Social Security Solvency And Deficit Hawks

The drumbeat about the supposed “insolvency” of Social Security (SS) has been going for decades and it has clearly fixated a whole bunch of people on the right and even in the center. I remember being in a restaurant in the mid-1990s and hearing a young man say that, by the time he retires, there would be nothing in Social Security for him so he wasn’t even thinking about it. That was probably a good long-term saving plan because I have a feeling he will be happy with the extra money he does get from Social Security when, or if, he actually does retire. And I’m sure by now Pete Peterson, Fox News, the Washington Post and others in the mainstream media have already brainwashed a couple of generations of young people that Social Security is doomed to go bankrupt. Another way that these groups obfuscate the issue is by throwing these scary-sounding numbers around that sound horrific but are never put in proper context of an existing $18 trillion dollar economy that is only expected to keep growing for the foreseeable future.

Right now, in its 75 year planning horizon, the Social Trust fund is predicted to start running shortfalls where it is unable to pay full benefits somewhere in the middle of the 2030s. But the date of shortfall has continually moved farther and farther out in the future over the last couple of decades. Of course, as we have seen over the last eight years, predicting what will happen economically for a 20 or 30 year horizon, much less a 75 year one, is a fool’s errand. And name any other plan that is fully funded for the next 20 or 40 years, much less 75. It doesn’t exist.

But the reality is that Social Security could always be fixed pretty easily – it was just a matter of having the political will. The easiest first step would be to substantially raise the cap. Right now, the Social Security tax only applies to the first $118,500 earned, another example of the rich not paying their fair share. Over 40% of the projected shortfall is the result of the upward distribution of income moving above the cap, another negative of our increasing inequality. Eliminating that cap extends the time before a shortfall would be reached by another 20 years. Remember, Social Security is funded via the payroll tax, meaning that other sources of income such as capital gains and dividend and interest income are exempt. It would be possible, though politically difficult, to put a Social Security tax on that income, adding even more dollars to the trust fund. Theoretically, some of that increase would also be paid out on the back end in higher payouts when the individuals retire. On the other hand, the formula for allocating that new money could be tweaked to be more redistributive. Another easy fix is to simply raise the payroll tax. Yes, that would cut into current incomes but it would fully fund Social Security for its 75-year planning horizon. A payroll tax increase equivalent to .95% of GDP would full fund Social Security for its 75 year horizon, according to the Social Security Trustees Report.

Now 1% of GDP is still a lot of money, nearly $200 billion. But, as Dean Baker points out, look at what has happened to our economy over the last eight years. If the economy had grown at the rate projected back in 2008, our economy would be almost $2 trillion larger than it is today, ten times more than the 1% of GDP that Social Security needs. And a large part of the reason the economy is weaker than projected is that, rather than increasing government spending in the face of a severe recession, deficit hawks insisted on austerity, subjecting us to years of unnecessary slower growth. And many of those deficit hawks are the very same people, such as Pete Peterson and the Washington Post, that are so deathly worried about the shortfall in Social Security.