Another Social Security Scare Story – The Zombie Lie Lives

It seems like I could spend every single day refuting another misleading article about Obamacare, the debt, or Social Security. It is almost a daily onslaught on what Krugman calls the “zombie lie” – no matter how many times it gets refuted, it just keeps coming back to life. Today’s zombie comes from Bloomberg which has run another scare story on Social Security.

The fact that the Social Security Trust Fund will be depleted somewhere around 2035 is not in dispute. What is in dispute is the severity and timing of changes that will need to be made in order to push that date farther into the future. The Bloomberg article initially focuses on the declining worker-to-beneficiary ratio as one of the drivers of the problem noting that the ratio is projected to fall to 2.1 in 2040 from the 3.2 level that existed in 1975. Interestingly, that same ratio fell from 16.5 in 1950 to its 1975 level without driving Social Security into insolvency. The critical question is not the worker-to-beneficiary ratio but how much workers wages will actually rise over the next few decades. In fact, part of the reason there is a potential issue with Social Security is because workers wages have been stagnant for the last couple of decades. Faster rising wages will extend the solvency of Social Security.

The Bloomberg article at least lists a number of options for extending the Social Security Trust Fund and it rightly points out that it will probably take a combination of changes to accomplish this. But some of the proposals consist of cutting benefits now, such as slowing cost-of-living adjustments or raising the retirement age, so we can make sure we don’t have to cut benefits later. This makes no sense. Why not just wait to see exactly where we are before we start cutting benefits. Yes, a growing workforce would help but, as I mentioned before, so would growing wages. They do float the idea of raising the payroll tax by about 2.5%. That alone would solve the problem. But they dismiss this as being politically impossible. But, as Dean Baker points out, there was hardly a huge outcry when the payroll tax went up by 2.0% in the beginning of 2013 when the payroll tax holiday ended after its institution in 2011. So it doesn’t seem like it would be so impossible to do that again.

The Bloomberg article claims that the neither candidate has produced a solvency plan for Social Security. But one of the options that the article provides as a solution involves eliminating the taxable minimum at which the payroll tax ceases to be in effect along with a gradual increase in the payroll tax. So let’s go back to the third debate when the discussion of Social Security solvency came up. Hillary’s response (without Trump’s “nasty woman” interruption) was, “I am on record as saying we need to put more money into the Social Security Trust fund. That’s part of my commitment to raise taxes on the wealthy. My Social Security payroll contribution will go up as will Donald’s assuming he can’t figure out how to get out of it, but what we want to do is…replenish the trust fund by making sure that we have sufficient resources, and that will come from either raising the cap and/or finding other ways to get more money into it.” That sounds awfully like the idea of raising the cap and the tax rate, although it was admittedly not explicitly the Bloomberg option.

The reality is that small tweaks to the payroll tax rate and the income cap at which the Social Security tax ceases to be paid will easily solve the solvency problem. But the greatest impact in reducing the issue of Social Security solvency would be faster rising wages for American workers, rather than letting the benefits of a growing economy mostly accrue to the top 1%.