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Fixing Social Security in two easy steps

Social Security has a modest funding shortfall. If nothing is done, benefits will have to be cut by a quarter in 2033 or thereabouts.

Several Republican candidates for president think this is just fine as long as we cut only the benefits of young people. That's kind of cynical, but politics ain't beanbag. If young people have to be thrown under the bus, well, that's why God gave us buses.

But I'd like to remind you that Social Security can be fixed for everyone for all time with only two small changes:

  • Increase the payroll tax cap so that 90% of income is taxed, as intended by the 1977 reform act. In practice, this would raise the cap from its current $160,000 to include income up to about $300,000.
  • Increase the payroll tax from 6.2% to 7.4%.

That's it. That's all it takes to fix Social Security forever and meet the promises we've made to workers of every generation. It's not hard and not painful.

67 thoughts on “Fixing Social Security in two easy steps

  1. erick

    Not to get morbid, but simple Demographics are also going solve a lot. It’s pretty simple, there are a ton of Boomers, a lot less Gen Xers and then a ton of Millennials. I don’t know the exact numbers but I’d bet for every Gen Xer that becomes eligible for Social Security 3 or 4 Boomers are going to be dying.

    1. tango

      Don't sound so happy about us Baby Boomers dieing off! But seriously, while the Baby Boomers are a large generation, the difference is not THAT large and it is already cooked into the numbers. What I wonder though is how much COVID-19, whose deaths were heavily concentrated among our older countrymen, reduced our SS obligations --- enough to move the needle in any significant way?

        1. tango

          I would be offended, except us boomers were pretty uncharitable to our elders as well. Hope your descendants treat you with more love!

    2. Jasper_in_Boston

      Not to get morbid, but simple Demographics are also going solve a lot.

      No, they're not. The numbers don't work as you think. You realize civilization has these people called actuaries, right?

      1. Lounsbury

        Don't believe the maths, Man! It's been done by the Man duuude....

        (if the opening comment was in fact real and not mere trolling)

  2. rick_jones

    Social Security has a modest funding shortfall. If nothing is done, benefits will have to be cut by a quarter in 2033 or thereabouts.

    Needing to cut benefits by 25% and "modest shortfall" don't seem compatible.

    And raising the tax 19% doesn't seem like a small change.

    1. golack

      The tax increase is solely on the employer's side, not employee, so people will not see that increase on their pay stubs.

      1. Jerry O'Brien

        Where do you get that it's solely on the employer's side? This is all just Kevin Drum's proposal, isn't it? He didn't say what part of the payroll tax he meant.

        Anyway, "people will not see the increase on their pay stubs" doesn't mean it won't affect their pay. Companies will know what's going on with their cost of labor, including payroll taxes. There's no reason to believe they'll just take lower profits and never adjust the pay structure down.

        1. Lounsbury

          Quite. Such an increase is an increase in total cost of employment: it is something of a fiction, economically if not accounting wise, to think magically that an employer side increase is simply sticking it to the bosses.

          Of seen on the pay statements is the political angle.

          Increased cost of labour drives substiution. In the era of emerging AI not to be shrugged off by the BoBo Intello professional class.

          That said there is nothing logical about having salaried income subject to a cap in this area, the rational economic policy would be to make all personal salaried income (and perhaps even all personal income) subject to a retirement levy. That might well (without knowing the structure of your numbers), addresss many issues including distributional ones.

        2. azumbrunn

          Very true. But consider the alternative: A cut in SS will make a large chunk of the population poorer. What will they do? They will consume less. This will put a drag on the economy of pretty much the same size as the one caused by raising the tax.

          There is no way around feeding everyone.

          1. KenSchulz

            One of the many good reasons to read Dean Baker, is that, like you but unlike many economists, he never forgets that ultimately economics is about how people obtain the goods and services they need and want, and how those goods and services are distributed among a population.

  3. tango

    Thank you Kevin, that is the correct answer. But one small problem with that formula is that SS benefits are linked with how much you put in. So if you increase the amount that some are required to put in, they will be eligible for larger payouts when their time comes to collect. Might have to cap maximum payouts at a lower level or eventually that becomes just a short-term fix

    In real life I expect the most likely single outcome is that when the shortfalls start, Congress will just meet the shortfall by tapping into general funds or some financial sleight of hand. Rather than, you know, fund it properly.

    1. skeptonomist

      Why shouldn't SS tap into general funds? At the moment the separate SS budget has a surplus of about $2.7 trillion, although this should be mostly paid out to boomers, who paid it in. SS does not contribute to deficits, although SS taxes have sometimes been counted along with general income to reduce apparent deficits (or produce apparent surpluses). Even if there are no tax changes, any contribution of SS to the unified budget would not be large in comparison to other things which are responsible for the current debt.

      There is no reason that SS has to have a separate budget. Should the military have its own budget and separate taxes?

      1. Joel

        There is every reason for SS to have a separate budget. One is that the income is paid by future retirees and those retirees are effectively getting paid out of the fund they paid into. It can't be used for anything else.

        The other big one is that if it were simply part of the general fund, it would be a target for all the political monkeyshines that bedevil the regular budget process.

        On top of all that, if it were just part of the regular budget, it would be treated like welfare. We know how welfare is treated.

        1. Austin

          The other big one is that if it were simply part of the general fund, it would be a target for all the political monkeyshines that bedevil the regular budget process.

          That would be a good thing. Having tens of millions of seniors bitching at their reps and senators would be a huge disincentive to government shutdowns. Even the ones from deep red districts usually know their voters skew heavily towards old people.

          On top of all that, if it were just part of the regular budget, it would be treated like welfare. We know how welfare is treated.

          This is a theory that really should be tested out. It's unclear that regular people view Social Security and Medicare like they do welfare, since seniors are not ashamed to use either program, and in fact every year millions clamor to join it as soon as possible, taking permanent benefit cuts to join it early at 62.

        2. skeptonomist

          SS has been a target for a long time. Republicans and many Democrats want to cut benefits although the program has a multi-trillion surplus. The discourse is deceptive and often dishonest.

          There is actually a lot of welfare of all kinds. Some cuts were made in the Clinton administration, but most programs survived. Republicans often talk about how everything has to be cut when a Democrat is President, but when it comes down to actually passing cuts that affect a lot of people (not all Republicans are rich) not that much actually happens.

          1. skeptonomist

            Having a separate budget which is limited in revenue gives Republicans - and many Democrats - an excuse for cutting benefits without really taking responsibility. They claim there will be a disastrous "bankuptcy" if SS is not cut now, now. But there is no real reason that SS couldn't go into the red when the government as a whole has a huge dept. The requirement that SS can't be in debt could be changed by a simple Act of Congress.

        3. QuakerInBasement

          "It can't be used for anything else."

          In what universe? Not this one, certainly You think that multi-trillion dollar surplus is just sitting there in cash somewhere?

          1. KenSchulz

            As you note below, the surplus is held in special-purpose Treasury bonds, which the SSA has been cashing in for years now, as boomers have retired and are receiving benefits rather than paying in. It is at least true that the surplus cannot be diverted in the dead of night; it would take Congressional action and a Presidential signature. Not politically feasible.

      2. Austin

        I agree that SS doesn't need to have its own budget or taxes. Just pay it out of general revenue and be done with it.

        But this stuck in my craw:

        At the moment the separate SS budget has a surplus of about $2.7 trillion, although this should be mostly paid out to boomers, who paid it in.

        This is total bullshit. Virtually nobody gets back exactly what they personally paid in. A bunch of people die before they qualify, so they get nothing back. Some more people live long enough to get some SS benefits, but not as much as they paid in, so they're also "screwed."
        Everyone else generally outlives what they paid in. (And don't even get me started on Medicare, for which recipients almost always get thousands of dollars more in benefits than what they paid in due to the high cost and growth of medical care.)

        This whole mentality of "I should get back exactly what I paid in" bullshit is selfish and self-defeating: almost none of us get this from any government program ever devised.

        1. skeptonomist

          Yes, the surplus is mainly for boomers, and they are the ones who paid it in. It is a kind of temporary funding for the population bulge. When boomers are gone, the program should be back to pay-as-you-go, that is not funded in advance.

          Whether this shifting of money around on paper was a good idea or not is another thing.

          1. QuakerInBasement

            While Boomers were paying additional payroll tax to fund the then-distant retirement wave, tax rates for the investor class were slashed. The excess payroll collections were promptly transferred to Treasury in exchange for special purpose bonds--essentially IOUs--and the proceeds used to fund deficit spending.

            Now that the scheme has run its course, the GOP proposes to slash benefits to future retirees. Raising income tax rates even a few percentage points is off the table.

            1. lawnorder

              The government could pull a bit of sleight of hand by raising the interest rate paid on those special purpose bonds. The effect would be to allocate some of the general revenue to SS, but it could still be legitimately described as self-funding.

              The fact is that the SS Trust Fund COULD be earning a considerably better rate of return that it currently gets from those government bonds.

    2. KenSchulz

      I favor the dedicated-funding scheme as a necessary framing of OASDI as an insurance program, to which beneficiaries are entitled, having paid (or having had family members pay) FICA taxes during their working lives. Funding from general revenues would open it to criticism from the right wing that ‘half the recipients paid no taxes’. Continuing the present structure at least offers the possibility of making (keeping?*) the program net progressive by making the payout rate less regressive than the effective tax rate.
      It is worth noting that the shortfall is the result of voodoo economics: virtually all the real-income gains since Reagan have gone to people who were already above or near the income cap, leading to little increase in FICA revenues. The last SS commission, bless ‘em, believed that real worker incomes would continue to increase with productivity growth; instead, they were mostly flat.
      *I haven’t dug into the numbers deeply enough to know what the current status is.

      1. golack

        Lift the cap on the payroll side completely, and include all forms of compensation, e.g. shares, given by the company.

        Right now, making up to the limit for social security puts you in the 24% tax bracket. Once you're above the cap, you're tax rate goes to 32%, but there's no social security tax on that saving you 6.2% and your company 6.2%. It's not until the top tax bracket of 37% (now set to $356K/year for single filer) that tax the income tax rate has gone up enough to account for the social security income cap.

        1. Lounsbury

          Taxation of non-cash compensation in cash is not going to fly as it would first create for non-wealthy holders of shares like technology ventures a signficant cash obligation on an asset with no cash potential.

          A social security / retirement fund taxation upon realisation of sale on other hand and on dividends in addition to that of salary has something to recommend it for many reasons including distribution.

    3. Jasper_in_Boston

      So if you increase the amount that some are required to put in, they will be eligible for larger payouts when their time comes to collect.

      Kevin's been doing analysis on Social Security for a couple of decades. I'd be very surprised if his numbers don't take the effect you mention into account.

    4. TheMelancholyDonkey

      But one small problem with that formula is that SS benefits are linked with how much you put in.

      It's not a linear function. The more you pay in, the less of each dollar you get back in benefits. There is no reason why the maximum benefit couldn't capped where it is now, while the cap on tax paid increases or is abolished.

      1. tango

        Agreed --- as I said later on, "Might have to cap maximum payouts at a lower level or eventually that becomes just a short-term fix..."

        Capping the returns at current rates while getting more money from the higher earners WOULD be politically difficult to impose because it undermines one of the tenants of SS that make it acceptable to conservatives, namely that you get back what you put in and it is a =n insurance plan rather than a welfare/income redistribution scheme (not entirely true, but close enough).

    5. azumbrunn

      I think the number counters have considered the details more thoroughly than someone like us who submits a comment to a blog post.

    6. Anandakos

      Actually, the part that matters to people who would be affected by raising the cap is only credited at 15%, so it won't juice their final payment very much. The way to get a high SS benefit is to meet or exceed the full MIDDLE tier for every one of one's working lifetime, because it is credited at 45%. Almost nobody does that, because very few folks start working at middle income wages,

  4. skeptonomist

    Inequality has increased over the last 50 years and the structure of Social Security is one reason for this. I am sure that many if not most people are unaware that capital gains, dividends, interest and rents are not taxed at all for SS. There is no economic or moral reason that all income could not be taxed, not just wage/salary income up to a cap. There is a very solid majority in favor of increasing taxes on the rich, and this would be one kind of such tax which would do away with the phony cries of alarm about how SS is going to go "bankrupt".

    Presumably raising the "employee" share of the payroll tax from 6.2% would be accompanied by the same raise on the "employer" share, and this would be burdensome on people at the lower end. Both shares are really paid by the employee - do you think that employers reduce their profits by the amount of their share?

    There are actually many ways that promised SS benefits could be paid for without increasing the tax burden on lower-income people. What if Democrats or a newspaper sponsored a poll offering all of the real alternatives, including actually taxing all income? Why haven't they done this? Would raising the payroll rate score high as opposed to taxing non-wage/salary income? Aside from the general power of rich people to keep their taxes down, the financial industry would like to do away with SS entirely and have all retirement money in their hands. This is a main reason we have so many types of individual tax-deferred accounts.

    1. golack

      With CEO compensation coming in the form of capital gains, those should at least be subject to the payroll tax.

  5. cld

    Just read this,

    https://www.rawstory.com/jack-smith-trump-2662325667/

    . . . .
    Appearing with former Deputy Attorney General Donald Ayer, McQuade noted Smith is using Section 241, a criminal statute that’s part of the Ku Klux Klan Act, that prohibits any conspiracy designed to “injure, oppress, threaten, or intimidate any person in any State, Territory, Commonwealth, Possession, or District in the free exercise or enjoyment of any right or privilege secured to him by the Constitution or laws of the United States.”
    . . . .

    Read it here,

    https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title18-section241&num=0&edition=prelim

    Aren't there a lot of things Republicans do that statute could apply to?

    Abortion, voting rights . . .

  6. ProbStat

    Social Security is a program from the 1930s that was mildly revised in the 1980s. It was designed for a very different world than the one we live in. There is an immense amount of wealth transfer in the system, but (a) it is entirely among wage earners, and it applies only up to a certain level of income; and (b) it reflects societal values and assumptions -- heavy subsidies for single-earner married couples, poor accounting for gaps in employment, etc.

    These could be addressed; my preference would be to have all wealth transfers explicitly stated -- so they are subjected to public approval -- and funded from GENERAL revenue -- so that property income shares the burden.

    HOWEVER, one of the Trumpublicans' top goals for the last 85 years -- since the inception of Social Security -- has been to destroy it, and whenever any sort of changes to the program are proposed, they go full bore after destroying it or planting a poison pill in it that ultimately will lead to its destruction. While they might not be able to accomplish this, they generally can keep anything positive from happening.

  7. Austin

    Increase the payroll tax cap so that 90% of income is taxed, as intended by the 1977 reform act.

    Or just raise it to 100% of ALL income and be done with it. I pay Social Security tax on 100% of my work income. No reason why capital gains, rental and other non-work income should be exempt, nor why the rich can't pay SS taxes on 100% of their income sources too.

    1. Salamander

      Like +25! Yeah, the high earners and wealthy have successfully gamed the system to where they pay in just a small pittance to Social Security and Medicare. Time to end the con.

    2. Jasper_in_Boston

      There are "reasons" why Social Security is funded via a payroll tax and not via an income tax. You may think those reasons aren't good, but they're there (mostly having to do with political support and administrative simplicity). Payroll taxation has traditionally been one of the three pillars upon which social democracies have been built, (the other two being VAT and income tax), and is the one normally utilized to fund pensions and healthcare.

  8. Wildunlap

    The way to sell the fix is to cut the rate a bit and raise or remove the cap. Most people will get a tax cut, which everybody likes, and the system would be more progressive. I'm not a math whiz but I'm sure you could come up with a new rate and cap that would fix the shortfall without too much pain.

  9. SC-Dem

    Over the last several decades the share of total personal income going to the bottom 90% of households has dropped from around 63% to 49% with all of this lost income going to the top 1% of households. And it's not like the households in the 91st or 95th percentiles have been spared; you've got to get to the 98th percentile to find a group whose share has held steady. This great transfer of income amounts to around $3 Trillion/year.

    I think we should tax all of this income away from the top 1% and use a small part of it to not only finance SS but to increase it. After all, part of what was diverted to the top 1% is the private pensions that have all but disappeared.

  10. horaceworblehat

    This is absurd. You're going to ask people barely getting along to pay 19% more in payroll taxes on top of a higher percentage of their income being taxable? I don't care what the intention of a 1977 law was. Most people working today weren't even born then. The world has changed. Our economy has changed, and the reality of the economy today is that too damn many people work paycheck to paycheck. Let's solve this problem before we go returning taxes on the working class to pre-Reagan times because without fixing this no one Gen X or younger will be drawing Social Security or applying for Medicare tax increase or no tax increase.

    That is, of course, the plan all along.

    1. Jasper_in_Boston

      Let's solve this problem before we go returning taxes on the working class

      "This problem" (rising economic inequality) is highly complex and politically difficult, while a simple fix to save Social Security is not. Moreover, not doing something to fix SS (thereby triggering a benefits cut) would be the mother of all kicks in the teeth to working people (it would be a disaster for millions).

      And in any event, various strategies for tackling economic inequality can be accomplished independently of fixing Social Security. Allowing that program to be slashed won't help the non-rich.

  11. bbleh

    Increase the payroll tax cap...

    (1) this is absolutely the fairest, least painful solution. There is no reason 6-figure wage-earners shouldn't contribute an EQUAL percentage of their income to SS, and it's not like it would be at all a serious burden for them. As is, we literally have the administrative assistant paying a higher rate than his/her executive boss.

    (2) there is absolutely NO way on this green Earth that it would ever pass Congress, even if Dems had more than 60 in the Senate. YER TRYIN'A RAISE TAXES ON WORKIN' FOLK!! They'll screw over the real workin' folk (who have enjoyed basically NO increase in life expectancy) by raising the eligibility age long before they'll RAISE TAXES OMG TAXES!!!

    This has been your Sunshine Report.

    1. Jasper_in_Boston

      this is absolutely the fairest, least painful solution.

      Possibly, although a single line law might also do the trick:

      The Treasury shall make up for any payroll tax shortall via general revenue and is hereby authorized to borrow on the full faith and credit of the United States for this purpose without reference to the borrowing limit.

      If massively slashing Social Security benefits is politically next-to-impossible (I believe it is), such an approach would work, and would also, I think, be conceptually very simple. Moreover, it preserves the general contours of the system intact ("I paid into it!"), while making it somewhat more redistributive in that it would be more reliant on income taxes.

    2. tango

      Social Security benefits are pegged to how much you contribute, if you increase the SS tax on on the higher income people, you also increase their payout later on, which washes out a certain portion of what you were getting in. So you would also have to cap the benefits at a certain point, which progressives are down with but Conservatives are going to block.... Your number 2 is more likely!

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  13. n1cholas

    Remove the SS income cap and SS is solvent for longer than western civilization will exist.

    Next problem that requires a one sentence fix please.

    1. Creigh Gordon

      Our war machine and Social Security are paid for the same way: by not doing something else with human time and energy.

      Money is free. Opportunity costs are the only thing that matters.

  14. Jim Carey

    Either the parts of a life system are serving the life system, in which case the life system is healthy, or the parts are benefiting at the system's expense, in which case the life system is unhealthy.

    The human social system is a life system.

    Amateurs talk strategy, professionals talk about logistics. - Omar Bradley

  15. NeilWilson

    Forget money for a minute.
    Today, or anytime in the past or future, the people who are not working are being supported by the people who are working.
    That means that whatever is consumed by people not working can't be consumed by people who are working.
    Simple case. We don't work from 0-20 and from 60-80 when we die.
    That means that each working person supports one kid and one parent.

    Now, people magically live to 100.
    So that means that every person who works now supports one kid and two parents.

    Depending on how you split the production, workers need to reduce their consumption by a LOT if old people live a good retirement or a LITTLE if old people have a bad retirement.

    In Japan and Korea, the demographics are terrible. There is no way the few workers in 2060 will be able to support the tons of old people.

    We need to have more kids and have more immigration to be able to support people in retirement.

    Now let's talk about money.
    You claim we can solve our problem by increasing the tax from 12.4% of a lot of earned income to 14.8% of a slightly higher share of income.

    That condemns the average old person to consuming about 20% (made up number since I have no idea what the ratio of retirees to workers will be in 40 years). Old people won't stand for that BUT there will be no solution except more workers (which means raising the retirement age to around 70-72 if we are going to live to our mid-90s.

    In short, we NEED a lot more workers compared to retired people. Eventually, that means raising the retirement age A LOT.

    1. Creigh Gordon

      Either that or we need to invest in our young people's education and infrastructure so they will be more productive, or both of those things.

  16. hollywood

    Well, we could increase the admission of young working immigrants into the country so they could pay taxes.

  17. Citizen99

    Which makes Joe Biden's dumb promise not to raise taxes on anyone making under $400,000 even dumber. I've never come anywhere close to $400,000 in my lifetime, and I supported a wife and child for 35 years, putting the child through college, and retiring with zero economic worries.

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  19. BobPM2

    Can we at least acknowledge that it would be painful for that taxpayer, especially if self employed. Attorney with his own practice or a partner at a small firm say makes about $300k. This tax bracket is already one of the most heavily taxed groups, but your asking them to pay an additional, not 6.2%, but 12.4% on the additional $140K in income since they pay both sides of the tax. So this group suddenly has to pay $17,360 more in taxes on top of the roughly $60k to $75k they already pay. And thats $20,720 at your higher rate on the $140k plus $3840 more on the current base amount. So your asking for another roughly $25,000 from the self employed.

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