What Social Security crisis?!

Posted: 15 September 2012 in Uncategorized
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The other day in class, I made two—what I thought were very straightforward—assertions about Social Security:

1. Social Security is solvent, and will be for at least 20 years (without any changes whatsoever).

2. Raising the taxable earnings base, without any other changes, would eliminate the projected deficit.

Simple, right? Except none of the students believed me. They all thought Social Security was doomed—and, while they expect to pay into Social Security, they don’t expect to receive any Social Security benefits when they retired.

So, let me share with you the information I gave to them:

On the first, a useful source is the Social Security Trustees latest annual report (available here). The bottom line: in the absence of any policy changes, the combined Social Security trust funds will be exhausted in 2033. However, after that date, Social Security could still pay three-fourths of scheduled benefits using its tax income even if policymakers took no steps to shore up the program.

On the second, Janemarie Mulvey has written a useful report for the Congressional Research Service [pdf]. Given the fact that earnings on which Social Security taxes are paid are currently capped (at $110,100 this year, encompassing more than 90 percent of workers but less than 90 percent of total incomes), Mulvey estimates the effects of three different options: (1) cover 90 percent of earnings and pay higher benefits, (2) cover all earnings and pay higher benefits, and (3) cover all earnings and pay no additional benefits. The first two options would reduce the projected deficit, and the third would eliminate it and actually produce a surplus.*

That’s it. Social Security is 100 percent solvent, and will be through at least 2033. And all it will take is raising the earnings cap and the projected deficit can be eliminated.

So, what’s the problem? First, the Social Security scare campaign has worked, and many people (including my students) believe the program needs to be drastically “reformed”—that is, that benefits need to be cut in order to keep the program going. Second, those who would end up paying more for Social Security seem to be determined to keep that from happening.

Let me explain: the employers’ share of Social Security is a federally mandated distribution of the surplus they appropriate from their workers. If the earnings base is expanded, and they have to pay more in Social Security taxes, corporations will need to decrease other distributions from their surplus and/or find some way of generating more surplus. It’s easier just to keep the existing cap on earnings and continue to pay the existing 6.2 percent on earnings under the cap. Also, employees who earn more than the existing cap, and who likely get their own cut of the surplus, would have to pay higher Social Security taxes. Together, corporations and high-earning employees have every interest in creating an “entitlement” scare instead of contributing more to the Social Security fund.

Unfortunately, my students are victims of that scare campaign and seem resigned to doing without Social Security benefits—instead of fighting to make sure, with a change in the earnings base, the program remains solvent for them and for future generations.

*Over time, the Social Security earnings cap has covered a pretty consistent percentage of workers but a falling percentage of earnings. That’s because salaries for top earners, in recent decades, have grown much faster than the pay of workers below the cap.

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Comments
  1. Sheldon says:

    Thanks for the essential info. and argument. More people need to read this!

  2. Alan Bickley says:

    The prospects for the survival of Social Security are better even than you thought. The actuaries of the SSA prepare three scenarios, a High Cost, a Low Cost, and an Intermediate, These correspond to pessimistic, optimistic, and split-the-difference expectations. Each is based upon a set of demographic and economic data assumptions that differ from one forecast to another. Reporters seem to be ignorant of this fact, and so they write their alarmist stories on the basis of the Intermediate forecast. In fact, history has shown the Low Cost forecast to have been the most reliable of the three sets of what I emphasize are assumptions, and that forecast – almost never discussed by the Trustees and virtually unknown to a lazy and biased press – holds that Social Security will be in excellent shape as long as it exists. The true dangers to the program, apart from its traditional enemies, are payroll tax holidays that reduce contributions, and the ignorance of its friends who buy the lies of the opposition.

  3. [...] What Social Security crisis?! The other day in class, David Ruccio made two—what he thought were very straightforward—assertions about Social Security, except none of the students believed him. [...]

  4. [...] First, as I’ve shown before, there is no Social Security crisis. [...]

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