A day or so ago I received an article from Seeking Alpha in my mailbox that raised my hackles. The article was about testimony from Congressional Budget Office Director Phillip Swagel. The gist was that the Social Security Old Age and Survivors Trust Fund will be depleted by 2031, just five years away. What raised my hackles was this:
The fundamental problem with Social Security, though, is a demographic one. We have an aging population, and the ratio of workers paying taxes to retirees receiving benefits is shrinking.
That observation is true as far as it goes. But it is not the fundamental problem. People get old and retire. But that’s not the “fundamental problem” that will result in the fund being depleted in five years. And the real lesson here is broader than Social Security. Demographics matter, of course. But the erosion of the taxable wage base has played a much larger role than is commonly acknowledged.
We have known there would be a “demographic hump” for the Social Security system starting around 2011 and continuing until roughly 2029 for 75 years. It didn’t just sneak up on us suddenly. The fundamental problem is somewhat different: the assumptions that guided the reform of Social Security in 1983 have not held true.
Under the 1983 reform 89% of wage income was subject to Federal Insurance Contributions Act withholding (FICA). Today only 83% of wage income is subject to FICA. Keeping the system solvent would have required only one adjustment: indexing the payroll tax cap so that roughly 89% of wages remained taxable. Because wage growth has been concentrated above the taxable maximum, a growing share of national wage income escapes the payroll tax entirely.
That shouldn’t have been politically impossible or even controversial. Any assumption worth making is worth defending. It was assumed that the mean wage income would rise at roughly the same pace as the median wage income. The 1983 reforms were explicitly designed so that roughly 90% of wage income would be subject to payroll tax. That ratio has steadily eroded as wage growth has concentrated above the taxable maximum. The reasons for that are beyond the scope of this post.
As it true of so much in public life we can’t take a mulligan on that. Now any solution adequate to solve the problem would be politically painful and even impossible.
The point of this post is not to propose a solution to the problem but to point out something different. In making public policy we need to check our assumptions and ensure that they continue to hold for the expected life of the policy. That isn’t just true of Social Security. It’s true of trade policy, immigration, tax policy, and much of what government does.
