Opinion

David Cay Johnston

Social Security is not going broke

By David Cay Johnston
May 4, 2012

Which federal program took in more than it spent last year, added $95 billion to its surplus and lifted 20 million Americans of all ages out of poverty?

Why, Social Security, of course, which ended 2011 with a $2.7 trillion surplus.

That surplus is almost twice the $1.4 trillion collected in personal and corporate income taxes last year. And it is projected to go on growing until 2021, the year the youngest Baby Boomers turn 67 and qualify for full old-age benefits.

So why all the talk about Social Security “going broke?” That theme filled the news after release of the latest annual report of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, as Social Security is formally called.

The reason is that the people who want to kill Social Security have for years worked hard to persuade the young that the Social Security taxes they pay to support today’s gray hairs will do nothing for them when their own hair turns gray.

That narrative has become the conventional wisdom because it is easily reduced to a headline or sound bite. The facts, which require more nuance and detail, show that, with a few fixes, Social Security can be safe for as long as we want.

SHIFTING TAX BURDENS

Let’s look at how Social Security taxes have grown in the last half century — a little-known tale of tax burdens shifted off the rich and onto workers. From 1961 through 2011, the year covered in the last Social Security report, Social Security taxes exploded from 3.1 percent of Gross Domestic Product to 5.5 percent.

Income taxes went the other way. The personal income tax slipped from 7.8 percent of the economy to 7.3 percent, with most of the decline enjoyed by people in the top 1 percent of incomes. The big drop was in the corporate income tax, which fell from 4 percent of the economy to 1.2 percent. Notice that the corporate income tax fell by 2.8 percentage points, an amount almost entirely offset by a 2.4 percentage point increase in Social Security taxes.

The effect has been to ease the taxes of the wealthy, while burdening the vast majority of workers. Considering how highly ownership of stocks is concentrated, the benefit of those lower corporate taxes went overwhelmingly to the top 1 percent and, especially, the top 1 percent of the top 1 percent. Considering that the Social Security tax is capped, most of the burden of the increased payroll tax went to the bottom 90 percent.

Now let’s look at how that $2.7 trillion Social Security surplus arose. In 1983, President Ronald Reagan sponsored an increase in Social Security taxes, changing the program from pay-as-you-go to collecting much more taxes than it paid in benefits. The idea was to have the Boomers prepay part of their old age benefits. The extra tax was supposed to pay off the federal debt and then be invested in federal bonds. Instead, Reagan ran huge deficits, violating his 1980 promise to balance the federal budget within three years of taking office.

FINANCING TAX CUTS

In my view, building the Social Security surplus has had two major effects.

One effect was to finance tax cuts for those at the top, whose highest tax rate fell during the Reagan years from 70 percent to 28 percent, and for corporations, whose rate fell from 50 percent of profits to 35 percent. Those with less subsidized those with more.

The other effect was a huge increase in consumer debt, as Americans saddled with higher Social Security taxes took out loans to cover other needs. Stagnant wages played a role, but the $2.7 trillion Social Security surplus is also a factor in a $1.5 trillion increase in consumer debt since 1984.

It is no wonder consumers have gone into debt. Paying a tax in advance is expensive. Indeed, the first lesson in tax planning is that a tax deferred for 30 years is effectively a tax avoided, provided the money is invested wisely. The reverse is also true. A dollar of tax paid in 1984 cost $2.20 in today’s dollars, and that’s before counting the interest that could have been earned.

With the coming bulge in retirees, Social Security will start to pay out more than it takes in 2021, according to projections in the latest annual report. Under current law the program would be able to pay only about three-quarters of promised benefits starting in 2033. But that scenario can easily be avoided through a combination of four policy changes that would ensure full benefits continue to be paid, though I fear Congress will continue to do nothing.

One would be restoring the Reagan standard that 90 percent of wages are covered by the Social Security tax, which now applies to only 83 percent of wages. If we went back to the Reagan standard, the Social Security tax would apply to close to $200,000 of wages this year instead of $110,100.

Two would be raising the Social Security tax rate by two percentage points. That tax hike could be smaller or even avoided if, three, we reignited the growth in wages. Median wages have fallen in 2010 back to the level of 1999. And, four, it would help just as much if we created millions more jobs, which since 2000 have grown at only a fifth the rate of population increases.

Under current tax rules, the Social Security shortfall for the next 75 years is $8.6 trillion.

But there is a much bigger problem that needs our attention. If we continue national security spending at current levels, with no future increases, the total cost would be $63 trillion, based on the figures in President Barack Obama’s latest budget. Unlike spending on Social Security, much of the national security spending goes overseas. And that makes us worse off.

Comments
62 comments so far | RSS Comments RSS

This debate serves the right by making yet another diversion to rape the elderly of their _earned_ benefits. After paying taxes for decades the right is happy to suck us dry to fund yet more programs to benefit business and the wealthy. Trickle down? i don;t think so – not a reliable stat to show that is how it works – but many stats to show the uber-wealthy have become even more uber-wealthy. America is now failing democracy 101 by lying to the voters, who are gullible enough to believe. A bit of truth now and then is refreshing.

Posted by ArghONaught | Report as abusive
 

I do like Reuters’ and Mr Johnson’s focus on financial reality. Good job.

Posted by ChrisHerz | Report as abusive
 

I’m sure we will all get the dollars we are supposed to get, but I worry that the dollars won’t buy much when I retire. The universal complaint I hear from my elderly patients is when they were contributing it sounded like they would have enogh, but now prices have all increased and the benefits won’t cover things.

Posted by zotdoc | Report as abusive
 

I am late to this discussion but after 4 decades working with retired clients, am fascinated that no one sees the obvious problems under the current system:

1) Double taxation of Soc Sec benefits..we have the computer technology to trace the precise payments into the pool.. they have already been taxed. No SS payments should be taxed until they are paid out.

2) More critically, ditch the antiquated and deeply unfair system that pays high Spousal Benefits when nothing has been contributed for same. If a spouse wants their wife/husband to have their benefits, then the SS payment should be reduced ..just as every other pension system demands.

In this day asking me as a single parent to pay Anne Romneys benefit is obscene.

I would like to see the projections based on both scenarios How do you think we can begin this conversation in the country?

Posted by WealthGoddess | Report as abusive
 

I like positive articles that aren’t all doom and gloom. But I will say I do have some concern about where Social security will stand in 20 years based on trends in employment in the USA. I want the younger generation to succeed and prosper so they will pay into the system that will be helping my social security payments remain on solid ground. Looking at the demographics of what our workers will be like in 20 years, I hope things do a 360 otherwise we are going to be faced with low paid, service worker employees funding our pensions!

Posted by QuidProQuo | Report as abusive
 

$200,000???? OMG with Police sargeants getting paid over $250,000 in San Jose let’s get real. The ceiling should be more like $750,000.

Posted by Carllehb | Report as abusive
 

David, I would have to question the accuracy of this statement

“One effect was to finance tax cuts for those at the top, whose highest tax rate fell during the Reagan years from 70 percent to 28 percent, and for corporations, whose rate fell from 50 percent of profits to 35 percent. Those with less subsidized those with more.”

Reagan cut taxes in 1981. At that time, Social Security’s Trust Fund was in negative cashflow. Social Security’s Trust Fund financed exactly zero of Reagan’s 1981 tax cut. The 1986 tax package was revenue neutral so again, Social Security didn’t finance any of the tax cuts. Social Security didn’t generate really much cash flow until Reagan’s last year.

Posted by FixSSNow | Report as abusive
 

Can you comment on this new article I find it flawed. Thanks

FACT CHECK: Social Security adds to budget deficit

http://www.twincities.com/national/ci_21 296385/fact-check-social-security-adds-b udget-deficit

Posted by UselessEater | Report as abusive
 

Social security will eventually go broke as all ponzi schemes do.

Posted by SamHill | Report as abusive
 

According to factcheck.org, SS now collects less than it pays in benefits. The surplus is only on paper. During the years that it collected more than it paid, the excess money was used to purchase government debt. My understanding is that the government owes SS about 5 trillion of the 16 trillion dollar national debt. Yes it is true that the government pays interest on that debt. Of course those interest payments come form somewhere, either taxes or more borrowing. The question now that SS no longer collects more than it pays out and the government will have to start paying that debt back so SS can meet its benefit obligations, where will the government get the money. There are only two choices: borrow it or raise revenue. Borrowing it is like like using one credit card to pay another. Raising revenue through tax increases forces tax payers to pay back SS the money we contributed that the government borrowed. In other words, we are paying twice.

Posted by fred123456 | Report as abusive
 

First, the SS Trust Fund is a bookkeeping device. Treasury issues all the checks from the GFRA, and if the SS Trust Fund were bone dry empty the checks would go out simply because the Federal Government, in its sovereign capacity, can pay any obligation denominated in dollars. Treasury checks never bounce.

What Mr. Johnson conflates is the bookkeeping function with the actual payout function. Look what’s happening right now. All Federal government expenditures whether Trust Fund or not are payed from the GFRA. Technically, the GFRA is paying the 2% of the FICA suspended in 2011. This fiction, of the SS Trust Fund as paymaster, is compounded by the fiction that tax receipts are used to pay for Federal Expenditures.

They are not per se used to spend. They are in fact a tool used to manage, among other things, inflation, not to pay bills.

Why then would an autonomous Federal government issuing its own currency need to have income/revenue to spend. It simply issues more of its fiat currency. When it taxes it reduces consumption, demand, income. But, it also guards against inflation since it can issue all the fiat currency for which there is an appropriation.

So there is no operational threat of insolvency for the Federal government or any of its programs. Only political, self imposed constraints prevent funding for to meet the nation’s obligations. Self imposed constraints like the debt ceiling, prohibition against Treasury overdraft authority, Congress’s failure to legislate and/or appropriate,

So, Mr. Johnson, we can’t run out of money, can’t go broke operationally, and can afford to pay any obligation denominated in dollars. All the other stuff about Trust Funds and such are distractions. Social Security doesn’t need fixing, not now or ever.

Posted by PotomacOracle | Report as abusive
 

Thanks, David, for putting historical context and truth to this debate. You might have also mentioned that many of the lawmakers who cry wolf about SS and want to “privatize” it now, presumably to save it, are the same who could have done, but failed to do, something long ago to protect it, such as putting the trust fund into marketable US Treasuries in a “lock box” instead of raiding it for the general budget. The average interest rate would also have been higher than what was given to the nonmarketable bonds in the trust. Last, but not least, if you’ve read the Ryan plan to privatize it, you’ll find that the plan would actually create a giant government investment operation to regularly invest all the tax receipts on Wall Street that would be the worlds greatest opportunity for graft, insider trading and front running. Curiously, most of the advocates believe government can’t do anything right, and we need to scale it back whereever possible.

Posted by Allstreets | Report as abusive
 

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