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Social Security Changes Are Inevitable

Dan Brian   |  August 10, 2015   |  

It was not long ago that President Barack Obama & Congressional Republicans leaders were discussing the terms of a “Grand Bargain” to reach a balanced budget.  Included in the discussion were modifications to entitlements like Medicare and Social Security.  The idea was that Republicans would agree to new taxes and to more spending in the short-term, on things like schools and roads, and Democrats would agree to long-term reductions in Social Security cost of living adjustments (“COLA”) .  Oh, how times have changed.

As Social Security nears its 80th birthday, 72 Democrats have signed onto a letter to the President calling for legislation moving in the opposite direction, enhancing benefits to seniors.  As Bernie Sanders, candidate to be the Democratic nominee for President, draws record crowds, calling for more liberal policy initiatives, there is no doubt the terms of the debate have shifted.  Republicans are still calling the growth in entitlements unsustainable, but many Democrats no longer seem willing to consider program cuts, and instead argue that benefit increases are in order.

Social Security is funded by payroll taxes.  These funds were intended to go into a trust fund, with some being used to pay retirees, and some saved to pay future retirees.  This worked well for decades, when there were far more working Americans than there were retirees.  But as Americans are living longer, and the baby boom generation hits retirement, the numbers no longer work.  The program that once ran an annual surplus, now barely breaks even.  It will not be long before the program runs into huge annual deficits, meaning the country will be paying out far more in social security benefits than are being taken in in social security taxes.  You have probably heard politicians say that the program will remain solvent until 2035, but this is deceiving.   While the program was running annual surpluses, the trust fund allegedly rose to almost $3 trillion dollars.  The “solvency” mentioned is really an accounting mechanism; by 2035, we will have “spent” these “savings” from the trust account.  But of course, there never was a trust account.  Those monies were spent on other things, like bombers and highways.  We are now paying for much of seniors’ social security benefits by borrowing and by using general tax dollars.  And with each passing year, we will go more and more into the red.

So how can we afford benefit increases?  Currently, social security taxes are assessed on incomes up to $118,500.  That means that once you earn more than that figure, you cease being subject to additional social security taxes.  A man earning $118,500 a year pays the same amount of social security taxes as a man earning $118,500,000.  One option being suggested is to eliminate the cap, and subject all incomes to the social security tax.

The usual counter-arguments apply.  Taxes are never popular, and people earning $125,000 or $150,000 consider themselves as doing well, but they hardly see themselves as “rich”.  Especially if they live in large metropolitan areas, where costs of living are high.  There is no doubt they would prefer not to see their taxes rise.  And the elimination of the cap has one other psychological factor–it further transforms the system beyond the notion of a “trust fund” where workers pay into the system then get benefits back when they retire.  If benefits have an annual cap but taxes do not, then there is no question that higher earners would be subsidizing lower wage earners, rather than paying into a trust account that they would later draw upon.

On the other side, Republicans continue to argue that benefits are just not sustainable at their current rates.  They continue to discuss limiting Cost of Living Adjustments, meaning that retirees would not see their benefits cut, but they would see their checks grow by less each year as the government changed the way it would calculate inflation.  A higher retirement age is also frequently discussed, as applied only to future retirees.  The argument for this proposal is that Americans are living longer, and doing so in relatively good health, meaning they can wait longer to retire.  Of course, the problem with that argument is that not all bodies and not all jobs are equal.  A white collar worker might be able to work into his late 60s, but can a mechanic, or a coal miner, whose job is more physical, and whose body has been subjected to years of a day-to-day physical grind?

The social security system also pays disabled people who have worked long enough to qualify.  Currently no major proposals are being debated to change this system, but as the debate goes forward, there seems no doubt some plans will be placed on the table that either expand benefits or reduce them.

There seems no doubt that these questions will need to be answered soon.  Change is hard, but as countries like Greece and communities like Puerto Rico are demonstrating, decisions only become harder when they are not dealt with until crisis level is achieved.