Social Security Solvency.
Issue:
The Social Security Trust Fund in the United States pays retirement benefits to citizens through a trust funded by taxes on the earnings of all current and former earners and employers ("Social Security"). Demographic changes in the population, as well as Congressional borrowing from this trust continually affect the amount of money available for payment of benefits. Doubts are therefore often raised as to whether Social Security can continue to pay full benefits in the years ahead.
Deception:
For decades the warning bell has been sounded by many that Social Security will eventually be unable to meet all benefit payment obligations. Many critics of Social Security would like to see it replaced by private investment accounts, whether through individual investments or employer- or group-sponsored investments, maintaining that this would eliminate costs to the government of funding Social Security, would result in a better return to retirees and eliminate the problem of fund insolvency. All of this is deception.
Reality:
Social Security does not cost the government a dime and will always be solvent if managed correctly:
Resolution:
To ensure continued solvency of the Social Security Trust Fund, which has remained solvent throughout its entire history of more than seventy years even during recession and depression, the U.S. government should take three steps:
Step One:
Congress must take responsibility for the national budget to ensure that money borrowed from Social Security will be returned when needed. As of this writing, Congress owes Social Security more than two trillion dollars with no plan to repay the debt.
Step Two:
Congress must eliminate the cap for Social Security taxes on taxable income. For 2015, any earnings over $118,500 are not taxed. The inequity of this cap is clear: anyone making less than $118,500, which most likely includes you, is taxed on their entire income. A person earning $200,000, on the other hand, is not taxed on $81,500 of their income. This is a substantial benefit available only to high-income earners. Taxing all income, regardless of amount, would substantially increase the money available for retirement benefits. Social Security is currently a highly regressive tax, meaning it taxes lower-income people more than high-income people as a percentage of their income. Lifting the cap would make it somewhat more progressive.
This step is also essential due to the continuing upward movement of income distribution in the United States. This phrase describes the ongoing process whereby more of the nation's money is going to fewer people each year and more people are getting less (simply put, some people are getting richer but the vast majority are getting poorer). One result is that fewer taxes are paid on all earned income each year because the percentage of all earned income that falls above the cap increases annually. Approximately 40% of the projected Social Security shortfall expected over the coming years is due to this upward distribution of income above the cap; this portion of the shortfall would be eliminated by lifting the cap.
Step Three:
Congress should open the door to means testing of retirement benefits. This would allow Social Security to pay less in benefits to those who simply do not need it. Approving means testing does not require that it actually be put into effect but it would allow Social Security more leeway in managing funds if necessary. In any case, a retiree with few savings or assets certainly needs Social Security benefits; a retiree with handsome investment earnings and/or substantial net-worth in assets will enjoy a good retirement income regardless of whether they receive full Social Security benefits or, in some cases, any at all.
End Note:
Social Security is a time-tested success and can continue to be managed to ensure solvency without any reduction in benefits. With the above-noted changes in place there would be no need to reduce benefits or raise the retirement age. Private investment funds are risks that cannot provide the assured security of Social Security, though all individuals are free to pursue them as an adjunct to their Social Security retirement income. It is time to stop politicizing Social Security and make it both equitable and permanently solvent.
The Social Security Trust Fund in the United States pays retirement benefits to citizens through a trust funded by taxes on the earnings of all current and former earners and employers ("Social Security"). Demographic changes in the population, as well as Congressional borrowing from this trust continually affect the amount of money available for payment of benefits. Doubts are therefore often raised as to whether Social Security can continue to pay full benefits in the years ahead.
Deception:
For decades the warning bell has been sounded by many that Social Security will eventually be unable to meet all benefit payment obligations. Many critics of Social Security would like to see it replaced by private investment accounts, whether through individual investments or employer- or group-sponsored investments, maintaining that this would eliminate costs to the government of funding Social Security, would result in a better return to retirees and eliminate the problem of fund insolvency. All of this is deception.
Reality:
Social Security does not cost the government a dime and will always be solvent if managed correctly:
- The cost to the government of Social Security benefits is zero: Social Security is a self-sustaining benefits program funded by its beneficiaries (wage earners and their employers, and self-employed persons) and managed by the government. Money collected by the government in excess of the benefits paid to retirees and the cost to administer the program is invested in government bonds. The government uses this bond money to fund other operations. This means that our Social Security taxes are partially used for the government's general spending, not just our retirements.
This is a responsible arrangement so long as the government pays it back. The government, however, currently owes Social Security more than two trillion dollars under this arrangement. The problem is not that Social Security costs the government money, because it does not. The issue rather is that the government draws upon our Social Security taxes to pay other expenses, owes the program trillions and has no plan to repay in full this outstanding obligation to its citizens.
- Social Security can remain solvent: At present the number of workers contributing to Social Security is decreasing in relationship to the number of citizens drawing upon it (due to demographic changes in the population). The difference between contributions and payouts is therefore decreasing and is projected to continue to decrease in coming years. This is expected to possibly result in an eventual shortfall in Social Security funding decades from now.
Some people want you to believe this means that Social Security is therefore doomed to certain failure (insolvency) and must be privatized by allowing Wall Street to manage your retirement funds. Yet during the economic debacle of 2008, which saw huge losses to many private investment accounts, Social Security remained solvent and was never in danger of failing to pay retirement benefits, demonstrating that privatization of retirement funding (such as through stock market investments like the 401(k) and private pension funds) clearly offers considerable risk whereas Social Security does not. The government already has the tools required to ensure continued solvency; these are detailed in the three steps listed below under "Resolution".
- Social Security retiree benefits are secure: The primary difference between Social Security and private investment accounts, whether such programs are funded by an individual for their own benefit, funded through a non-profit association or funded jointly with their employer in an employer-sponsored pension or 401(k) plan, is that Social Security does not operate as a for-profit entity (it is operated by the government) and does not invest in the stock market. This means that your Social Security taxes are not lining the pockets of for-profit investment brokerages or subject to the whims of the stock market and will be available to you as designed.
Resolution:
To ensure continued solvency of the Social Security Trust Fund, which has remained solvent throughout its entire history of more than seventy years even during recession and depression, the U.S. government should take three steps:
Step One:
Congress must take responsibility for the national budget to ensure that money borrowed from Social Security will be returned when needed. As of this writing, Congress owes Social Security more than two trillion dollars with no plan to repay the debt.
Step Two:
Congress must eliminate the cap for Social Security taxes on taxable income. For 2015, any earnings over $118,500 are not taxed. The inequity of this cap is clear: anyone making less than $118,500, which most likely includes you, is taxed on their entire income. A person earning $200,000, on the other hand, is not taxed on $81,500 of their income. This is a substantial benefit available only to high-income earners. Taxing all income, regardless of amount, would substantially increase the money available for retirement benefits. Social Security is currently a highly regressive tax, meaning it taxes lower-income people more than high-income people as a percentage of their income. Lifting the cap would make it somewhat more progressive.
This step is also essential due to the continuing upward movement of income distribution in the United States. This phrase describes the ongoing process whereby more of the nation's money is going to fewer people each year and more people are getting less (simply put, some people are getting richer but the vast majority are getting poorer). One result is that fewer taxes are paid on all earned income each year because the percentage of all earned income that falls above the cap increases annually. Approximately 40% of the projected Social Security shortfall expected over the coming years is due to this upward distribution of income above the cap; this portion of the shortfall would be eliminated by lifting the cap.
Step Three:
Congress should open the door to means testing of retirement benefits. This would allow Social Security to pay less in benefits to those who simply do not need it. Approving means testing does not require that it actually be put into effect but it would allow Social Security more leeway in managing funds if necessary. In any case, a retiree with few savings or assets certainly needs Social Security benefits; a retiree with handsome investment earnings and/or substantial net-worth in assets will enjoy a good retirement income regardless of whether they receive full Social Security benefits or, in some cases, any at all.
End Note:
Social Security is a time-tested success and can continue to be managed to ensure solvency without any reduction in benefits. With the above-noted changes in place there would be no need to reduce benefits or raise the retirement age. Private investment funds are risks that cannot provide the assured security of Social Security, though all individuals are free to pursue them as an adjunct to their Social Security retirement income. It is time to stop politicizing Social Security and make it both equitable and permanently solvent.