

 It’s time to make some hard choices.