While it is true that the change would be small for any single year, it would add up when applied year after year until it had significantly hurt the buying power of those who depend on their Social Security checks to live. The president may not want to call this a benefit cut to Social Security, but that's exactly what it is -- a cut to future benefits that would harm the elderly.
I have to admit that I don't understand why the president is even allowing a discussion of Social Security to begin with. The whole "fiscal cliff" mess, which was agreed to by both the Congress and the president, was an effort to lower the deficit. Personally, I don't think we should worry about the deficit until we fully pull the economy out of the recession and start creating lots of new jobs (and I'm talking about Main Street, since the recession is already over on Wall Street). But even if the government wants to do something about the deficit right now, it makes no sense to talk about cuts to Social Security.
The deficit concerns discretionary spending -- the spending that is funded through income and other taxes. But Social Security has never increased the deficit by as much as a single penny. That's because it is funded fully through the payroll tax called FICA deductions (which go straight into the Social Security Trust Fund). In other words the government is talking about benefit cuts to help the deficit from a program that has never added anything to the deficit. That doesn't make sense.
It's time for the public to demand that Social Security benefits be protected, and while we're at it, Medicare and Medicaid and Veteran's benefits should be protected also. Cutting benefits for any of these programs is just too high a price to pay. How about eliminating billions in unneeded corporate subsidies? Those corporations are making record-breaking profits, and could easily afford to do without those subsidies. But the elderly, the poor, and our veterans need the government to fulfill the promises made to them -- many times to maintain their lives at a barely decent level.
All it takes to fix SS is an increase of 40 cents per week per year to fully fund it forever.
ReplyDeleteOn what basis do you make that statement?
DeleteThe basis is Congressional Budget Office report on Social Security Policy Options. Option 2 is a 2% increase over 20 years or 0.1% per year. Half of that is paid by the employer and half is paid by the employee. So, that is a 0.05% increase per year which for the average worker comes out to roughly $20 per year increase or about 40 cents per week per year.
DeleteThe information from CBO is from 2010 or about 10 years of solvency ago. In 2011 alone, Social Security lost more than a trillion dollars of projected interest income. 2010 is simply not relevant.
DeleteToday because of the holiday, we will have to raise payroll taxes by 2%. The Trustees project (page 15) that we would need another 3.9% of wages to fix SS. For someone making 35K per year, it is about $1,500 per year or about $30 per week. This does not fix medicare or disability both of which heading for insolvency before OAS.
The employer pays for SS by lowering the willing wage for employees. SS is a cost of employment, and as prices rise employers cut wages and people hired. Economists at the SSA assume that the employee pays the full cost of Social Security.
The tax holiday does not affect the SS trust fund. "...the legislation was crafted to explicitly protect the trust fund, by transferring resources from the government’s general coffers."
DeleteI don't know where you get your numbers but the study I referenced in my comment above says a 2% increase over 20 years is sufficient.
When the tax holiday ends, it is the workers who will be affected. Their taxes will return to 12.4%. How the holiday is 'paid for' does not change that fact.
DeleteMy numbers come from the latest Trustees Report found at SSA. http://www.socialsecurity.gov/OACT/TR/2012/ Which number do you doubt?
CBO also measures solvency not fixed. Here is what Social Security says about the 75 year number : "Consideration of summary measures alone for a 75-year period can lead to incorrect perceptions and to policy prescriptions that do not achieve sustainable solvency." The reason is that the 75 year figure ignores most of the financing cost of the system.
I agree workers will be affected when the tax holiday ends. However workers share of the 2% increase is 1% and it returns the SS tax to where it should be.
DeleteYour 3.9% required increase does not apply to the current tax rate so it is inappropriate to apply it to today's income. Your report clearly states "Through the infinite horizon, the unfunded obligation, or short- fall, equals $20.5 trillion in present value, which represents 3.9 percent of future taxable payroll or 1.3 percent of future GDP." The infinite horizon is 75 years from now.
Option 2 in the report I referenced increases the tax rate by 0.1% per year for 20 years (approx. 40 cents each for worker and employer) and represents 0.6% of GDP. If more is needed simply extend it longer. Another 20 years will get us to about 1.2% of GDP and still only be a little more than half way to the 75 year horizon. Minor tweaks to the tax rate can be made along the way as the economy ebbs and flows.
Jerry, The 75 year solvency figure and the infinite are not the same. They are roughly 12 trillion dollars apart.
DeleteYou continue to press the CBO data without saying why such antiquated data is meaningful.
I would also like to understand your statement : "Your 3.9% required increase does not apply to the current tax rate so it is inappropriate to apply it to today's income. " As I understand it, to fix Social Security we would have to add 3.9% to the SS tax to make the system whole. That is 2012 not 2010 data.
DeleteThe 2012 report that you referenced says,
Delete"Extending the horizon beyond 75 years increases the measured unfunded obligation. Through the infinite horizon, the unfunded obligation, or short- fall, equals $20.5 trillion in present value, which represents 3.9 percent of future taxable payroll or 1.3 percent of future GDP."
The key phrase is 3.9 percent of future taxable payroll
In other words, to extend SS beyond 2087, the payroll tax must be 3.9% higher in 2087 than it is today, not 3.9% higher now.
The 2010 report that I referenced is dealing with a 75 year actuarial balance, not the infinite horizon. Your 2012 report with more current numbers says
"This unfunded obligation represents 2.52 percent of taxable payroll and 0.9 percent of GDP for the 75-year valuation period."
This is higher than the 2010 report (0.9% GDP vs 0.6% GDP). So, I would estimate that a 3% (instead of 2%) increase phased in over a 20 year period would probably cover it. Instead of 40 cents per week, it would be 60 cents per week per year. To reach the infinite horizon, the increase could be extended longer than 20 years.
Of course economic ups and downs will affect such long range projections.
That isn't the way I read it. 20.5 is a present value number. It isn't like we solve this problem by putting up 20.5 trillion in 75 years. I read that to mean that all future wages not those starting in 75 years.
DeleteThe 2010 study I referenced clearly shows that the SS tax rate does not need to be raised the full amount starting now. Yes, to provide full SS benefits, the rate needs to be raised, but it can be raised gradually over time to make it easier on the people paying it. Raising it the full amount now, preserves the trust fund, but why not use the trust fund while slowly raising to rates to where it needs to be by the time the trust fund runs dry?
DeleteThe Rethuglicans don't want to fund it. They only care about the rich bastards who pay their campaign costs. They would like everything set in motion by their "great satan"...FDR destroyed. And they don't really give a damn if they destroy 3/4 of the American populace to do it. They'd happily see American workers reduced to serfdom.
ReplyDeleteMy retirement IRA was decimated by Wall Street, I had to pay half of my unemployment benefit for COBRA Ins. after I was laid off because of the recession, and now there are negotiations to cut my Social Security COLAs... WTF???
ReplyDeleteSlowing the growth of Social Security benefits will not add a dime to improve the debt. That doesn't mean that the system doesn't have problems all of its own. The Trustees project that if the economy is good full benefits may last as long as 2033. That means that people as old as 64 expect to outlive the system's ability to deliver full benefits.
ReplyDeleteThe debt is not a reason to fix Social Security. The long-term needs of the elderly is the reason to fix the system.
I agree, Joe. The debt is not a reason to fix SS. And the fix is simple and easy as I have explained in my earlier comments and has not impact on the deficit or the debt.
DeleteTwo year old data is not antiquated.
ReplyDeleteIn the world of Social Security it is. The two years have been very hard on the system which is why solvency is coming in. It is going to continue to come in as the economic assumptions of the Trustees fail to materialize. Long-term real interest rates for example.
DeleteThe past two years have been hard on the system. The economy goes up and down. There will be good years in the future which will help balance out the bad years.
DeleteThe last five years have been hard on the fund. This isn't about the economy up or down. A lot of it comes from overly optimistic assumptions of the Trustees, see the lost projected interest income. The good years very well may come after it is gone.
DeleteMillions of people depend upon the system. It should not be run on maybes. This is a huge difference between us. I think it should be run on GAAP accounting. The paygo nature of the system is an invitation to political mischief.
Yes, the infinite horizon is not the same as the 75 year point. The 3.9% figure represents the infinite horizon. As the report states. "The summarized shortfalls for the 75-year period, as percentages of taxable payroll and GDP, are lower than those for the infinite horizon..." In other words, the 75 year figure is less than 3.9%
ReplyDelete"Consideration of summary measures alone for a 75-year period can lead to incorrect perceptions and to policy prescriptions that do not achieve sustainable solvency."
DeleteThe 75 year solvency figure does not include all of the financing costs. It is a convenient statistic for DC which wants to make the problem appear smaller. The 2012 75 year solvency measure was 8.6 trillion. The infinite is 20.5 trillion. So you think that the majority of the problem is 76 years away? If you talk to most supporters of the system the demographics will balance out in the future. The 75 year is junk.
What is the problem with SS? Maybe we should define that first. What happens if nothing is done? SS will continue to pay full benefits until the trust fund is exhausted. The benefits will be reduced to match SS income. Current estimates are that SS would be able to pay 75 to 80% of full benefits. SS will still exist. It will not disappear. It will not be bankrupted. It just will have no savings and will have to live on income alone, kind of like many people who live paycheck to paycheck.
DeleteIf the problem is that SS will not pay full benefits, then SS tax rates need to be raised such that there is sufficient annual income to pay full benefits at the time, not now, that the trust fund runs dry. The trust fund will run dry in less than 75 years, so yes, the majority of the problem is less than 75 years away.
Paying full benefits is the problem I am talking about solving. If you are trying to solve a different problem, let me know.
We see the problem very differently. Social Security is woefully underfunded. The Trust Fund could pay for about 3 years of benefits. It is in fact not funded. It is a paygo system which depends upon political support.
Delete"Current estimates are that SS would be able to pay 75 to 80% of full benefits."
One of the assumptions here is that workers will pay higher income taxes for the debt while having to pay higher parental support costs. At the same time they will see a system which promises less.
Here is the assumption, that workers will vote to pay the same amount for less while having less disposable income. There is no economic model that explains that assumption. This no more realistic than saying Leprehcans will spit out gold coins to pay for it.
Social Security is "woefully underfunded" only if you consider being able to pay full benefits for the next 20 years until 2033 and then 73 to 75% of full benefits for the next 53 years until 2086 without any change in the current tax rate.
ReplyDeleteIf 75% is OK, why don't we cut it to 83% today and the system is solvent for 75 years. I forget what the numbers are but it is something like a 17% cut today.
ReplyDeleteJerry, I do not believe that workers will be willing to pay 12.4% for less while having less disposible income. There is no economic model that explains that assumption. It is much more likely that future workers redirect payroll taxes to paydown the debt and shift retirees to one of the public assistance systems already in place on very different terms.
The system does not run dry in 20 years. Running dry implies that there will be no money to pay any benefits. That is simply not true. Even if there are no changes made to SS, it will still be able to pay 75% of scheduled benefits.
DeleteIs 75% of scheduled benefits OK? No. That is why something needs to be done. I think the best solution is to slowly increase the rate approximately 0.1% per year for many years. What is your solution?
We have a couple of factual disagreements. Your reading of payroll taxes is very different from mine. I do not believe that they would express the shortfall in present value terms, and the impact on payroll taxes in 76 year terms, particularly when the system runs dry in about 20.
ReplyDeleteYou subscribe to the 75 year shortfall rather than the infinite shortfall. The 75 year figures to me are feel good numbers that let you arrive at the wrong decision. That is backed by the statement of the Trustees.
The difference between fixed and solvent is simple. Fixed means that you have no problem. Solvent is the cost to make your problem a problem for your Grandchildren.
Interesting discussion guys, but I fail to understand why the rate must be raised. Why not just eliminate the cap of income subject to FICA tax, and include all types of income?
ReplyDeleteThat is certainly another solution. There are many. My personal objection to that solution is that it begins to turn SS into a welfare program. Now, people get a benefit based on their contributions. I think the best solutions are ones that do not remove people from the benefits, that means test the system, or remove the cap on the system.
ReplyDeleteOne benefit to removing the cap and subjecting all income to the tax is that I suspect that the overall rate could be lowered instead of raised thereby benefitting people at the lower end of the income spectrum.