Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.
Charles Dickens, David Copperfield
I’m writing this, not because I think that the regular readers here do not understand it, but because the readers somewhere else where I comment clearly do not understand it.
For workers who receive a wage 6.2% of your gross wages up to $176,100 is deducted from your pay. Another 6.2% is what is referred to as the “employer’s contribution”, a payroll tax. That money is added to your account maintained by the Social Security Administration. Once upon a time Social Security’s total revenue exceeded its outlays. That is no longer the case. Most recently, for example, Social Security revenues were around $1.2 trillion while Social Security Retirement Income outlays (that’s what most people mean by “Social Security”) were $1.6 trillion and the difference was deducted from the “Social Security trust fund”. Where did the missing $400 billion come from?
It came from the Treasury Department. From what are called “general revenues”. Since the federal government is operating at a substantial deficit, in effect we borrowed it. Yes, Social Security adds to the deficit. When the accumulated differences between Social Security revenues and Social Security outlays over the last 90 years reaches zero Social Security will be insolvent. That is expected in 2036. That is what is generally meant by “Social Security insolvency”.
By law that means that SSRI benefits will be reduced to whatever the system can pay on an ongoing basis. I (along with at least one regular reader here) think the outrage over that will be sufficiently great that the federal government will continue to pay promised benefits even after Social Security insolvency.
Over the years I’ve made various proposals for extending the cliff of Social Security insolvency including eliminating Social Security max and subjecting all wage income to the tax and raising the age of full Social Security retirement age to 80 (that’s consistent with the original structure of the plan) indexed to life expectancy. I should also mention that I’m one of those poor benighted souls who think that Social Security’s problem is not that it’s a Ponzi scheme but that its original assumptions have not held true and have been abandoned.
“I should also mention that I’m one of those poor benighted souls who think that Social Security’s problem is not that it’s a Ponzi scheme but that its original assumptions have not held true and have been abandoned.”
I think that’s correct. Its been a horrible ROI, even acknowledging that people are living longer, but not a Ponzi scheme. Given that it has such a poor return, and the fact that for 30 years I paid bot he base and employer contribution, I’m not really in favor of extending the earnings base. But moving out the eligibility age to be in sink with the original intent of the program seems a no brainer. Analytically, not politically.
Here are my assumptions for what will happen:
1) Congress is full of spineless jellyfish who refuse to cut any benefits including something like raising the retirement age. This is because in politics friends come and go, but enemies accumulate.
2) Congress will not take action until they absolutely have to.
3) Congress cares more about getting reelected than any real issues.
With these three assumptions, here is what I expect will happen:
Once the trust fund runs out, Congress will overwhelmingly vote to pay full social security benefits at the previous level to those on the lower end of the income range. This “make-up payment” will apply to the majority of beneficiaries. This will not extend to the wealthy who will see their benefits cut to match the income for social security. The way it will be spun is that the “make-up payments” are a new benefit. As such, Congress didn’t really cut benefits for the higher income people. The fight will be over where to draw the line.
Drew: Its been a horrible ROI, even acknowledging that people are living longer, but not a Ponzi scheme.
That’s as incorrect as saying Social Security is a Ponzi scheme. There is no return on investment, as your contributions aren’t in a savings account. Rather, Social Security is an inter-generational transfer program. Your contributions are used to pay the previous generation’s benefits. (The Trust Fund is just a reserve to help account for changes in demographics.)