FIXING SOCIAL SECURITY

On April 23, 2012 the trustees of the Social Security System issued its annual report projecting the health of the program into the future based on a number of factors. The “dire” news then reported in the media was that:

After 2020, Treasury will redeem trust fund assets in amounts that exceed interest earnings until exhaustion of trust fund reserves in 2033, three years earlier than projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2086.

http://www.ssa.gov/oact/TRSUM/index.html

This news has generated a paroxysm of near panicky concern and the knee jerk reaction that the only way to save Social Security is to fundamentally change Social Security.

However this predicted shortfall in funds need not occur if some relatively simple steps are taken, some of which have been suggested by leading politicians or economic experts for years.

One reason given for SS’s bleak outlook is that the United States has an aging population which means more retirees tapping that resource. Couple that with the concurrent demographic and actuarial fact that the ratio of workers paying into the SS Trust Fund to the number of beneficiaries keeps dropping.

Too, longer life spans mean these beneficiaries will be receiving payment for such a term of years as to eventually receive far more in benefits than they ever paid into the fund through payroll taxes.

In 2010 SS paid out more in benefits than it added to the Trust Fund for the first time since the early 1980’s when Alan Greenspan was appointed to chair a commission to address the situation.

Not all of that Commission’s recommendations were adopted then or perpetuated since then though there was a major law enacted for reform. Among other provisions was a gradual increase in the payroll tax, now at 6.2%, and the raising of the income cap to which such taxes applied to the current $110,100 per year just raised in 2012 from $106,800.

See the entire report here:

http://www.ssa.gov/history/reports/gspan5.html

But a funny thing happened on the way to observing and maintaining that income cap. Over the past thirty years we have experienced an erosion or stagnation in income growth for most wage earning brackets save for the ones above that cap.

At least from the time of the Greenspan Commission until the past few years, SS payroll taxes were collected on about 90% of all wages. But that has fallen to under 85% of all wages. The 2012 hike in the cap will reverse the downward trend but still not restore it to the more common 90%.

Some members of Congress have suggested raising this cap. Economist and former Treasury Secretary Robert Reich has put forth his own estimate that the cap would need to be $180,000 in order to again meet the 90% level.

http://www.marketplace.org/topics/economy/federal-budget/how-fix-social-security

There is opposition to raising the income cap substantially in some quarters.

e21, which describes itself thusly on its website as:

 a new nonprofit, nonpartisan organization dedicated to economic research and innovative public policies for the 21st century.

presented this report arguing why a cap hike will not work:

http://www.economics21.org/commentary/why-raising-social-securitys-tax-cap-wouldnt-eliminate-its-shortfall

The basic premise is that raising the cap will mean that workers with that higher income will thus be eligible for increased benefits as they are based on lifetime earnings.

That report does provide citations to charts and graphs and other sources but somehow that argument seems weak to me. After all, if for 25 years or more the SS Trust Fund tapped 90% of wages for its financing and the earnings cap steadily increased and the Fund until 2010 was collecting far more than it paid out, why did these earlier increases not culminate in the same conundrum the report warns against.

Further, for me its credibility suffers due to its connection with noted Neocon William Kristol who is on e21’s Board of Advisors. Kristol is a regular FoxNews commentator and his other credentials demonstrate a natural antipathy to anything resembling a tax hike, potentially worthwhile or not.

But in fairness I presented this alternative point of view.

If Reich is correct and a new cap of $180,000 will restore the 90% point of wages subject to payroll taxes, that additional funding may well mean SS Trust Fund solvency far beyond the present doomsday date of 2033. If not it may be possible to tweak other aspects of the program to guarantee its long term health.

However, I have one more trick up my sleeve.

Mitt Romney released his tax returns for the previous two years as part of his campaign. They showed he earned around $45 million in that time. (Exact figures that differ will not change the conclusion.) Since that income was all interest and dividends he paid zero payroll taxes.

There is nothing illegal about that and I am singling him out to make a point, not because he is a politician.

But let’s say we make that type of income subject to the SS tax of 6.2%. I’m not even worried about having that equal the 12.4% paid by the self-employed since there is no employer to contribute a like amount. I am unable to crunch the numbers but how could  such a step not give a healthy boost to the Trust Fund?

Protests will ensue complaining that this is unfair to those who sit on their butts and rake in the dough, you know, the job creators. But the current system is unfair to the schmoes who have to schlepp themselves to work each day and pay that tax on every dollar they earn, while also being potentially liable for a higher income tax rate than the 15% on long term capital gains.

Joe Sixpack would approve though Joe The Not Plumber probably won’t.

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