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.