Saturday, December 29, 2012

Fixing Social Security

Social Security is paid for by a payroll tax (called the FICA deduction), which goes into the Social Security Trust Fund (which issues all Social Security checks). It has never been paid for out of discretionary funds (funded by income taxes) and shouldn't ever be. That means Social Security has not added a single penny to the deficit or the total national debt. That's why it makes absolutely no sense at all for the Republicans to be demanding cuts to Social Security benefits as part of the "fiscal cliff" negotiations.

That does not mean there are no problems in the Social Security system. As the above graphic shows, the system can still issue full checks for another 25 years, but after that, it will only be able to continue by cutting those checks back to 78% of what they should be. The system is not going to go bankrupt (that's just a Republican lie), but it does need to be fixed, so it can go on issuing the full benefit earned by retirees after the year 2037.

The Republicans want to "fix" Social Security by reducing benefits now. They would raise the retirement age or cut the amount that retirees get each month -- or both. These are not real solutions, and they would hurt the people who need their Social Security checks to live on the most. While raising the retirement age might be feasible for the rich (whose life span has increased in the last few decades), that is not true of lower-wage workers who often must perform physically difficult jobs that require a lower retirement age (and whose lifespan has not increased).

Cutting the amount of the monthly benefit would be just as ridiculous. Most people do not get a lot in Social Security (with the average monthly check being in the range of about $1000), and to have their small check cut would pose a real hardship -- and it could sink many of this nation's elderly into poverty. So, how do we fix Social Security so it can continue to issue full benefits far into the future?

There are three possible options -- means testing, raising the payroll check FICA deduction, or raising the cap on the amount of income subject to the FICA deduction. Means testing would deny Social Security to those who make a certain income or have a certain level of wealth. The drawbacks to this are the difficulty in setting where the line should be drawn on who gets Social Security benefits and who doesn't, and the fact that it is uncertain just how much this would save (and how long it would keep the fund solvent) since that would depend on where the line is drawn.

The simpler methods are the two that would increase the amount of money deducted. As the graphic above says, raising the FICA deduction by another 2% would insure the fund can issue full benefits until at least 2083 (and maybe even longer). The problem is that this solution would hurt the poorest workers (those working for the lowest wages) the most. For the last couple of years, the FICA deduction has been about 4.2% (having been lowered to stimulate the economy). But it looks like that will end in a few days and the rate will return to the normal rate of 6.2%.

With low wage and middle income workers still struggling to pull themselves out of the last recession (which is already over for the rich), raising the rate another 2% (to about 8.2%) just doesn't seem feasible right now. It would not only add a financial burden on to the people who can least afford it, but it would also hurt the economy by taking money now being spent for items like food, housing, clothes, school items, entertainment, etc. -- which means this money would go to the government instead of circulating through the economy.

The best fix for Social Security, and also the easiest to do and least economically damaging, is simply to raise the cap on the amount of wages subject to the FICA deduction (or eliminate that cap entirely). The current cap is slightly more than $110,000. Raising the cap would insure the Social Security program can issue full benefits for many decades (and eliminating the cap would fully fund it far into the future). And this would not impose any more burden on low-wage workers, since they would still pay the same that they now pay. It would only make those that make above $110,000 a year pay a little more.

Another benefit of this solution is that it would make the system fairer. Currently, those making less than $110,000 a year must pay 6.2% of their gross income, but those who make more than that pay a smaller percentage of their gross income (for instance, someone making $1,000,000 would only pay about 0.0068% of their income).

1 comment:

  1. Good summary of the situation and options. I have a couple of comments. One, the tax could be increased a small amount over a number of years, such as 0.1% per year foes 20 years. Two, you could combine a couple of years such as increasing the cap and increasing the tax. Also, currently, someone earning 1,000,000 per year pays 0.68% of their income to SS.

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