Social Security is a model, not a failure, for Washington budgetmaking

Thirty years ago, President Reagan signed bipartisan Social Security reforms that raised taxes and kept the system solvent for decades, while Congress overspent in other areas and cut taxes. So who should pay for the next Social Security reforms?

|
Alan Warren/The Courier/AP/File
Charliene Hooker of Houston holds up signs supporting expanding Social Security benefits during a press conference in Houston earlier this month. Compared with the rest of Washington budgetmaking, Social Security looks like a model of fiscal rectitude.

Every day in the United States, 10,000 baby boomers reach retirement age. That, in a nutshell, is the demographic challenge facing Social Security.

Critics want to blame the system itself. They point out how it will run through its surplus funds by 2033 – and how, after that, it will only have enough to provide 75 percent of promised benefits. They depict Social Security as one more failed government program or, as Texas Gov. Rick Perry once put it, a Ponzi scheme.

But compared with Washington’s budget processes, Social Security is a model of fiscal rectitude. While Congress has failed to rein in spending and engaged in expensive off-budget wars at the same time that it was cutting taxes for the rich, Social Security has operated under a 30-year bipartisan agreement that not only fully funded existing benefits but also built up a $2.6 trillion surplus in anticipation of today's retiree bulge.

How has Washington rewarded that fiscal prudence? Congress and various administrations have raided these surplus monies in order to make their overspending appear less egregious in the budget books.

So next time someone suggests radically downsizing Social Security or scrapping it altogether, ask yourself who should take the bigger financial hit: baby boomers and younger workers who paid into the system to build up the surplus – or the top 1 percent of Americans who benefited the most from all those tax cuts?

The 2000s have not been golden years for retirees or workers. Their savings took a hit when the high-tech bubble burst in 2001 and again when the economy tanked in 2007. Restructuring of pension benefits at many companies cut the income that employees had come to expect for their retirement. And the bursting of the real estate bubble has limited their ability to use the equity in their homes for income as well.

Moreover, workers have put far more into Social Security than the system needed to pay current retirees. A baby boomer born in 1946 who began working as a teenager has been paying into Social Security through payroll tax deductions for more than 50 years. His employers over those years helped fund his Social Security benefits through excise taxes, which economists generally agree was also funded by that retiree – through reduced wages.  

 

Social Security has stayed solvent for so long because of bipartisan legislation signed 30 years ago by President Reagan – a compromise that seems almost impossible today given the bitter partisan divide. The legislation gradually increased the retirement age and indexed for inflation the maximum annual amount of wages subject to Social Security taxes (FICA) each year (called the “FICA wage ceiling”). As a result of this and subsequent legislation increasing the rate of workers’ FICA tax deductions and employer excise taxes, the Social Security trust fund had accumulated that $2.6 trillion surplus by the end of 2012.

But Congress required those funds to be invested in nonmarketable US Treasury bonds, which may be used for other government purposes. Congress has already used those monies to fund government operations including several wars, allowing lawmakers to cut income taxes, turning that surplus into a debt owed by our government to the Social Security trust fund – in other words, a debt owed by America’s taxpayers to themselves.

 

It's true that Social Security’s 30-year-old compromise was not a permanent solution. Social Security has historically been a pay-as-you-go system: the FICA amounts paid by workers and their employers exceeded the payments from Social Security for benefits for current retirees. That changed in 2010 when the Social Security Administration had to begin using the interest accumulated on the excess amounts paid into the system over the past 30 years to make up the difference between receipts and benefits. SSA estimates that this interest along with Social Security taxes collected annually will be sufficient to fund benefits through 2020. After 2020, SSA must begin drawing on the $2.6 trillion in the trust fund by liquidating enough US Treasury bonds to make up the difference. The shortfall in monies for future retirees’ benefits, referred to as an “entitlement problem,” must come from somewhere.

 

Solutions to this entitlement problem generally focus on three areas: increasing the FICA wage ceiling on current workers; reducing future cost-of-living increases for retirees by basing future benefit increases on a chained CPI; and eliminating Social Security benefits for high-income retirees. Congress has yet to suggest that the 1 percent of high-income earners who increased their wealth through tax cuts should now step forward and do their part to help out Social Security.

This last solution could be done in several ways: reinstituting the transaction tax on investment transactions; increasing estate tax rates to pre-2001 levels and decreasing the estate exemption equivalent amount from $5 million to $3.5 million; eliminating the capital gain exclusion at death for beneficiaries of estates over the exemption equivalent amount; and by maintaining progressive tax rates when (and if) Congress reforms the individual income tax by limiting or eliminating tax expenditures (subsidies) that cost more than benefits or fail to accomplish policy goals.

Raising such taxes to solve America’s entitlement problems would not only make the coming decades of the 21st century more financially secure for retirees, it would also show America's other creditors that US Treasuries are in fact backed by the full faith and credit of the US government.     

 

– Paula N. Singer is a tax attorney with Vacovec, Mayotte & Singer LLP and author of many articles in tax journals and 11 tax guidebooks published by Windstar Publishing (now Thomson Reuters).

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Social Security is a model, not a failure, for Washington budgetmaking
Read this article in
https://www.csmonitor.com/Business/new-economy/2013/0813/Social-Security-is-a-model-not-a-failure-for-Washington-budgetmaking
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe