No issue faces more political posturing than social security. The Democrats incessantly accuse Republicans of wanting to end or destroy social security. “They are after your retirement.” Republicans insist that no one is going to destroy your retirement security. But they offer solutions with fear and trepidation because each time they make the attempt, they are destroyed in the media and the results often show up in elections.
But this is reality. It doesn’t come from the Republicans or the Democrats. This is not news generated by a right or left-leaning media outlet. This is a coming reality as articulated by none other than the Social Security Administration itself.
The concepts of solvency, sustainability, and budget impact are common in discussions of Social Security, but are not well understood. Currently, the Social Security Board of Trustees projects program cost to rise by 2035 so that taxes will be enough to pay for only 75 percent of scheduled benefits. This increase in cost results from population aging, not because we are living longer, but because birth rates dropped from three to two children per woman. Importantly, this shortfall is basically stable after 2035; adjustments to taxes or benefits that offset the effects of the lower birth rate may restore solvency for the Social Security program on a sustainable basis for the foreseeable future. Finally, as Treasury debt securities (trust fund assets) are redeemed in the future, they will just be replaced with public debt. If trust fund assets are exhausted without reform, benefits will necessarily be lowered with no effect on budget deficits.
But to illustrate just how irrational the debate can get, one only has to look at the response of Joy Reid, of MSNBC. This was her response to Representative Byron Donalds when he brought up the above statement:
“That is not true. That is actually not true.”
Reid repeated this nearly 10 times, speaking over Donalds.
Hmm – I wonder what Reid’s sources are for that assertion? Evidently, it is not the government. The SSA has it wrong, the Congressional Budget Office has it wrong, but Joy Reid has the right answer?
If there is anything that is true, it is that this critical issue has been a political hot potato. Quite frankly, I don’t always blame the politicians. It is you, the voter, that is the problem. I previously did an article on the Alaskan Congressional primary that was held as a special election in June of 2022. My initial purpose for tracking this election was its unusual opportunity for analyzing how 48 candidates communicated their platform over the Internet. But I came across an interesting discovery. Of the 48 candidates, only two mentioned our national debt. That’s right. Of the $31 trillion debt, only two candidates had the guts to talk about it: Chris Bye (a Libertarian) and Sarah Palin (a Republican). Needless to say, the candidate who eventually won did not mention it at all during the primary (Mary Peltola – Democrat). During the deluge of ads that I encountered on the Internet and on YouTube, none discussed the national debt.
Yet the national debt will hang over this country for decades to come. It will, eventually, shape the politics of this country. Voters will need to come to their senses on this issue, educate themselves on what it means, address the issue at public forums, and confront the candidates. As of now, the issue hardly registers on the political radar because no one really cares. That’s true!
Of course you can be like Joy Reid and simply mouth the mantra “Not true”.
Social security is part of the discussion on national debt because when social security fails to balance it’s own budget, it will need to get the money from somewhere else. In other words, when the social security taxes taken from your paycheck are not able to match the benefits being paid out, then the money will have to come from income taxes. If Congress (and you) fail to confront this matter by 2035, the benefits paid out will begin to come out of the regular budget. If Congress (and you) fail to confront social security reform now, it will merely add to our national debt. If Congress (and you) have the fortitude to begin balancing budgets, then the deficit in the social security fund will be met by spending less on something else. It is a horrible place to be in. And we can choose (that’s we, not just Congress) to confront this matter now.
What are Our Options?
There is a good article on the problem of social security published in AOL News (see below). Our options with social security are as follows:
- Raise the payroll tax rate
- Increase wages subject to Social Security taxes
- Raise the full retirement age
- Reduce the annual cost-of-living adjustments (COLA)
- Cut benefits
As you can see, this list is full of difficult decisions. If I was still teaching economics, I would love to cut my class loose on this one. What is unfortunate about all these options is that there is a lot of political posturing, name-calling and virtue signaling. Watching MSNBC these past few days has been particularly painful as irrational accusations have been made regarding the Republican position on social security. Appealing to our lowest emotions, a rational discussion on social security reform is almost impossible.
Reducing COLA benefits would be the deadliest, hitting the poorest in our community the most. Retired Americans and the disabled would see the spending power of their social security benefit decline year-to-year. People with strong pension funds and IRAs will probably not be that concerned. But a vast majority of retired Americans would be seriously impacted.
Cutting “benefits” goes by another name – cutting “disability payments” and redefining “disability.” Most people do not realize that disability payments have leaked into the SSA program at levels never anticipated. What once covered less than a million people in 1960 is now covering over 10 million people today. This obviously affects the health of a fund that was primarily designed to support people in their retirement. Are we to reduce the range of disabilities covered?
Increasing the maximum wage up to which social security taxes are assessed is obviously the easiest political option because “taxing the rich” seems to be the easy choice – that is until you realize that there are not enough rich people around to finance social security. It also raises constitutional questions because social security was originally designed to provide a secured retirement for the average American. Requiring people of high income to pay into social security without a matching benefit is an income transfer.
Raising the retirement age is only a reasonable option if you see people living longer, something we can’t guarantee. In essence, this is going to be a tough discussion and invariably of higher cost to almost every American.
What Does it Cost You?
If you receive a paycheck, both social security and Medicare are paid out using your payroll check. When I last looked it was about 7-8% of your total income. What many people do not realize is that the same amount is paid by your employer. In total, a little less than 16% of your income is paid into social security. In economics, we call that opportunity cost. If social security taxes did not exist, would your employer pay you 8% more?
Folks who are self-employed know full well what I am talking about. Money they take home is taxable, all 16% of it! This is before you even think about income taxes. The social security tax must be paid.
What is interesting is that retirement advisors often suggest you take out more than 16% of your income for retirement. So to wack the government over the head on social security taxes may not be fair. That 16% number did not come up out of the blue. When I worked for the State of Alaska, I had the option of not participating in the social security program. Instead, 18% of the my income was placed into a state-endorsed 401-K program.
Social Security and the Debt Limit Debate
Since I first started working on this article, the Speaker of the House Kevin McCarthy has stated that there will be no vote for raising the debt limit unless there is a game plan for reducing the government debt. The initial reaction of the White House and Democratic leaders was not encouraging as they falsely accused the Republicans of reducing Social Security benefits. Yet since then McCarthy and Biden have met, the rhetoric has toned down, and McCarthy has made it abundantly clear that retirement benefits are untouchable. That leaves covering the costs.
One thing voters can learn from this is the intuitive relationship between the government debt and social security/Medicare. Both sides of the political aisle realize that what will occur in the next few years will be the reality of these benefits no longer being self-financed unless something is done structurally to change the taxes. Failing that, any extension to raise the government debt ceiling will invariably affect the benefits provided to Americans in social security and Medicare.
Another important thing to consider is the consequences of a government “shutdown.” It is in quotes because the government will not be shutting down. The social security checks will still go out and hospitals will receive compensation from Medicare because these programs are self-financing. A shutdown will force the government to prioritize discretionary spending – in essence, running on a balanced budget. What will no longer be possible will be funding non-essential programs that contribute to the national debt. One economist even speculated that the entire Department of Education may be shutdown.
Conclusion
So we are talking about 16% here. Half from you and half from your employer. If you find it too painful to cut benefits, are you willing to pay more? How much more? Part of this amount is for Medicare. It, too, is going to run short on cash in 2026. Something to think about.
Be engaged. Take some time to check the sources. I have provided some here. Address these issues with your senator and representative. Ask them if they considered this issue and their stance on social security reform. They will most likely give you a carefully crafted statement that says little, if anything, about specific solutions. Challenge them to be specific. Attend town forums and ask questions about social security and the national debt.
Hopefully, by 2024, the issues of social security reform and the national debt will become more visible. My guess that is that neither will rise to the top until we encounter a budgetary crisis. Hopefully by then Americans will be informed and willing to agree that these are critical issues. Or, like Joy Reid, simply ignore reality and say “Not true.”
Resources
“All Disabled Beneficiaries: 1960-2021,” Social Security Administration
“What Social Security Could Look Like in 2035”, AOL News, by Cameron Huddleston, January 12, 2023
“The Future Financial Status of the Social Security Program”, Social Security Administration, by Stephen C. Goss, Social Security Bulletin, Vol. 70, No. 3, 2010
“Republicans sound alarm on Social Security insolvency: Taxpayers ‘clearly have to worry about’ retirement”, Fox Business News, by Kristen Altus, January 12, 2023.
“Medicare Tax: What It Is, Who Has to Pay It, Current Rates”, Investopedia, Kathryn Flynn, August 25, 2022
“What Is Social Security Tax? Here’s What You Need To Know”, Forbes, by Kimberley Washington and Kim Porter, November 28, 2022.
“Trillion-dollar coin, 14th Amendment: Dems, academics float radical options for Biden in debt ceiling standoff”, Fox News, by Aaron Kliegman, February 5, 2023
© Copyright 2023 to Eric Niewoehner