Budget Baloney (1): Why Social Security Isn’t a Problem for 26 Years, and the Best Way to Fix It Permanently

New Jersey Governor Chris Christie, a Republican presidential hopeful, says in order to “save” Social Security the retirement age should be raised. The media are congratulating him for his putative “courage.” Deficit hawks are proclaiming Social Security one of the big entitlements that has to be cut in order to reduce the budget deficit. 

This is all baloney.

In a former life I was a trustee of the Social Security trust fund. So let me set the record straight.

Social Security isn’t responsible for the federal deficit. Just the opposite. Until last year Social Security took in more payroll taxes than it paid out in benefits. It lent the surpluses to the rest of the government.

Now that Social Security has started to pay out more than it takes in, Social Security can simply collect what the rest of the government owes it. This will keep it fully solvent for the next 26 years.  

But why should there even be a problem 26 years from now? Back in 1983, Alan Greenspan’s Social Security commission was supposed to have fixed the system for good – by gradually increasing payroll taxes and raising the retirement age. (Early boomers like me can start collecting full benefits at age 66; late boomers born after 1960 will have to wait until they’re 67.)

Greenspan’s commission must have failed to predict something. But what? It fairly accurately predicted how quickly the boomers would age. It had a pretty good idea of how fast the US economy would grow. While it underestimated how many immigrants would be coming into the United States, that’s no problem. To the contrary, most new immigrants are young and their payroll-tax contributions will far exceed what they draw from Social Security for decades.

So what did Greenspan’s commission fail to see coming?

Inequality.

Remember, the Social Security payroll tax applies only to earnings up to a certain ceiling. (That ceiling is now $106,800.) The ceiling rises every year according to a formula roughly matching inflation.

Back in 1983, the ceiling was set so the Social Security payroll tax would hit 90 percent of all wages covered by Social Security. That 90 percent figure was built into the Greenspan Commission’s fixes. The Commission assumed that, as the ceiling rose with inflation, the Social Security payroll tax would continue to hit 90 percent of total income.

Today, though, the Social Security payroll tax hits only about 84 percent of total income.

It went from 90 percent to 84 percent because a larger and larger portion of total income has gone to the top. In 1983, the richest 1 percent of Americans got 11.6 percent of total income. Today the top 1 percent takes in more than 20 percent.

If we want to go back to 90 percent, the ceiling on income subject to the Social Security tax would need to be raised to $180,000.

Presto. Social Security’s long-term (beyond 26 years from now) problem would be solved.

So there’s no reason even to consider reducing Social Security benefits or raising the age of eligibility. The logical response to the increasing concentration of income at the top is simply to raise the ceiling.

Not incidentally, several months ago the White House considered proposing that the ceiling be lifted to $180,000. Somehow, though, that proposal didn’t make it into the President’s budget.


Originally published at Robert Reich’s Blog and reproduced here with permission.

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One Response to "Budget Baloney (1): Why Social Security Isn’t a Problem for 26 Years, and the Best Way to Fix It Permanently"

  1. Vinyl Slider   February 18, 2011 at 6:48 am

    I’m sure your accounting analysis is correct Mr. Reich, but you blithely tell a lie that doesn’t make it work (yes, a lie because you and everyone else know it’s provably wrong). You say: “Social Security can simply collect what the rest of the government owes it.” And doing so would end everything the government does outside of defense. And even if peace, love, and kumbaya broke out and we cut the defense budget by half — still half of everything else the government does would cease. This is a sad recast of Al Gore’s lock box. There is no money to “collect what the rest of the government owes it.”Most sad is someone with your intelligence and education has spent so much time in a PC-talk, obfuscation environment you don’t even know where the sun rises anymore. Rather than applying your skills to help solve our problems, you waste them.Try a fact: Social Security funds should have never been commingled with general discretionary spending. But they were and have been for decades. Thus, the solution for the specific program of Social Security must be dealt with in view of the entire budget and debt. PERIOD. Suggesting otherwise is not even a lack of leadership, it’s cowardice.