Let's Fix This Country

Social Security: A Year Closer to Crisis and Still No Fix

Over 40% of millennials think they'll get nothing

"Nobody in politics wants to deal with Social Security a second before they have to", quipped Alan Simpson, the towering former Republican senator from Wyoming. That again held true in 2019 even though the money coming in from payroll taxes is no longer sufficient to pay benefits. Starting in 2018 the administration had to begin recalling the surplus tax collections it has loaned to

the federal government over the years, but that so-called trust fund will run out in 2034. From that point forward the SSA won't have enough and will have to cut benefits to all retirees by by 21%.

The country was faced with this same threat in 1983, but Congress raised the payroll tax and the eligibility age, sending revenues into surplus enough to keep the system healthy for over three decades. Congress shows no sign of taking action this time. Fourteen years will go by quickly. Where will that leave you?

Let's first take the measure of the crushing demands the Social Security program faces in coming years. As it is, in fiscal 2019 it paid $1.1 trillion in benefits to 69 million recipients, assisted 43 million visitors at its offices, and fielded 75 million calls to its toll-free line. The population bulge of those born between 1946 and 1964 — the Baby Boomers — define its future. They have been turning 65 at a rate of 8,000 to 10,000 every day and they are living longer with life expectancy steadily increasing. In 1970, the median American age was 28.1 years. In the half century since, the median age by 2016 became 37.9 years. By 2035, the number of Americans 65 and older will exceed those under age 18 for the first time in our history, and by 2060 this cohort will nearly double in size.

Benefits to retirees are paid from the payroll taxes collected from those at work today, but there are fewer workers supporting more retirees. The boomer population isn't the only reason; women are bearing children later in their lives or foregoing motherhood — the "baby bust" it's been called. In 1950, the payroll taxes of 16 workers supported each senior. The lower birthrate together with increased longevity has led to a mere 3 workers supporting each retiree today, and the swelling of the senior population group by the postwar baby boom will reduce that number to 2 per retiree. Without major change, this is clearly unsustainable in Social Security' s future.

And yet we cannot allow that 21% cut to happen else millions will be reduced to poverty. Pretty uniformly across all age groups, 78% of Democrats and 68% of Republicans oppose any cuts in benefits. Employers have largely done away with pensions, and the current crop of retirees have only $152,000 in savings on average — far too little for a likely 20 year retirement — with 45% having no savings at all. For about 1 retiree in 3, the Social Security payment (today averaging $1,413 a month, about $17,000 a year) accounts for 90% of their income. For 3 in 5 it is half their income. A 2017 study by the Center on Budget and Policy Priorities reported that 9% of all retirees lived in poverty but that would have been 39% had there been no Social Security. (Those percentages are 19% and 52% for African-Americans and 17% and 46% for Hispanics, respectively.)

A Gallup poll found that 74% of Americans hope to work past 65, but how many businesses are eager to hire people in their late years? (There are many reasons they should, but that is its own subject).

What's to be done?

It should be clear that we cannot work for 40 to 45 years paying an eighth of our income into the system and then expect to receive a substantial payout for another 25 years. Any rescue of Social Security needs to be a thorough overhaul.

Short of raising taxes on today's wage owners to unconscionable levels, which the Social Security trustees said in 2018 would have to be an "immediate and permanent" payroll deduction of 15.18% to solve the 2034 problem, trimming of benefits to well-off seniors must be on the table. How can it be justified to further favor those at the older end of the age spectrum who spend their days at leisure by further taxing the younger generations who spend their days at work? For the Social Security system to be self-sufficient, need must figure in. Benefits must be reduced relative to beneficiaries' increases in income, and at some income level early along that increasing scale, benefits must decline to zero for the cost savings to make a difference in the 2034 equation. The young and middle-aged cannot go on being taxed to give money to those who do not need it.

Social Security income isn't free and clear. It is already taxed, will be the argument against this proposition, with the tax increasing according to other income. But no more than 85% of the benefits are taxed, and the computation just increases one's tax. The benefits themselves are not curtailed.

Americans believe their payroll deductions are their own money loaned to the government and owed to them on retirement, so they rebel at any suggestion of holdbacks. But the law is otherwise, or so has said the Supreme Court. Those deductions are labeled a payroll "tax", take note, and the court ruled early on in 1937's Helvering v. Davis that…

“The proceeds of both the employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way”

and in 1960's Fleming v. Nestor

“To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever changing conditions which it demands".

That bold flexibility is now needed.

This is especially appropriate when we admit that, given increased longevity, seniors reaching ages somewhere in their 70s in the usual case, will receive — despite adjusting for inflation their contributions through life and crediting a modest rate of interest all along — considerably more in Social Security benefits than than they ever paid into the system. As they live on, the old folks become parasites.

Raise the Cap

For 2020, an individual's first $137,700 of income will be subject to the 12.4% FICA or Social Security tax, with half paid by the employer and half by the employee. That's up from $132,900 in 2019. This is a regressive tax, applied as it is to the very first dollar of a minimum wage employee and not at all to income beyond $137,700. Mindful that it is a tax with no "earmarking" or "property rights", it could be argued that there should be no cap, that all income should be subject to FICA's reach. That would never get through Congress, of course, where they would be voting to tax themselves and the contributors to their re-election, but it's worth making the point to encourage receptivity to other unpalatable but equitable solutions.

Raise the age of eligibility

That's already been done, but not enough. In the 1983 fixes, the age was raised from 65 to 67, but starting only several years after so no one in Congress would be voted from office, and then ratcheting up so slowly that only a 10th of a year of age was added for each calendar year, such that 67 won't be reached until 2027. Two percentage points across 44 years.

Given the long retirements afforded by longer lives, the age for Social Security eligibility must be raised further: 70 is often proposed. But there's a problem. Those who worked physical jobs all their lives — sanitation workers doing heavy lifting, roofers nailing shingles, commercial fishermen hauling traps and nets — are unable to go on working to that age to support themselves. They need Social Security relief sooner. They are joined by those in the bottom income rungs who need Social Security assistance the most and who, for one or another reason — those physical jobs did physical damage, they weren't able to afford proper healthcare, and so forth — have not seen their life expectancy rise as much as the more affluent with their physically undemanding jobs and money enough to pay for better healthcare. For men now at age 50 and at the top of the wealth and income scale, life expectancy is 88 years. Men now at age 50 at the bottom of the income ladder can only expect to live to 76 years. Data for women shows a similar spread.

That says that with full benefit eligibility now at 66, those at the bottom will receive only 10 years of Social Security benefits whereas those at the top (who don't even need the added income) will receive benefits for 22 years. It should be clear that the current schema is dramatically unfair.

By postponing eligibility and trimming benefits, both in proportion to wealth and income of those who are better off, we could restore some fairness. But eligibility cannot be postponed to age 70 for those at the other end of the income scale. And for those physically unable to work late in life, the Social Security calculus might factor in a new metric — how Americans have made their living. Employers submitting payroll deductions to the SSA would tag them with a 3-level rating characterizing the employee's job — physically demanding to moderate (such as on one's feet all day) to undemanding. Alongside one's income history would be this point score, with those who spent most of their working years in physical work scoring highest and thus earning earlier benefit eligibility, with those who scored lower for having done less or no physical work earning later eligibility.

There have been a number of other proposals to fairly include those left out. Women are likely to have spent uncompensated years as caregivers, whether to infants or older family members. Most other industrialized countries credit some years of caregiving when calculating retirement benefits, says a Boston College survey — entirely missing in this country. A bill introduced by Chris Murphy, Democratic senator from Connecticut would award up to five years of figurative wages to Social Security scorekeeping to those who provide at least 80 hours a month to "parents, spouse, domestic partner, sibling, child, aunt or uncle".

It gets complicated, but it must. Social Security and Medicare now account for 42% of the annual budget excluding interest on the national debt and is on course to become 50% by 2029. Social Security needs to be more finely calibrated to fit the needs of changing demographics and evolving American life.

The Social Security Act.

It's the handiwork of Representative John Larson, another Connecticut Democrat and chair of the Ways and Means Committee, and is supported by 90% of Democrats in the House. It would raise benefits 2% across the board; rework the annual cost-of-living adjustment to factor in the different expenses older people experience, high medical costs especially; and boost the minimum benefit to lift more people from poverty.

To pay for it, the payroll tax would rise by 0.1% every year for 24 years, lifting the tax from today's 12.4% (split between employee and employer) to 14.8%, and the tax would be applied not just to the first $137,700 of earnings (2020's cap) but would kick in again for income exceeding $400,000, creating a doughnut hole of no tax for the $262,300 in between, much like Obamacare's prescription drug coverage.

Compare that with the problems this article has proposed to solve. There is no contemplation of split eligibility ages to meet the needs of different groups of people; the diminishing pool of younger workers are to pay considerably more to the mushrooming older contingent; nothing is done to trim benefits of older people whether needed or not and despite their increased longevity taking out far more than they ever put in. It's understandable that 42% of ages 18 to 29 assume they won't get any benefits.

Of course neither Larson's bill nor any other could get through a Republican Senate with Majority Leader Mitch McConnell blocking all access. And one of Trump's campaign promises was, "I'm not going to cut Social Security like every other Republican". So another year will go by with nothing done.

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