It’s Too Late to Fix Social Security

Ten years ago subscribers would have read on this page "What’s Going to Happen to Your Social Security?". It told you that, according to the Congressional Budget Office, Social Security will be short of funds starting in 2033 — unable then to pay full benefits if Congress failed to fix the shortfall.

In the ten years since, Congress has done nothing.

And so, just six years from now, the Social Security trust fund will run out of money by 2032, “resulting in benefit cuts of 22.5% in 2033”, says the CBO.

For many decades, the Social Security Administration (SSA) took in more from payroll taxes than it paid out as benefits to seniors and those with disabilities. The difference was loaned in a constant stream to the government in exchange for IOUs with the growing deposits referred to as a trust fund. As the bulge of the post-World War II baby boomer generation began to retire, that surplus dried up. Beginning in 2021, benefit outlays began to exceed tax receipts and the SSA had to begin drawing down the difference, calling in the IOUs from the government trust fund to cover the gap. The trust fund will be completely drained at some point in 2032 leaving only the income of payroll taxes beginning the following year, and that income will be 22.5% shy of what will be needed to pay out as benefits to retirees. What to do?

There is no end to the ideas for adjustments that would put Social Security's finances back on firm footing. Trouble is, it is now so late that none of them have enough time to pull in funding enough to fill the void. There's a reason to know what fixes there are, nevertheless, to answer the question of whether Social Security can be saved in the long run, or whether it has become unworkable in its current form. A run through:

Payroll is taxed at 12.4% (half by one's employer) on the first $184,500 of income, a “cap” that is adjusted upwards every year for inflation. The most frequently suggested fix is to raise that limit to various proposed amounts – $300,000 perhaps, or $500,000. Some, such as Senators Elizabeth Warren and Bernie Sanders, ask why any limit – why not tax all income, as we do for Medicare?

Because the Medicare tax is 2.9% versus 12.4% for Social Security. Changes to Social Security should be equitable, and taking from an individual that high a percentage for every dollar earned is not. As it stands, someone making $184,500 or more is paying almost $23,000 in Social Security tax. Beyond that would be penalizing someone for doing well, charging $124,000 for every million dollars of income. Should that someone be required to pay this much to the benefit of someone else?

What could be done is to charge a much smaller percent — like Medicare’s 2.9% — on all income above this year’s $184,500.

We’ve seen no movement on that or on increasing the cap; indeed the subject of Social Security never seems to come up in Congress.

One study says that if the 12.4% payroll tax rate were increased by 3.5 points, that would eliminate the income-to-outlay deficit. That would be taking a touch under 16% of an individual’s income when 12.4% is already a rough go, especially for those with low income, and for those starting out who, even with a college education are now having difficulty finding a job, burdened by student loan payback, outsize housing costs, no childcare assistance, etc. It would be asking that they pay more when Gallup polling shows that only 37% of Americans aged 30 to 49 expect to receive any Social Security benefits at all when they retire. They’re mistaken, but it certainly shows the distrust in “the system”.

For the Social Security system to be self-sustaining, trimming the benefits of well-off seniors must be on the table. The more one has, the less one needs from the government. Benefits must be reduced relative to beneficiaries' other income and liquid assets. The young and middle-aged cannot go on being taxed to give money to those who do not need it.

That would of course be greeted with howls from all but the most generous. "That money is owed to us! It's time we got it back!"

(sidebar?For the record, there already is some degree of means testing. First, those with lower incomes get a higher ratio of benefits relative to their lifelong taxation; benefits decline as a percentage for those who had higher incomes. Second, those who have other income in their retirement years see their Social Security benefits taxed on a sliding scale — a particularly pernicious deceit considering that the government already taxed the money when it made off with it years ago as a payroll deduction.)

But for this so-called means testing to be a solution, how would it be done? How would the Social Security Administration gather income and asset data every year? Despairing of doing so, would it not lead to the SSA to require every senior to submit a statement every year tallying income and liquid assets — on severe penalty for omissions or fraud — from which the SSA computes that year's benefits? This is a huge administrative overhaul and ongoing burden.

And how would it not discourage people from working years longer if continued earnings were offset by reduced Social Security benefits? But suggestions like these – like those that started this "cut back benefits" – are tossed out without any follow through of what they entail.

When Roosevelt enacted Social Security in 1935, he established 65 as the retirement age when the average life expectancy in the United States was 63 years. Today, the average life expectancy in the United States is close to 79. Today’s retirees who exceed that age are clearly receiving far more in benefits than the Social Security taxes they paid in – and that’s after adjusting all those payments for inflation and ascribing reasonable interest earnings to the money loaned to the government for decades.

It should be obvious 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 possibly 20 or 25 years thereafter. Funding this – what Elon Musk called a Ponzi scheme – are our fellow citizens toiling away for those 40 to 45 years. With today's greater longevity, this has gotten way out of balance.

Moreover, when Congress passed the Social Security Act of 1935, 42 people worked for each post 65-year-old retiree. By the start of the Covid pandemic, retirees were being funded on the backs of only 2.7 workers per retiree.

If people weren't eligible for Social Security until a later age, fewer years of benefits would save the government a vast amount. The Reagan administration came to the same conclusion when it faced the same problem we do now. In a law passed in 1983, the age of eligibility to receive full benefits based on work and payment history was raised from 65 to 67 — but ever so slowly in tiny increments across 44 years. Next year therefore is the first year when one must be 67 to sign up for full benefits. (One can begin drawing benefits at age 62 but at a reduced rate.)

The better health of people now living longer lives says they could work longer to support themselves, so shouldn't the eligibility age be raised again, to 70 say? That assumes we can change a culture where employers discriminate against age, where younger workers are thought to be more productive, more willing to adapt to new ways, new technologies, and are cheaper.

You can see how sensitive an issue it was in1983, such that the yearly age increase was made almost imperceptible. To prevent uproar would require a similarly attenuated age increase schedule, which, even if enacted right this minute, would have little effect on the problem looming six years out.

Pushing the retirement age later only worsens a serious inequity that must be fixed.

Those who worked physical jobs all their lives — sanitation workers doing heavy lifting, roofers nailing shingles, commercial fishermen hauling traps and nets – would be unable to go on working to the age of 70 to support themselves. They need Social Security relief sooner.

Moreover, those in the bottom income rungs 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. That says that with full benefit eligibility at 67, those at the bottom with shorter life expectancy will receive fewer years of Social Security benefits whereas those at the top (many of whom may not even need the added income) could receive benefits for a couple of decades or more. It should be clear that the current arrangement is dramatically unfair. They should qualify for benefits sooner.

How would this work? Six years ago when this subject came up, a Let’s Fix This Country article invented the following scheme: Employers submitting payroll deductions to the SSA would tag them with a 3-level rating – just three to keep it simple — characterizing the employee's job — physically demanding to moderate (such as on one's feet all day) to undemanding (desk jobs). Alongside one's income history would be this life evolving point score, with those who spent most of their working years in physical work scoring highest and thus earning earliest full benefit eligibility, along a scale to those who scored lower for having done less or no physical work earning latest eligibility.

Or rather, we thought we had come up with an invention only to find that France had been concurrently developing just such a scheme, although elaborate, of job characteristics, awarding points for night work, variable shifts, repetitive tasks, exposure to extreme temperatures and noise, etc., that entitles workers to full pensions earlier. And not just France. Many countries have adopted and others are considering such schemes, classifying jobs according to what the French call pénibilité or arduousness. But not the U.S.

As said, no one of these remedies nor all of them combined would fill the deficit coming in six years. We will probably see Congress vote to fill the 22.5% difference from general government revenue – and they’ll leave it at that, discovering, as we lay out here, that reform is too complicated for our dysfunctional, polarized Congress to deal with.

With general government funds used increasingly as the income/outlay gap widens, which it will if no fixes are enacted, there’s fear that a powerful, monied class with no stake in Social Security might be inclined to work for its destruction. Like an Albanian blood feud, there is the Republican element that, from one generation to the next, has never given up the goal of avenging FDR's "socialist" scheme. Stephen Moore, most recently the chief economist of the conservative Heritage Foundation, has said that Social Security is “the soft underbelly of the welfare state”; “jab your spear through that” and you can undermine the whole thing.

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