Tuesday, May 17, 2011

Why "fix" Social Security?

For years we have been bombarded with claims that Social Security is going “bankrupt” and needs to be “fixed.” So far, though, no politically acceptable fixes have been found.

There are problems with Social Security, but the most prominent claim about it is nonsense: that its trust fund, holding 2.6 trillion dollars in federal bonds, is a “fiction,” that the government has “robbed” it and spent all the money. The government has indeed spent the money, but it didn’t steal it. It borrowed it and owes it back to the trust fund (plus interest) just as much as it owes money to other people from whom it has borrowed money.

For more than 25 years Social Security FICA payroll taxes have exceeded benefit payments. The resulting surplus has accumulated in the trust fund. We will now be drawing down the trust fund in order to pay benefits that are more than FICA taxes currently collected. This can be done until 2036 without reducing benefits, without increasing payroll taxes, without cutting government’s operating expenses, and without increasing the national debt. Bonds can be sold to the public (individuals, banks, China, etc.) to get the needed money. For every additional billion borrowed from the public, a billion will be paid back to Social Security. This will reduce the money owed to the trust fund by the treasury by the same amount. Since the national debt is the sum of money owed to the public and money owed to the trust funds, the total federal debt will not increase as a result of these paybacks.

Our government needs to cut operating expenses and raise taxes, but Social Security did not create the problems making this necessary.

The situation will change in 2036. In that year, the trustees project that the trust fund will be all used up. Under existing law Social Security payments would then be reduced so they could be covered by FICA taxes currently being collected. The trustees estimate that people would still receive about 77% of the benefits they would be receiving before the trust fund was exhausted.

Republican leaders would avoid this future decrease in benefits by reducing them right away. Well, maybe not so soon as to antagonize today’s politically active geezers, but a lot sooner than 2036. Democratic leaders favor increasing the FICA payroll tax enough to solve the problem, which according to the trustees would be about 2.15 percentage points. Either of these approaches would do the job if they could be enacted.

But Congress is better at doing nothing than at doing something, and this might be a case where inactivity would be acceptable. People would have a quarter century warning that benefits will decrease 23% starting in 2036. Younger folks would have ample time to save more to prepare for that (and improved means to do so, since they won’t be paying the higher FICA tax starting tomorrow), whereas people who are already retired and not in a position to save more are unlikely to live that long.

Regretfully, similar Congressional inactivity cannot solve other major problems, one of which is Medicare. But that’s another story.


This article has run in the (Adrian, Michigan) Daily Telegram.

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