'Securing' Social Security
Social Security is one of the most important programs in America. We cannot let it go unfunded, and we cannot sacrifice the well-being of our seniors to make it solvent. At a time when economic prosperity is so great (at least for some), reforming the tax system is the obvious and easy solution.
Recently, Social Security made the news in what has become an annual tradition. A yearly report about the long-term financing of the program was released and many people made a lot of noise about the program running out of money. Such concern is understandable, as millions of senior citizens rely on Social Security to live in retirement. Without this vital program, millions of people would be left in poverty. Financially securing Social Security is extremely necessary for the well-being of our country.
According to the report, the Old-Age and Survivors Insurance Trust Fund, which pays benefits to seniors (what we usually think of as “Social Security”) and survivors of deceased workers will be exhausted by 2033. Starting in 2034, the Social Security Administration will only have new tax revenue to fund benefits; roughly 78 percent of benefits could be paid out with current Social Security taxes. The exhaustion is one year earlier than projected because the pandemic recession lowered tax revenue. The Disability Trust Fund (for disability benefits) will be exhausted by 2057 and have enough revenue to pay 91 percent of benefits starting in 2058.
Clearly those sizable cuts in benefits will be disastrous for retirees, survivors, and disabled persons. However, the situation is not as dire as it looks. We can easily maintain Social Security’s solvency for a generation or more with very simple changes.
The current funding mechanism for Social Security is very odd. It is funded through the FICA tax, which is a tax on payroll. On paper, employees and employers both pay 6.2 percent of an employee’s gross wages to the government. However, economists widely agree that employers cover their share by just lowering the worker’s pay, meaning the employee pays the cost of most of the employers’ contribution through lost wages. Combined, this 12.4 percent tax on payroll adds new money to the Trust Funds every year. Unlike the regular Federal Income Tax, though, the Social Security tax is a flat rate. This system means that the wealthiest people pay the same taxes as the poorest—completely at odds with our normal tax system and any notion of fairness. It gets worse, too. The payroll tax only applies to earnings up to 142,800 dollars. If you make more than that amount, you can just stop paying the tax on that higher income. Factoring the cap in, the wealthiest earners pay a far lower tax rate than low-income workers; the CEO of McDonald’s would pay a lower tax rate than a cashier. The system is incredibly regressive on its face. Even if Social Security had no funding issues, this tax scheme would need to be fixed.
At the bare minimum, we should eliminate the cap on taxes. Wealthy earners should not be able to opt-out of paying into Social Security—they should pay the same rate as everyone else. This basic correction also helps the solvency issue. According to the Social Security Administration, this one change would keep the program fully-funded until almost 2070. Everyone’s benefits would be protected, and we wouldn't even need to raise taxes on the working and middle classes. Some may argue that it would be unfair to get rid of the cap because Social Security benefits are themselves capped. Realistically, very few people who actually reach the tax cap would need or care about receiving a few more dollars from Social Security during their retirement. If it is such a concern, though, we could easily implement a system to offer those who would now pay more increased benefits. There would be marginal effects on long-run solvency. With a few more steps, we could get an even better solution.
Another quirk about the Social Security tax is that it only applies to wages and salaries. Any sort of capital gains or similar income receives no tax at all. This means that the wealthiest people in the country, who disproportionately make money off of capital gains and not salaries, largely escape paying into Social Security. Just like the tax cap, this setup makes the payroll tax even more regressive and ineffective. These are severe weaknesses in the current Social Security funding mechanism—they make the system unfair and underfunded. The solution would be to transition from a payroll tax to an income tax (people above a certain age, such as 65, would be exempt, just like how current retirees pay no payroll taxes). An income tax would stop tax avoidance by the wealthy and make the system less regressive. Rich households would no longer get away with paying a lower tax rate than working families. The Social Security Administration does not publish solvency estimates based on proposals like this one, but it is safe to say it would keep the trust funds safe until far past 2070 because it increases tax revenue. Just like eliminating the tax cap, this proposal protects Social Security without raising taxes on the average American. In fact, because the tax base is so much broader (all income in the United States instead of just wages and salaries), it may be possible to lower the tax rate and still collect enough revenue to maintain solvency. We could safeguard one of our most important social programs and give the working class a boost in take-home pay at the same time.
One downside of these changes is that the trust fund will not achieve a “fully funded” status. However, I believe it is somewhat unrealistic to treat Social Security as a regular pension fund and expect the same standards. Firstly, changing demographics and economic conditions will drastically impact the funding and spending of the program. The original version of Social Security passed in the 1930s, but Congress had to make major changes in the 1980s to keep the program running. The problems then were the same as now; a growing retiree population and a lack of revenue. The politicians of yesteryear thought they had solved the issue, but it is clear that they were wrong in the long-run. This is a program that is supposed to run, theoretically, forever. Society and the economy will always be in flux, so trying to fully line up our systems with how the world will be like in 50, 60, 75, 100 or more years from now is a fruitless effort. I propose that ensuring solvency for the next 50 years is the most logical option, as any plan that reaches further will probably turn out to be a failure—just like the revisions of the 1980s failed. Secondly, although it is tempting to see Social Security as just another pension fund, that outlook is reductive. It is not just a collection of personal savings or an investment portfolio. It is a “Social” program. It is a promise that our society will take care of our elders and ensure dignity in retirement. It is a system that keeps millions out of poverty, and it takes the burden off of the adult children of retirees (who otherwise might have to pay a significant portion of their income to support their parents). Social Security provides a substantial benefit to families at all age groups, and it frees up their finances for more consumer spending. The benefits to our economy are tremendous. In short, we should protect Social Security even if it doesn’t have some sort of long-run actuarial solvency.
Social Security is one of the most important programs in America. We cannot let it go unfunded, and we cannot sacrifice the well-being of our seniors to make it solvent. At a time when economic prosperity is so great (at least for some), reforming the tax system is the obvious and easy solution.
Katharine Sciackitano is a a third-year Economics major in the College of Arts and Sciences. She serves as a Managing Editor for the Agora.
Image Credits: AFGE
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