We have two annual days of mourning in the United States, the first on April 15th when we’re supposed to file our 1040 individual income tax forms. The second is a movable feast, sometimes in April, occasionally in May. It’s the day when the Social Security actuaries publish their annual report on the Social Security and Medicare trust funds. Both days are celebrated with mourning, breast-beating, occasional curses, and a barrage of editorials on our profligacy and improvidence and the general imcompetence of our elected leaders.
The Social Security Actuaries published their report this week. There’s a bit of good news. Due to fewer people on the disability rolls the Disability Insurance trust fund will not become insolvent until 2052, a major improvement over last year when it was expected to become insolvent in 2032.
The date when the OASI fund, the Social Security retirement fund, is expected to become insolvent, is unchanged at 2034. What that means is that unless something changes by that time the Social Security system will not have the money to pay all of the benefits that have been promised and Social Security checks will be reduced. The depletion of the Medicare hospital fund is even more imminent, expect in just 8 years in 2026.
At the American Spectator Quin Hilyer presents his plan for reforming Social Security and Medicare:
The first is a very rough tradeoff of “general fund†revenue for money specifically dedicated to Social Security and Medicare — with the added goal of making accounting less complicated by dealing in whole or round numbers. The current payroll tax dedicated to Social Security is 6.2 % each for the employee and the employer, and the Medicare tax is 1.45% each for the employee and employer. I would bump the former up to 6.5% each, and the latter up to 1.5% each. End those weird fractions, and put the tiny increases into the two trust funds.
To help corporations pay for the added cost, let’s cut the top corporate income tax rate from 21 % to an even 20%. At the same time, the 20% deduction for pass-through businesses, which under current law will end after 2025, should be made permanent.
Two more major changes will lengthen the actuarial life of both programs. First, lawmakers should bite the bullet and do exactly what Dole and company did in 1983, and allow the age for qualification for full benefits once again to rise. The Social Security full-eligibility age is now rising to 67 by 2027. Let it keep rising, over the subsequent six years, to 68. Likewise, the Medicare full-eligibility age, now 65, should start rising slowly to 66.
Now come the two bolder proposals. First, it’s long past time for adoption of some version of what presidential candidate Pete DuPont proposed as early as 1987, and as the Institute for Policy Innovation think tank again proposed on Monday: Allow younger workers to use some of their payroll tax money to go into separate, private accounts (with their future claims on ordinary Social Security being reduced accordingly).
Second, it’s time for the tax code to stop favoring executive pay over that of ordinary workers. Right now, payroll taxes end for earnings above $132,900. I propose eliminating that cap, but only for the business’s part of salaries above that. In other words, the business would pay 8% of all earnings (Social Security and Medicare combined), but the employee (presumably an executive) would stop paying his 8 percent at the currently scheduled limit. (The topline benefit down the line, however, would not rise.)
To summarize: a small increase in FICA, a small reduction in the corporate income tax, a small increase in the Social Security retirement age, and eliminating the employer FICA max. With the exception of that last provision all of those proposals have been examined by the Social Security actuaries and found to be inadequate to restore solvency to the system.
That last proposal is interesting and suggests to me that Mr. Hilyer is not particularly mathematically or politically sophisticated. It would constitute the largest tax increase in the history of the Social Security system and, if enacted despite the enormous hue and cry that would ensue, would, in theory, increase FICA receipts by just about 4%. In practice that wouldn’t happen. What would happen is a decrease in wage incomes on the part of the highest income earners in favor of other non-wage compensation. In other words not only wouldn’t it solve the problem it would have serious run-on effects.
In his column in the Washington Post Robert Samuelson remarks:
The trustees suggest that, if nothing is done, benefits might have to be cut so that Social Security’s spending is covered by its revenue, which comes mainly from payroll taxes. The prospective cuts to Social Security benefits would initially be around 20 percent and grow to 25 percent. Though this is possible, it seems unlikely. Based on experience, presidents and congresses will simply divert more non-payroll tax revenue to Social Security and Medicare (Medicare is health insurance for the 65-and-older population).
Of course, this will trigger chain reactions, because the money has to come from somewhere, and the choices are no secret: (a) higher taxes; (b) higher borrowing — and bigger budget deficits; (c) cuts in other programs, from scientific research to the FBI to the National Park Service, indeed, most other federal programs. (Note: One other possibility — creating inflation — is left off this list, because it has yet to be tried.) The message here is familiar. The aging of the population, including the high cost of health care, is determining the nation’s budget priorities.
By and large, both parties are practicing the politics of evasion. That is, they have taken Social Security and Medicare spending as a given and have ignored its impact on the rest of the budget. This is true of both Republicans and Democrats. President Trump successfully proposed his $1.5 trillion tax cut (over 10 years), while many of the already-announced candidates for the Democratic presidential nomination have proposed major new programs.
Consider. Sen. Bernie Sanders (I-Vt.) plugs his Medicare-for-all proposal. Sen. Elizabeth Warren (D-Mass.) wants to make tuition at public colleges free. Sen. Kamala D. Harris (D-Calif.) touts a roughly $3 trillion tax cut (over a decade), which she describes as “the most significant middle-class tax cut in generations.†On paper, each of these proposals is financed by some sort of tax increase. But what isn’t acknowledged or emphasized is that the proposals typically ignore the existing budget deficits, which are now approaching $1 trillion annually.
What is to be done about these deficits? The answer, according to most of the candidates, is that nothing is to be done. The large deficits don’t yet seem to have hurt the economy, so cautious candidates conclude they should be left alone. It’s more rewarding politically to peddle grandiose and costly proposals and pretend that the large deficits won’t cause any long-term problems. By and large, this is the path of least resistance.
As is not unusual he suggests no solutions, satisfied with lamenting the problem.
This post is already long enough but I wanted to make a few observations. First, the present program is not FDR’s Social Security program. When the program was enacted into law, U. S. life expectancy was 61 years and full Social Security retirement was 65. In order for today’s program when life expectancy is 78 to resemble FDR’s program full Social Security retirement age would need to be increased to 83. Need I point out that isn’t going to happen?
Second, the program’s economic and demographic assumptions have failed. Either not enough people are paying into the system or not enough income is being taxed or both. That’s where Mr. Hilyer’s FICA max proposal fits in. He wants to subject more income to the tax. It won’t happen but it’s a practical solution.
Third, for much of the history of the Social Security system defined benefit pensions were actually a thing. They no longer are except for government workers.
Fourth, I don’t see how anyone who lived through the 17 years during which stock prices didn’t rise at all and the double digit inflation of the late 1970s-early 80s can really believe that individual saving for one’s retirement is a realistic alternative for most people. There are too many factors that are simply beyond our control. Besides the amount by which consumption would need to be reduced would bring on an economic collapse. Need I point out that businesses aren’t investing in domestic facilities the way they used to? In other words if Americans were saving at the level that would be necessary for them to provide for their own retirements, that money would simply be withdrawn from the American economy.
“Fourth, I don’t see how anyone who lived through the 17 years during which stock prices didn’t rise at all and the double digit inflation of the late 1970s-early 80s can really believe that individual saving for one’s retirement is a realistic alternative for most people.â€
Saving is a lifelong event, even with due consideration given to individual’s lifelong consumption/saving function. It’s a forty year event. Fed mismanagement happens. But I know of no generation that couldn’t withstand that 17 years if they properly managed their finances. Probably everyone at this site lived through those 17 years. The market is now at all time highs.
“Besides the amount by which consumption would need to be reduced would bring on an economic collapse. Need I point out that businesses aren’t investing in domestic facilities the way they used to? In other words if Americans were saving at the level that would be necessary for them to provide for their own retirements, that money would simply be withdrawn from the American economy.â€
Why is that? The money doesn’t go into a mattress. Does taxing it away from individuals cause economic collapse? No, it causes inefficiency, and deprives people of the liberty to spend it as they, and not others, see fit. But it’s recycled into the economy. The same can be said of money saved and recycled through the capital markets.
The biggest policy error in SS has been failure to recognize the structural change of increasing life expectancy. I’d move it to 70 to keep it somewhat tethered to a realistic working life vs life expectancy. (Relative to its inception). All the other tinkering simply leaves me thinking Rube Goldberg, or that Monty Python skit “How to do it.â€
Yes, I think you move the SS retirement age up, and as to the workers of the physical type, (like myself), some can make it to 70, some can’t. That’s where SSDI comes in.
Like so many other things, it’s a political football, so The SS trust fund, (ha ha) will always teeter but never collapse.
Besides, there’s that Russian doomsday submarine on it’s way.
“Why is that? The money doesn’t go into a mattress.”
We are pretty much a consumer driven economy. We need consumers to spend. If it goes into savings a bunch of that goes into overseas funds and we also know that in general companies are investing like they had in the past. So if that money just buys stocks that are doing buybacks, what do we get out of it? Look at China. They are very much a savings economy.
The problem I see is that if you let people use money that would have gone to SS, how do you fund the shortfall during the transition period?
“But I know of no generation that couldn’t withstand that 17 years if they properly managed their finances.”
Depends upon what you invested in and when you retired wouldn’t it? If you were in your 60s when Enron went down and you were one of their employees you were hosed. If you were in the market in the late aughts and retired you lost a lot of money so you weren’t living of of interest and worked down principal quite a bit until eh market came back up. Still, in general I think your point is fine, for people with average and above average incomes. If you are in that bottom 25% you probably weren’t able to save much, especially if you lived in states that dont assist with health care.
Make the SS eligibility age income related. We know that people who earn more live longer. Set the retirement age so that everyone projects to receive an equal number of years of SS payments.
Steve
And they’re actually investing in their own economy which we aren’t.
I should add that after the IPO stock purchases do exactly nothing to invest in the underlying businesses. Trading the price of a stock up may help the stockholders but until the money is actually spent it does not go back into the real economy. I’ve tried to explain this before unsuccessfully. It seems pretty obvious to me.
“Trading the price of a stock up may help the stockholders but until the money is actually spent it does not go back into the real economy. I’ve tried to explain this before unsuccessfully. It seems pretty obvious to me.”
You are speaking as a layman:
Today I decide not to consume, (or to rearrange my savings portfolio), but to save. I offer you $10 for your piece of paper giving me the rights to XYZ Corps future earnings. You sell me the paper slip and pocket $10. No cash has been destroyed or taken out of the economy. You can consume with your $10, or rearrange your own savings portfolio.
Next week I offer you the same slip of paper for $15. You say OK. You give me $15 and I pocket $15. Net: zero. No money has been removed from or added to the “real” economy.
Three weeks from now………well, you get the point.
So what is really going on? No money is being added or subtracted from the “real” economy, as you claim. Its the so called wealth effect. When markets in general go up, people believe they have more wealth, and tend to consume more. When markets go down they feel poorer, and consume less. Both the dot com and 2008 crashes were followed by recessions. People felt poorer. But market based values are all based on (well considered) faith, or judgment. Fortunately, for 100 years equity markets, with volatility, have gone up. And why have they gone up? Wealth creation through the efforts of labor and capital in the real economy.
This is just a variant of the famous maxim bludgeoned into every first year B-School student: you cannot change the value of the firm (which is the “real” economy) through capital structure.
“If it goes into savings a bunch of that goes into overseas funds…”
Define a bunch, else you are just flapping your lips. Look at net investment in the US.
“So if that money just buys stocks that are doing buybacks, what do we get out of it?”
See the previous comment. You do not understand basic finance.
That was precisely the theory under which quantitative easing was introduced. It didn’t work although it did vastly inflate the size of financial markets. Why?
I think it was because most people live and work in the real economy rather than the financial economy.
This is going to be controversial and half tongue in cheek.
But how about linking the level of social security contributions to the number of child dependents (biological or adopted). More dependents = lower FICA rate.
ie. create incentives to have more payers into the program in the future.
People do respond to incentives….
You are dodging the issue, Dave. The magnitude of the wealth effect, and other, negative effects of QE, like destroying savers buying power, animal spirits, taxes, regulation….are almost impossible to quantify and quantifying the tradeoffs. But that’s not germane to the question of whether money disappears into the ether through stock trading, or steves buybacks.
Its America. You are free to believe what you want. But they used to torture us at Chicago with debunking folk wisdom from articles, primarily from the WSJ or NYT at the time. These days I’m sure its Bloomberg, CNBC………
Perpetual motion only appears to work under certain conditions. The financial economy must be grounded in the real economy. I’m preparing a post to illustrate that.
I will await that post. Your comment again dodges the issue. The financial sector simply recycles wealth creation and the attendant portion called savings into the real economy. That’s a different concept than your position.
@Drew is mostly correct, but stuffing physical currency into a mattress is limited to M1/M2. The only way to remove credit-backed currency is to destroy the credit used to make them – write-down or write-off the loans they created. Repaying a loan does destroy the credit-backed currency, but even then, it will be recreated once the next loan is made.
It takes an event like the Great Depression or the Great Recession to cause massive amounts of money to be removed from the economy.
If a company uses its cash to buyback stocks, the cash returned is used by the recipients to purchase goods or services, or it is invested directly or indirectly as savings.
If a company borrows to buyback stocks, the money or money-like instruments is again used for purchases or investments.
Money sent off-shore enters the eurodollar financial system, and it can be used to purchase US goods & services or US investments. Part of the eurodollar system is used for purchases between other foreign countries, and the financial fees from these transactions is used to purchase US goods & services or US investments. Again, part is recycled back into the eurodollar system.
(The eurodollar system includes petro-dollars and trade-deficit dollars.)
With hard money, the commodity (gold) can be used to produce physical goods (jewelry), and commodity (jewelry) can be used to produce physical currency (money). It should be noted that most economic and/or financial theory is based upon hard money and full reserve lending. (Stuffing the mattress removes money from the economy and/or financial system.)