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

I commend you for being the first commentator I have read to tell the truth about Social Security.

Social Security is not the problem.

The problem is that the government, as the administrator, mishandled the account for decades by using it as extra cash to fund other programs.

As a result, now it is broke.

We need to force the government to fix what it has broken, and to quit attacking the elderly for something which it alone is responsible.

Shedding some truth on this would help tremendously.

Thank you!

Posted by PseudoTurtle | Report as abusive
 

It is certainly true that Social Security and Medicare generate huge surpluses. Those surpluses have be forcibly invested in War Bonds — er — Treasury Bonds. The money itself has been lavished on wars and history’s most massive military machine.

To even think about Social Security going “broke” is to apply private business thinking to the program, thinking of it like a private insurance company. If a private insurance company sold policies to the public, was the largest land owner in all of North America, paid zero rent on a staggering amount of real estate, just like the Queen of England, would we permit it to decide to not make good on its policies? Would we not force it to disgorge the assets to meet its obligations? Social Security and Medicare are far, far from “broke”.

Put all Federal lands and property into the Social Security Trust Fund and mandate market rate rents for Government usage of those assets, just like everyone else pays. Then there would be a huge surplus and the Federal Government might make better decisions about spending, as a side benefit.

Posted by usagadfly | Report as abusive
 

My congratulations to Mr. Johnston. It has irritated me for years to hear our elected officials speak about the ‘problem’ we have with ‘entitlement spending’, as if it were some kind of drag on our economy that will inevitably lead us into the depths of bankruptcy. I’ve known for years that this sort of talk was drivel, but I have neither the resources nor the intellectual clout to explain it as cogently as he.
Why don’t we fix this pseudo-problem by imposing Social Security taxes on all of the income earned by the wealthy? I rarely hear people of moderate means grousing about the money they pay into the Social Security system, so why should the rich have any greater problem with it?
It’s quite likely that this simple ‘fix’ would ensure the security of the Social Security system for meny years to come.

Posted by StanBonk | Report as abusive
 

Grateful for your post. Your option One is unclear to me. Does that mean that currently the top 13% do not pay proportionally into Social Security, and you would put 3% more into to the pool…. but still the top 10% would not pay? I am confused on that.

$200,000 of wages? How does SS collect from the really big bucks? Are the $400 million banker bonuses free and clear?

Posted by TheOldSodbuster | Report as abusive
 

The Social Security Disability trust fund is schedule to go broke in 4 years, true ss is less of a problem and can be dealt with by raising taxes, age, or means testing, in addition ss is subject to tax and isn’t inflation adjusted
, however medicare is more complicated.

Posted by Kberg | Report as abusive
 

@ TheOldSodbuster, let me try to flesh that out.

This year the maximum wage subject to SS tax is $110,100 so if you make, for example, $220,200 then only half of your pay is subject to the tax. If you make $1,101,000 only a tenth is.

Bankers paid salaries and bonuses should be fully taxed up the ceiling. But only earned income is subject to this tax, NOT dividends, interest, capital gains and most royalties.

At the current cap only 83% of wages are subject to the tax. The 17 percent of wages above $110,100 is free of this tax. If we raised the maximum to about $200,000 then 90 percent of all wages (The Reagan level) would be subject to tax. Wages above that would be free of the SS tax, but only a tenth of wages would be above the higher ceiling.

Raising the threshold, based on 2010 wage data, would bring in a little more than $100 billion annually.

Posted by DavidCayJ | Report as abusive
 

Social Security is easy to fix, unless you are a politician or partisan extremist.

The article mentions raising the cap on wages which are capped from 83% of wages to the Reagan standard of 90%. Nice of the author to point how far to the right of Reagan we have already gone, but really it should be 100%. Yes, for many years I enjoyed passing the mark and watching social security deductions disappear, but it really isn’t fair. However, it is a good political trick to give the upper middle class a tiny break so that the very rich can avoid social security tax on virtually all their income. TheOldSodbuster alludes to the fact that all earned income including CEO salaries, bonuses, stock options, perks, etc. should be taxed.

However, other fixes should be pursued. The COLA formula needs to be fixed as it as resulted in excessive increases for most of its history (although perhaps not so in recent years). The age thresholds should be continuously adjusted upwards with life expectations.

If all of this were done, we could actually lower the social security rates themselves.

Posted by QuietThinker | Report as abusive
 

David, excellent article. One little factoid about the Reagan changes on Social Security: It was designed by Alan Greenspan, probably the worst Fed Reserve chairman in history.

The big lie you here constantly in the conservative circles is that the rich pay all the taxes. Clearly we see that with the social security tax, let alone the sales tax, excise tax and other consumption taxes, the poor and middle class are paying more than their fair share.

Ever since FDR passed Social Security (which at first the Supreme Court ruled unconstitutional – which sounds like the what is happening to Healthcare now), the conservatives have ranted about this social net that is suppose to ensure that after decades of work, a person can retire without going into poverty.

Another big change Reagan pushed through on Social Security was eliminating social security benefits for students over the age of 16 (if a working parent dies, Social Security pays monthly to support the child). THe age used to be 21. so poor families who lose a working parent can’t afford to keep a teenager in high school. That’s the Reagan legacy.

Posted by Acetracy | Report as abusive
 

@QuietThinker, the reason SS is capped is that benefits go up with inflow. That said, I would love to see a study of what would happen if we continued the slightly progressive payout formula (those who make the least get more benefits, those who pay the top every year as I have since 1969 get less) without limit as with the Medicare tax. I suspect with some tweaks we could lower the rate, but that does require a finely detailed actuarial study. And COLA is not just an SS problem, as the late Hastings Keith used to say about his enormous and growing Congressional pension which paid for “the cost of living it up” instead of keeping up with the cost of living.

@ Acetracy, yes, and the Greenspan role is in one of my books. A child whose parent dies, becomes disabled or has retired can get benefits to age 18 or, if still in high school, age 19. The lowered age surely has had a negative impact on college educations.

Posted by DavidCayJ | Report as abusive
 

The problem with Social Security is that Congress spent all the money and has stuffed the SS Fund Box with IOU’s. Which means that SS checks actually come out of the treasury. This is really causing a problem for Congress as they are running out of money to spend on defense and more tax cuts for the rich.

Posted by xyz2055 | Report as abusive
 

The problem is that our govt borrowed the excess (prepay) from SS. Our govt only generates revenue by taxation. So to pay the IOUs back they will need to increase taxes. Our govt should never have been allowed to borrow from SS. It is far easier to say SS is going broke than to admit any wrong doing.

Posted by isdjww | Report as abusive
 

Thanks for another well presented and researched article. I would have to challenge your assertion, however, that “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.” There is certainly no clear concensus among economists (nor should there be) that the burden of corporate taxes falls predominantly on capital as you imply here. Surprisingly, this is a point you made yourself in a previous post titled “Congress’ potential faulty tax logic” where you reference the work of several economists who have determined that the burden of corporate income taxes falls predominantly on labor. For instance, you referenced Arnold Harberger’s opinions with the following “In later works, Harberger wrote that while the corporate tax burden falls on owners in a closed economy, in a global economy, where capital flows freely, the burden shifts toward workers, who cannot move so easily.” In addition you referenced the recent work of Aparna Mather and Kevin Hassett and you appear to more or less accept their conclusions. While I do generally agree with their conclusions I would also agree that it is possible, and even probable, that while an increase in corporate income taxes would fall disproportianately on labor (particularly unskilled labor, as I argued in my comment to that post), a decrease in those taxes might well disproportianately (but not necessarily overwhelmingly) benefit the owners of capital and corporate management. Issues of this level of complexity certainly don’t have to, and rarely do behave the same in both directions. I believe that, according to Mather’s work, there would be an inflection point below which reductions in corporate taxes would begin to positively impact labor income. This would be the point at which corporations would be induced to repatriate labor intensive operations. Above this point I would imagine that the benefits of reduced corporate taxes would go mainly to capital and corporate management and possibly to customers depending on the influence of monopoly in the particular industry. All of this complexity and opacity is the reason why I’m generally opposed to corporate income taxes and believe that they should be shifted directly to income, consumption and (primarily) capital so as to remove corporate management’s influence on taxation. Given all this I still think that your statement regarding the benefits of changes in corporate taxes is a bit misleading.

And to your list of potential solutions I would add means testing. It seems rather odd to me that a system intended to provide “social security” should hand out survivor benefit checks to children who derive six figure incomes from a trust fund or have a parent who takes home a high six figure salary, or that it should provide any benefits to multimillionaires. These folks would appear to be quite financially secure on their own, no?

@usagadfly, I’m confused by your proposal. Are you suggesting that the government pay itself rent for the usage of it’s own assets? Surely not, I hope. I have to believe I’m misreading your intent.

@TheOldSodbuster, The level of income that is subject to Social Security taxes is capped (currently at $110,100), therefore, income above that amount is not subject to the tax. So if someone makes $400 million only $110,100 of it is taxed for Social Security purposes, the remaining $399,889,900 is not. In other words, the person with the $400M income would pay the same exact amount of Social Security taxes as someone who made $110,100. This is what makes Social Security taxes regressive.

Posted by jtfane | Report as abusive
 

Another excellent tax article, David. As usual, you do a good job of pointing out that most of our financial problems are highly fixable, and almost invariably fixable without causing undue pain to any one group. And, as usual, politicians who spend their political lives desperately catering to one group or another, conveniently ignore any and every workable solution. I note that a frequent outcome when a senior political figure either retires or is given the boot, is that he/she suddenly becomes reasonable and wise. Maybe the fix is actually a change to the elective process encompassing term limits, campaign spending limits and the like. When they stop running for office all the time, some of them are quite normal.

Posted by steve778936 | Report as abusive
 

Whatever sources of big dollars in US, is a target for greedy financiers, corporations and their lobbies. The government collects a share of nat’l wealth, but gives most back to the top 1%. Because of the greed and the weakness of government. Middle classes are fooled (by media tool) into thinking their livelihood comes from supporting ideas and plans of the successful top 1%, who unfortunately are only planning on continuing patterns that got them there, i.e. stealing country wealth from the bulk of middle class! Fools in middle follow the deception that the poor are the problem and readily vote for the 1%, thinking they’ll join them and gain in portfolios, but in reality the !% steals from their pockets! Evidence is in the growing division of wealth… yet middle class continues to attack the poor! Tax the rich and reward in deductions only those that benefit the economy, by proof… not by promise, i.e. trickle down fallacies. You create jobs, you get deduction. You create US spendable wealth, you get deduction. Shared wealth with middle class is what made US a powerhouse… now CHina has middle class growth and is powerhouse. Needed is strong government to keep 1% in check… not the other way around, as happens now! COrruption will destroy us if we can’t get a hold of what is best for US population… SS is needed.
Tax rich until debt is met… give them breaks ONLY when debt is gone… that is incentive to lobby for better budget…. if it means money in pockets of 1% only when US solvent, they’ll make a budget that works and fight amongst themselves overt the pillage that is bulk of budget, i.e. military contracts, sweet deals, favors, contracts, pork, etc.
Right now free for all, weak government, the richest take the biggest cut of the pillage.

Posted by OlliGo | Report as abusive
 

Reuters… still has journalists! How rare today when new affiliates and media corporations seem to be no more than soundbites repeating the same message.

Posted by OlliGo | Report as abusive
 

@ jtfane –

Regarding you comment about “means testing” as a potential solution to Social Security.

“Means testing” as you describe — that is as a method for denying those who have paid into Social Security, but now have other “means” of support so they don’t “need” Social Security — is illegal under US Supreme Court ruling in MATHEWS v. ELDRIDGE, 424 U.S. 319 (1976)
424 U.S. 319, because it would deprive individuals of their property interest in Social Security, which is unconstitutional.

It may come as a shock to most of you, but Social Security is PROPERTY and thus protected from unlawful government seizure.

Here is an except from that case.

The Supreme Court ruled that:

—————————————————-

Procedural due process imposes constraints on governmental decisions which deprive individuals of “liberty” or “property” interests within the meaning of the Due Process Clause of the Fifth or Fourteenth Amendment.

The Secretary does not contend that procedural due process is inapplicable to terminations of Social Security disability benefits.

He recognizes, as has been implicit in our prior decisions, e. g., Richardson v. Belcher, 404 U.S. 78, 80 -81 (1971); Richardson v. Perales, 402 U.S. 389, 401 -402 (1971); Flemming v. Nestor, 363 U.S. 603, 611 (1960),

that the interest of an individual in continued receipt of these benefits is a statutorily created “property” interest protected by the Fifth Amendment.

Cf. Arnett v. Kennedy, 416 U.S. 134, 166 (POWELL, J., concurring in part) (1974); Board of Regents v. Roth, 408 U.S. 564, 576 -578 (1972); Bell v. Burson, 402 U.S., at 539 ; Goldberg v. Kelly, 397 U.S., at 261 -262.

Rather, the Secretary contends that the existing administrative procedures, detailed below, provide all the process [424 U.S. 319, 333] that is constitutionally due before a recipient can be deprived of that interest.

This Court consistently has held that some form of hearing is required before an individual is finally deprived of a property interest.

Wolff v. McDonnell, 418 U.S. 539, 557 -558 (1974). See, e. g., Phillips v. Commissioner, 283 U.S. 589, 596 -597 (1931). See also Dent v. West Virginia, 129 U.S. 114, 124 -125 (1889).

The “right to be heard before being condemned to suffer grievous loss of any kind, even though it may not involve the stigma and hardships of a criminal conviction, is a principle basic to our society.”

————————————————–

Posted by PseudoTurtle | Report as abusive
 

@ jtfane –

I want to make clear that the point of my comment above is not only to illustrate that it is illegal for the government to seize personal property without due process (which I am sure they are well aware of), but that encouraging Congress to do so is a VERY “slippery slope”.

In reality, Social Security is only a “down payment” on our debt problems, since it will not resolve the real problem of out-of-control military spending, NOR the lack of revenue from taxes.

So, when Social Security fails to be enough to feed the maw of military spending, YOUR property may be seized next “for the good of the country”, of course.

Once the government begins to ignore our constitutional rights to unlawful seizure of private property, “Pandora’s Box” has been opened, and it then becomes easier to justify their acts going forward.

History shows a government under stress is capable of many things.

Be VERY careful what you urge Congress to do.

Posted by PseudoTurtle | Report as abusive
 

Maybe we should add the title Mythbuster to David Cay Johnston.

I imagine that he will now be added to the Tenth Percenters’ Hit List along with Bill Moyers and Paul Krugman.

So, it is Class Warfare.

Posted by ptiffany | Report as abusive
 

Social Security retirement payments are capped along with taxes. The very high income earners get the same checks after retirement as those workers that just reached the top salary taxed. It was not designed to be a progressive taxation mechanism that transfers wealth from the rich to the poor. If anything, Social Security currently transfers wealth from those with a short life span to those with a long life span. If you turn Social Security into welfare, then it will be treated as welfare.

My recent reading indicates that Medicaid, Medicare and Social Security Disability are the programs that are struggling with demands growing much more rapidly than revenue. The retirement portion of Social Security is projected to run a surplus for quite a while. You can lump them altogether, as many in the media do, but the demands and revenue are not the same.

Having wasted money on past wars does not change the untenable growth in entitlements that the US now faces. Since the bottom 47% of income earners pay zero federal income tax today, I suspect that they are paying less federal income tax now than in 1961.

The first problem to address with Social Security is the issue of disability checks going to those who are not in need. The disability side is where demands are far outstripping revenue. There has been some very good reporting about problems in both West Virginia and Puerto Rico. Then we should consider raising again the retirement age again, which would impact me personally. Increasing the the Social Security taxation rate will not lead to more jobs with which to right the ship.

Posted by alignedinterest | Report as abusive
 

GPS, Run flat tires, cell phones, ham radios, satellite tv/communications, dehydrated food products, space travel/exploration, countless medications, mammagrams, etc. All from military spending and thats just the stuff off the top of my head. Military spending is watering the crops, Entitlement spending waters the weeds that encroach and ruin the field. And forget AL Gore, we know the US Military invented the internet.

Posted by DEBarbie | Report as abusive
 

@ alignedinterest –

Raising the retirement age would be a MAJOR MISTAKE, primarily because the current higher average life span today compared to the 1930s is based mainly upon the availability of proper health care for the elderly!

DUH!

If you remove the ability for elderly people to access proper healthcare, average life expectancy will drop quickly and dramatically.

This is a SERIOUSLY ignorant idea that will lead to a humanitarian disaster.

After enough people died prematurely due to lack of proper healthcare to force the average life expectancy back to what it was in the 1930s, what would you suggest then?

Would you demand that we lower the age again until it began to rise with better health care?

Somehow I doubt that would ever happen, since once the benefits are taken away, they will never be restored.

This idea is a completely naive and moronic “Catch 22″ proposal by people who clearly don’t understand what they are talking about.

Posted by PseudoTurtle | Report as abusive
 

Columnist here,

A little civility goes a long way to bringing forth light, not wasted heat.

Posted by DavidCayJ | Report as abusive
 

David –

I stand by what I said.

This is a dangerous, stupid idea about Social Security that keeps spreading as though it were the most natural thing in the world to keep increasing the retirement age because people are living longer now than in the 1930s.

The reality is that the human species has not suddenly become much healthier than we were since the 1930s.

Better healthcare, education and working conditions have contributed to this, and if they should be taken away — which is EXACTLY what this government wants to do — the average lifespan will immediately plummet.

The whole problem with Social Security is the government doesn’t WANT to pay Social Security for a lot of reasons that are both monetary and social.

For that reason, ANY erosion in Social Security benefits will rapidly lead to more reductions.

We cannot give the government ANY chance to destroy Social Security or its associated programs because they will do absolutely that — AND as rapidly as possible, ESPECIALLY IF THEY CAN GET PEOPLE TO BUY INTO FALSE IDEAS ABOUT IT.

And thus far, the government has been TOTALLY DISHONEST about Social Security, deliberately allowing the egregious rumors to keep spreading, so that the very existence of Social Security is now in doubt.

That is NOT without a reason.

At a minimum, raising the retirement age assumes:

(1) that a person’s health will continue unchanged until the person is “ready” to retire at some indefinite age, and will not become too sick to work, AND

(2a) even MORE importantly in this society, because healthcare benefits are inextricably linked to employment, it assumes you will be able to remain employed until that nebulous date — thus, loss of a job means loss of healthcare as well.

(2b) the problem is that as workers age, their employers tend to find “reasons” why a once-valued employee is no longer a viable worker, who must then be laid off. Of course, these “reasons” have nothing to do with the fact that the employee is simply getting old and is costing the company more in terms of both direct labor costs and healthcare benefits — right?

NEITHER of these ideas — continued good health or employment until retirement age — are remotely true!

Meanwhile, the government, in order to avoid paying Social Security, WILL keep raising the age limit.

I am nearly 70 years old — a retired CPA/MBA who worked for several multinational high-tech companies (primarily as a Plant Controller and Finance Manger) since I was 40 — and I too never intended to retire.

In my particular case, I barely made it to “early retirement” at age 62. If, as these people want to do, the minimum retirement age had been any higher at all, I would have lost everything I worked for my entire life (even then I had to take “reduced benefits”).

The reason?

When I turned 60, my employer moved all of their manufacturing facilities to Asia — believe me, at the age of 60 it doesn’t matter how much education and experience you have on you resume, you won’t get a job.

Indeed, all things considered, I am VERY lucky to have made it the two years to “early retirement”, and even then it was a VERY close thing, which just about wiped out my retirement savings.

Most people would not have the personal resources (including a working wife) to make it years without any income or healthcare benefits.

I other words, I once held EXACTLY the same stupid, short-sighted ideas that are now being spread by the government as a viable “solution” to fix Social Security.

What is dangerous is that people in general are buying into this line of BS without even thinking what it means, either to others or to themselves someday.

BUT raising the age is NOT a solution — it would be an unmitigated disaster that falls the heaviest on those who can least afford to bear the burden.

Raising the retirement age, for reasons I have stated, and a lot of others that can’t be covered in this venue, is a disingenuous idea from the government that will force elderly people out into the streets to starve to death, since the US has NO “safety net” as do most European countries — PLUS whatever minimal safety net we have, such as welfare WILL disappear shortly.

THAT is why it is an incredibly stupid idea.

If that means a bit of rude language to make my point, so be it, because I am getting VERY tired of telling people this is a bad idea and simply being ignored.

THIS is one of the major issues that we, as a nation, cannot allow to have happen here, whatever that takes.

BUT most people don’t even understand it IS a problem, and not a solution.

It is CRITICAL that people understand what a disaster this would bring to our country.

That is why I stand by what I said in my other comment — the only way to get a person’s attention these days is to shock them and force them to reevaluate their position.

Granted, it may not work, but then neither has telling the truth about ANYTHING ELSE regarding Social Security. Not even the news media are willing to tell the truth about Social Security, which is why I commended you for your courage to do so.

However, your article is little more than a miniscule beginning that will probably never go much further because the American people have been sold a “bill of goods” by the government, and at this point they don’t want to hear the truth.

PseudoTurtle
CPA/MBA

Posted by PseudoTurtle | Report as abusive
 

David –

Your tax approach, which consumed about 99% of your article, is MUCH too narrowly focused.

Especially, since you yourself admit:

——————————————————-

“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.”

——————————————-

I understand you specialize in taxation, but THAT is where the real economic issues of this nation lie. If we go into 2013 with the reduction in taxes and no increases in revenues that are pre-planned right now (i.e. induced austerity), the US economy WILL crash as the eurozone is doing right now.

I wonder how many people even “saw” the last paragraph, which contained the most information of all? The taxation issues are simply “noise” that drown out the real message.

If you could apply your future efforts to examining the issues of “forced austerity” that will be upon us in a few short months — ALL of it, including cuts in “entitlements” (which used to be a good thing), just so the US can continue to spend egregiously on military programs — THAT would be a subject worth reading about.

PseudoTurtle
CPA/MBA

Posted by PseudoTurtle | Report as abusive
 

The yield on the treasury bonds owned by the SS trust is pathetic. We are being robbed blind. We could double our average yield by taking just 10 or 20% of the fund and investing it in the stock market via a simple low cost index fund (S&P linked). Alternatively one of the managed funds of a nonprofit like the TAA-CREFF foundation would do the trick. One should also invest some fraction of the money with in a more diversified bond portfolio selected by PIMCO or by some similar competent manager. If we had done minimal prudent things like these over the last 30 years SS would currently be rolling money and there would be no need for the current discussions. If a private retirement plan were run like SS the managers would have been fired 20 years ago (assuming they could stay out of jail).

Posted by hacimo | Report as abusive
 

What degenerate would speak of the topic, without discussing the fact that the government has lowered the “take” from every individual from $6,600 to $4,800 per year.. and that simple fact seems to escape the “journalistic” article…Only a Stooge can believe that 6-2=6…. If you believe that Donkey can make magic…. you will be surprised when the Magic Donkey looses his power.

Posted by Farkel44 | Report as abusive
 

If Republicans say something is bad, you best believe it is good. What is good they say is bad. They make Entitlements to Medicare a bad thing but the real Entitlements are the millions of dollars they give to rich Fortune 500 Oil Companies. It is more than an Entitlement, it is also a rape & theft of the American people.

Posted by angellight | Report as abusive
 

If the Social Security Administration since 1977 when the vast majority started their work careers had invested the baby boomers contributions into US Treasury -0- coupon bonds up to 2007, more than 100% of future obligations would have been easily funded.

Just realize, in the early ’80s -0- coupon 30-year Treasury bonds were yielding over 10% – that is a locked in return of 10% on an annual basis. Instead Reagan with his henchman Alan Greenspan raided the piggy bank to lower taxes for the 1% and corporate America.

This investment opportunity that existed in the early 80s was not lost on some top investment managers who bought treasuries and still hold them. Seems like our past Fed Reserve chairman was too busy preaching Ann Rand and the new age of deregulation and financial engineering. We will be suffering the consequence way past our life time.

Posted by Acetracy | Report as abusive
 

One facet of this thread that is being overlooked is that Social Security is not a tax. It was originally passed as retirement insurance and was subject to actuarial rules and underwriting based on demographics, one of which was supposed to be cohort life expectancy. The fact that the SS fund has been raided by the federal gov’t and IOU’s left in their place leaves a large gap in the claim pool. This is also another reason the the “tax” is limited to a cutoff, just as any insurance policy does not have an unlimited premium rise with a limited return. Otherwise, why would anyone ever agree to participate. It becomes a Ponzi scheme in those circumstances.

Posted by kr.trader | Report as abusive
 

Social Security ran a cash flow deficit of $49 billion in 2010, and the 2011 trustees report indicates such deficits will be the norm by 2017. The report also reveals that Social Security’s unfunded obligation stands at $9.1 trillion, in net-present-value terms; in other words, it owes $9.1 trillion more in benefits than it will take in through taxes. The program will experience further financial strain as the worker-to-retiree ratio keeps falling.

Posted by Carly_EngAmer | Report as abusive
 

@PseudoTurtle
Thank you for your spirited reply. Please keep in mind two other items in my first comment. First, SS retirement is not going broke anytime soon. Second, I believe that addressing fraud on the SS disability side would go a long way toward sustainability in the program. So, changing the retirement age might not be necessary.
Good constructive criticism requires that you provide a better alternative. I attempted to meet this challenge by bringing up the fraud issue, as an alternative to raising the SS contribution rate. I would welcome your comments on a better alternative to raising the retirement age.

@kr.trader
Exactly. SS is forced retirement insurance and therefore property, as pointed out by PseudoTurtle.

My concern with means testing SS payout in retirement is that the system is slowly being corrupted into welfare. The IRS already taxes SS benefits if you have adjusted gross income over a certain level. So, means testing is already creeping in.

http://www.irs.gov/newsroom/article/0,,i d=179091,00.html

If you think the SS system is being attacked now, just wait until it looks completely like welfare. Yes, I realize that ROI from SS is very, very low, but at least it still looks more or less like property/insurance and keeps paying when the market is down.

Posted by alignedinterest | Report as abusive
 

David Cay,

Please address Medicare. SS may not be insolvent but Medicare is the true problem on the horizon.

Liberals have their hands tied on this one because they, of course, cannot run a platform that reforms entitlments such as Medicare. They have to run on a platform that bashes the GOP for trying to address our projected unfunded Medicare liabilities and thus nothing will be done about it if Obama is re-elected.

In fact, not much of anything will happen if he is re-elected; a four year lame duck session.

Posted by jaham | Report as abusive
 

The President,as leader of his party, once again expressed that every American should pay his fair share in taxes. One sizable loophole in the Federal Tax Code is TAX EXCLUSION INCOME. It is time to do something about this unfair tax revenue placed disproportionately on small business & especially the self-reliant. The President is correct we are all in this mess together. It is time to correct the inequity of Tax Exclusion income for some rather than for all workers earning income & paying taxes on all received income. There is no reason for this inequity especially after the President many request for equity.

Posted by buckaroo5 | Report as abusive
 

@ alignedinterest –

Your state “Good constructive criticism requires that you provide a better alternative. I attempted to meet this challenge by bringing up the fraud issue, as an alternative to raising the SS contribution rate. I would welcome your comments on a better alternative to raising the retirement age.”

—————————————————–

You are right, of course, so here is my solution (which I have stated many times in the past, but without any success):

It is EXTREMELY EASY to make Social Security (and all its associated programs, many of which have never been funded by Congress), solvent.

The answer is to force Congress to:

(1) remove Social Security from the General Fund where it does not belong, back to a stand-alone insurance fund as it was designed to be,

(2) Remove the artificial cap on income subject to earnings, which would immediately and dramatically increase the cash flow going into the Social Security Trust Fund, thus permanently fixing its current insolvent status, since the tax can easily be adjusted each year by Congress to ensure enough revenue is coming in to support all the programs, and

(3) since government manipulation is the real problem, force government — by whatever means necessary — to stop “borrowing” from the trust fund.

Those three steps WOULD immediately and permanently fix ALL the problems of Social Security and return it to the social insurance program it was originally designed to be.

AND no age adjustment is necessary.

OK?

—————————————

I realize the major objection would be to remove the earnings cap, but there are many reasons for doing so.

Here are just a couple off the top of my head:

(1) Even though the wealthy believe they will retire in the “lap of luxury”, in fact the future holds no such guarantees for anyone.

(2) If everyone pays into it, the fund will remove the intolerable burden on those least able to afford it right now and spread the risk at the least cost (which is how insurance is designed to work), and while this may seem unfair to the wealthy, it would provide them with a more stable government and consumer demand — contrary to popular belief, seniors do NOT suddenly stop spending when they retire — would increase among the retired, so much of the money will be recycled back into the economy, mainly as purchase of healthcare.

Notice NONE of this is based on “fairness” or some scheme to “distribute wealth”, but on solid economic principles, which apparently the wealthy cannot seem to figure out due to their own short-sighted greedy blindness.

Posted by PseudoTurtle | Report as abusive
 

@ alignedinterest –

This is in regards to your answer to @kr.trader, but each comment requires a separate reply, so bear with me:

———————————————-

You state, “My concern with means testing SS payout in retirement is that the system is slowly being corrupted into welfare.”

Apparently, you (and many others) are concerned that Social Security benefits are being corrupted by those who evade the law, which is a reasonable stance and should concern everyone, including those who receive Social Security benefits — they are not your enemy and should not be punished by the few who abuse the system.

Getting the Social Security/Medicare system working again is the priority, then dealing with the “cheats” is an enforcement problem.

These are NOT at all the same issue.

———————————————

You state “The IRS already taxes SS benefits if you have adjusted gross income over a certain level. So, means testing is already creeping in.”

Actually, you are incorrect. The additional tax is being imposed due to massive actuarial errors made by the government regarding the amount of Social Security payments that were made during the 1970s. The current tax is an attempt by the government to recover the amount of money they mistakenly overpaid to Social Security recipients decades ago. I won’t comment on the rationale, or lack of it, of having current retirees pay for a mistake the government made in overpaying Social Security decades ago, but it is NOT “means testing”.

Means testing would be a violation of the law, whereas recovering overpayments of benefits is not.

———————————————

You state “If you think the SS system is being attacked now, just wait until it looks completely like welfare.”

As I pointed out and you acknowledged agreed to my comment that Social Security is property, Social Security is a social insurance fund that is supported by taxes on those who have worked, and therefore cannot “look completely like welfare”.

Since you bring up welfare, you should be aware that the US Supreme Court has also ruled that welfare is “property” as well.

For your convenience and ease of access, see this article in Wikipedia: “Goldberg v. Kelly, 397 U.S. 254 (1970), is a case in which the United States Supreme Court ruled that the Due Process Clause of the Fourteenth Amendment to the United States Constitution requires an evidentiary hearing before a recipient of certain government benefits (welfare) can be deprived of such benefits. The individual losing benefits is not entitled to a trial, but is entitled to an oral hearing before an impartial decision-maker, the right to confront and cross-examine witnesses, and the right to a written opinion setting out the evidence relied upon and the legal basis for the decision.”

So, if Social Security as an “entitlement”, you need to understand that Social Security is not remotely a problem. The social welfare system in this country is far more ingrained than you realize.

———————————————-

You state, “Yes, I realize that ROI from SS is very, very low, but at least it still looks more or less like property/insurance and keeps paying when the market is down.”

You are incorrect in applying ROI to Social Security, since it is NOT a retirement plan, but a social insurance plan. The two concepts are not at all the same.

———————————————-

I apologize if I have offended you, but the continuous stream of misinformation about Social Security has grown into a “feeding frenzy” as people look for a convenient scapegoat, and I am getting quite tired in stating the same things over and over.

Instead of simply expressing opinions, which have absolutely no merit whatsoever, it would be better to do a bit of research as I have, before expressing those inane opinions.

If I overreacted to your “age” comment, I apologize.

—————————————

I haven’t checked this column for several days, and did not realize anyone had responded to me.

If I could ask a favor of you, please just let me know you have read my response to you, so I know I have not simply wasted my time again.

Thanks.

Posted by PseudoTurtle | Report as abusive
 

@ Carly_EngAmer –

You are absolutely correct that “The program will experience further financial strain as the worker-to-retiree ratio keeps falling.”

This is a “dual function” of decades of:

(1) “job outsourcing” (i.e. a massive workforce size reduction) that results in fewer workers paying into Social Security, thus forcing the burden upwards on those who are left, and

(2) importation of cheap labor for positions that cannot be conveniently outsourced (i.e. cheap labor means lower wages, which results in lower Social Security taxes — or in many cases, total evasion of Social Security taxes).

———————————————-

IN ALL THE ARGUMENTS AGAINST REMOVING THE EARNINGS CAP, I HAVE YET TO SEE THIS ARGUMENT ADVANCED FOR INCREASING IT INSTEAD.

———————————————-

While we seemingly cannot stop this insane exportation/importation of American jobs for ever-cheaper labor, it is yet another excellent reason why we should remove the income cap on Social Security.

It is primarily the wealthy who benefit from this cheap labor at the expense of the American people, but by doing so they are destroying the
US economy by passing this “hidden tax” — David Cay Johnston are you listening? — to the American people as a “transfer cost” that adds debt to every single US taxpayer.

In effect, the wealthy, by avoiding Social Security taxes, are forcing the American people to pay their taxes for them!

Why has no “economist” seen this issue?

The amount of money the wealthy avoid by not paying Social Security taxes has to be astronomical, yet no one has done a study to determine the deleterious effects of continuing this artificial earnings cap.

Since they currently evade this social insurance tax, it is only “fair” they pay the taxes they expect everyone else to pay for them.

Posted by PseudoTurtle | Report as abusive
 

The CBO has studied how a variety of minor tweaks affect Social Security’s 75-year actuarial balance. They found several essentially wipe out the long-run (75-year) deficit of 0.7% of GDP. If detractors want to overhaul the system, they need another rationale besides its fiscal health. See below for details:

http://www.verisi.com/resources/decision 2012.htm#s6

Posted by datascientist | Report as abusive
 

Gee, if you didn’t call it “Social Security” tax, and, indeed, just lumped all of the taxes into a category called “Tax”, then let the IRS sort out where each penny goes (instead of the micromanaging, armchair quarterbacks), maybe the “Government” could function as it is designed.
This really isn’t Wartime and the Congress shouldn’t have the ability declare Martial Law on the Treasury or to rearrange “the arrangements” that have already been arranged, at least, not without the benefit of majority vote. Minority factions within our Government and politics are constantly trying to usurp control over the wishes of general Public, “for our own good”. We need watchdogs to watch the watchdogs who watch the dogs.
In simpler words, this whole process is getting ridiculous.

Posted by nieldevi | Report as abusive
 

How much the SS tax has gone up is just one part of the equation. I read an article over 10 years ago in USA TODAY, that the US government took (and takes??) Billions out of SS to finance budget shortfalls. Has anything been paid back??? Noooo!!! I am surprised the author opted not to discuss this pertinent fact.

Posted by Schelm | Report as abusive
 

IDIOTS! There is no fund. The money was simply spent. It was not invested anywhere. The Federal government already owes the surplus to us via the social security obligations. Saying thats ok because the Federal governent can get this money from its treasuries …. that is, the
Federal government can get it from the Federal government…. Is circular reasoning.

How can you miss something so obvious? It is bad enough for the government to attempt to perpetuate this fraud. How can you be so gullable?

Posted by Art-M | Report as abusive
 

I’m sick of hearing old people whine about how they can’t live off of it. Excuse me but why does someone footing the bill for some old fart’s ignorance know more about the fact that Social Security is a SUPPLEMENTAL WELFARE program, meaning it’s supposed to be used as a secondary source in addition to money you were supposed to be saving? I’m worried about my generation because we’re footing the bill for invalids AND raiding our own private savings. I’m stressed out being forced to pay into a program that I hear won’t be around and to top it off I may have no choice but to raid my own IRA I worked so hard to fund. My generation is screwed three times over. We fund the old people’s welfare, supplement the poorest through higher health care costs, and we have to care for our own aging parents. I’ll never have kids or get married because I’ll be taking care of my own parents thanks to greedy old parasites in office. My father was told his 401(k) from his job was being cut 40%. Now big corporations are screwing people who worked their butts off and saved to boot. Just WTH is going on?!

Posted by LogicLover | Report as abusive
 

The fact that the government has borrowed lavishly from the SS trust and collateralized all that with treasury bonds means that one of the United States’s biggest groups of creditors is its own citizens–particularly older Americans.

Like Me, for instance–I’m 63. I’m not by nature a violent man. If I were, every time I heard some smug conservative pundit speak derisively of “entitled (i. e. spoiled) “baby boomers”, I’d be seriously inclined to punch the son of a bitch in the mouth. You bet your damn britches we consider ourselves “entitled” to those benefits–we’ve worked hard and paid for them for the last fifty years! It’s OUR money, not Congress’s or Wall Street’s–and by golly, we want it back!

Posted by Art_In_Seattle | Report as abusive
 

Wealthy and highly paid people take their cut of social security, when they retire. Why not just remove the cap? Then they too will pay the same percentage of their income as most Americans do. Many experts agree that one answer to any fear of social security running out of money in 20 years is by equaling the playing, or paying, field.

Posted by NoHayChabo | Report as abusive
 

Bankrupt? Not anytime soon.

But our current college grads are looking at paying into a fund that WILL be bankrupt by the time they’re retiring. Even those who have only 20 years until retirement may not receive benefits and those who have 30 years until retirement won’t see any payouts, assuming things remain the same.

Increasing employer or employee SS taxes will just do what any good austerity does – hamper growth, therefore reducing the effectiveness of the taxes in the first place. Just look at Greece or Spain as perfect examples of the “benefits” of increased taxes.

A better solution that reduces waste, prevents our wonderful government from “borrowing” the funds, and guarantees that our current workforce actually receives benefits would be to create privatized accounts that are unraidable by whichever administration is in power but still require a minimum contribution by the employer and employee. Then the individual chooses where their money goes, not the government (who ends up funneling it to their wealthy campaign supporters).

Posted by DavidCharles | Report as abusive
 

Dave needs to define his use of the word “surplus”. He suggests there is a $2.7 Trillion pile of money somewhere, ready to pay social security benefits.

In fact, our federal government made operational expenditures with Social Security payroll taxes, then wrote itself IOUs. Dave apparently thinks these IOUs will be helpful in paying SS benefits. In fact, money must be borrowed in future years – or taxes increased – to pay SS benefits. The IOUs will NOT be helpful in any manner to fund these benefits.

Dave – get a clue.

Posted by BruceN | Report as abusive
 

Four solutions??? I don’t see any.

#1 raise the cap. Well that would help, but only if you also changed the formula for benefits. I, for one, would love to see this happen. It would socialize Social Security, and that would be the end of the game. Does the author realize that the conservatives are praying for Congress to do as you suggest?

#2 2% SS tax increase. This ideal has not one chance in hell of passing. Just forget anything that starts will , “Let’s raise taxes…”

#3&4 Wage increases/more jobs. This is a dumb suggestion. Yes, if by some miracle the economy started booming and unemployment fell and wages were rising the pressure would ease off of SS. But this is completely outside of the control of Congress and the President, (much less SS). This is like saying, “If the price of gas falls to $1, then the economy will improve”. True, but irrelevant.

There is every indication that the economy will remain stuck in a slow growth mode for another five years (at least), #’s 3 & 4 should be taken off the list as this is just fairy dust that is being discussed.

1&2 are non starters, 3&4 are just a joke, so really nothing has been proposed here at all.
bk

Posted by Krasting | Report as abusive
 

Where exactly is this supposed $2.7 trillion surplus?

Posted by rlp66 | Report as abusive
 

What an ingenuous article:sure Social Security is in profit on paper, but in reality the money has been squandered in wars, useless social programs, bailouts, and government waste.

It is gone, finished, the cupboard is bare so Johnston can spin it all he likes, but there will come a day real soon now with the Spender in Chief really turning on the spending spigots when America will not have enough money to pay Social Security.

And what good will it do then to say, “You know SS has lots of money – on paper – it’s just that, well, the government has none”.

Posted by eleno | Report as abusive
 

Quite a few here incorrectly believe that the SS Trust Fund has been “raided” by our government, that the “money is gone” and that the “cupboard is bare”. A couple of others incorrectly believe that SS is insolvent and will pay nothing to younger workers. These are all lies spread by paid lobbyists for Wall Street interests who are hoping to skim billions in fees by turning SS into a private retirement system.

Here are the uncontroverted facts:

1. SS used to be “pay as you go”, as the above article explains. In other words, there was never any trust fund because there were never any surplus taxes to put into a fund. Instead, each year’s benefits were simply a line item in the government’s list of expenses, and the money to pay each year’s retired beneficiaries came from that year’s tax and borrowed revenues.

2. Again, as the above article explains, Reagan increases SS taxes to “pre-fund” the Boomers’ benefits. Now that there were surplus funds at the end of each year, SS needed a place to invest these funds. The Greenspan Commission recommended that the surplus funds be invested in the safest investment available: non-marketable Treasury bonds. This was a bi-partisan decision and not at all controversial.

3. For the “cupboard is bare” folks, please note that the cupboard is full of these Treasury bonds. Yes, the government spent the money it received from the SS purchase of these Treasury bonds — what would expect them to do, borrow the money and bury it? Those bonds bear interest, just like regular Treasury bonds. They are assets, just as good as the cash that was used to buy them (in fact, better than cash because the bonds earn interest).

4. For the “they spent all the money” folks, what do you think would have happened if SS bought private stocks or bonds instead of Treasuries? Yup– those private corporations would have “spent all the money”, leaving the cupboard with just “promises to pay”, i.e., corporate stock certificates or bonds. I am trying to be tactful here, but if you believe that investing in U.S. Treasury bonds is “spending all the money”, that the SS bonds represent no asset that is still in the SS Trust Fund, or that the Government “raided” the SS Trust Fund when the SS Trust Fund simply followed the law and invested in Treasury bonds, you need to return to grade school and sharpen your critical thinking skills.

3. Some now suggest that had the surplus been invested in stocks, the surplus would be greater. In other words, if the cupboard was full of stocks and bonds of private corporations, the value of those stocks and bonds would be greater than the value of the Treasury bonds that are presently in the SS Trust Fund.

This is an argument made by Wall Street because it hopes to turn SS from an insurance program into a retirement account.

Here is the difference between the two: With insurance, you pay a fixed premium in exchange for a retirement income. If you die too early, you get nothing, just like you get from your fire insurance policy if your house never burns down. If you live to 100, the policy keeps paying regardless of what you invested. If SS were a retirement account, your premiums would be invested and you would receive upon retirement whatever growth (or loss) the SS Administration made from those invested premiums. If you died early, your account would go to your heirs. But if you outlived the value of your account, you would run out of benefits and be on welfare at whatever age that was. This age could well be soon after retirement if, for example, the stocks and bonds in your account suffered severe losses just as you were retiring. Just ask anybody with a 401k or IRA in the last decade how that worked out for them.

In any event, I prefer that SS remain an insurance policy, leaving me free to fund by own retirement account as an IRA or 401k. I don’t view my SS taxes as “my money” anymore than I view by fire insurance premium as “my money”. If my house never burns down, or I don’t make it to 67, I will not be disappointed that those insurance policies never paid out. But if I do make it to retirement age, as some of you here have done, I will certainly demand that the policy be paid, no differently than I would demand my fire insurance carrier to rebuild my home after a fire. And, no, such a benefit is not an “entitlement” that can be re-negotiated any more than a Treasury bond is an “entitlement” to the investor expecting a return of his investment with interest. Both are promises of future payment in exchange for the payment of present value. Our government cannot default on one promise — SS benefits —without defaulting on the other —U.S. Treasury bonds. So, for the young readers here, you should feel confident that your benefits will be there when you retire.

Posted by Goodrich | Report as abusive
 

I’m so thankful that congress didn’t spend the social security trust fund surplus and replace it with IOUs which can only be funded by more government deficits or new taxes. Sarcasm off.

Posted by CountYob | Report as abusive
 

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