Social Security Is Paying More Than It Takes In; Let’s Increase Benefits

In the 1980s, there was bipartisan concern about the future solvency of Social Security.  The solution they came up with was to increase Social Security taxes.  The idea was to take the extra money, above and beyond the amount of benefits that the government was paying out, and put it into an account, which could be used later, when benefits to be paid out were projected to be more than the amounts coming in.  And they did it.

The only problem was that, while the government put all that extra money into a separate account, it actually just turned around and used the money to cover deficits (and, during the end of Bill Clinton’s second term, pay down some of the national debt).

Now, we need money from that account.  The Great Recession has meant that the amount of Social Security benefits paid out has increased faster than expected (as people who lost their jobs started collecting benefits earlier than they otherwise would have) and the Social Security taxes collected was less than expected (because fewer people were working).  Overall, that meant the point at which Social Security was paying out more than it was taking in came earlier than expected.

Of course, in one way, it doesn’t really matter because there isn’t any money in that account.  It’s just a bookkeeping entry.  When Social Security needs money from that account (because it is paying out more in benefits than it is collecting in taxes), the government doesn’t take the cash it has in a lock box and give it to Social Security.  Instead, the government just takes money from other various tax collections it has coming in or it goes out and borrows it.  Borrowing isn’t too much of a problem now because the Social Security Administration doesn’t need that much money and interest rates are low.

And it would continue not to be not too much of a problem in the future as long as interest rates stay low and the amounts the Social Security Administration needs aren’t too much.  Except that is not going to happen.  As more and more people become eligible for Social Security and start collecting it, the gap between the amount being paid out and the amount being collected will increase.  Also, interest rates will go up.  Even the Federal Reserve is saying that.

Eventually, the gap between the amount paid out and the amount collected each year will use up the total amount of that bookkeeping entry.  What difference does it make, you might ask.  Why can’t the government just keep taking money from the other taxes it collects or borrowing money to pay Social Security benefits?  Because the law currently provides that, when the amount of that bookkeeping entry is used up, the Social Security Administration is supposed to reduce the amount of benefits it pays out so that the total of the Social Security benefits it pays out is no more than the total amount of Social Security taxes it collects.  The current projections are that the amount of the bookkeeping entry will reach zero in 2033, at which point Social Security benefits will be cut by about 23%.

Obviously, Congress could change the law before that happens, though if they do so, they will be abandoning the theory that Social Security benefits are paid for by Social Security taxes.  Some people may not have a problem with that.  However, doing so might arguably make Social Security less of something that is earned and more of just another government welfare program.  Whether that is a good idea is open to question.

Also, to the extent that we are paying more and more Social Security benefits out of other taxes and/or borrowing, that leaves less money to pay for other things the government does.¹

Another solution that some on the left have suggested is to “just” get rid of the cap on Social Security taxes.  Currently, Social Security taxes apply to the first $118,500 of income.  Getting rid of that cap would certainly increase that amount of Social Security taxes collected, but it would do a couple of other things too.

First, it would mean an immediate increase in the marginal tax rate for income over $118,500 of 6.2 percentage points.  That would be at least a 15% tax increase, and more than that for most people.  Also, since employers pay the same amount to the government, employers are going to keep that in mind when they determine how much money to pay employees.  If the amount of Social Security an employer pays goes up, eventually, the amount the employer will pay the employee will go down (or at least it won’t go up as much).

That may be something many people are willing to do.  Certainly, the people who want to raise taxes on “the rich” won’t object.  Though they might want to consider that, if they raise the Social Security tax in this way, it might be harder to raise other income taxes on the rich.

Also, and this is the second point, if people pay more Social Security taxes, according to the logic of the Social Security system, they should get a bigger benefit.  In other words, if the rich pay more Social Security taxes (because the cap is removed), they should be entitled to bigger Social Security benefits when they start collecting benefits.

Obviously, you don’t have to do that.  You can change the law, but once again, you would be cutting the link between paid taxes paid and benefits received, which would make Social Security less of a self-financing retirement plan and more of a garden-variety welfare program.

In any case, given the somewhat perilous financial situation the Social Security system finds itself in, what is the plan of the progressive/left wing of the Democratic Party for Social Security?  Raise benefits, course.  Social Security won’t run out of money (or, more accurately, run out of bookkeeping entries) until 2033, they say, so let’s raise benefits.  Doing that might cause Social Security to run out of bookkeeping entries before 2033, but we can worry about that in the future.  And, in the meantime, let’s raise as many taxes as we can on the rich.

It’s a plan.  Not one that I think is good, but it is a plan.  I guess.
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¹ This is a variation of the point Paul Simon was worried about.