Last Friday marked the 80th anniversary of Social Security. As befits such a significant milestone, the occasion was marked with political statements, punditry, and media perspectives — most of them wrong.
It should be no surprise that the presidential candidates are weighing in as well. With the exception of Donald Trump and Mike Huckabee, all the GOP candidates favor some type of Social Security reform that will reduce future benefits, although only Ted Cruz actively seeks to revive President George W. Bush’s plan for personal accounts. The Democratic presidential candidates, meanwhile, not only oppose any cuts to future Social Security benefits but are flirting with various benefit expansions.
With this in mind, it is probably worth injecting a few inconvenient truths into the Social Security debate — or at least debunking the most common untruths.
There is no Social Security crisis. Typical of this sentiment was the roughly ten thousandth column by Paul Krugman declaring, “Social Security does not face a financial crisis.” I’m not sure what Professor Krugman’s definition of a “financial crisis” is, but Social Security spent $63 billion more last year than it took in through taxes and other revenue. Generally, if one is spending more than one earns, that’s considered, if not a crisis, at least a problem. And, according to Social Security’s own trustees, that shortfall will never get better. Overall, Social Security’s unfunded future liabilities approach $26 trillion.
Social Security won’t be there for young people. This is the flip side of the “no crisis” argument. Some advocates of Social Security reform overstate the problem, implying that the program will disappear entirely. But as long as the government can force people to pay into the system, some remnant of the program will stagger on. It just won’t be as much as young people have been promised or, for that matter, a very good deal. According to projections by the Congressional Budget Office, for workers born in the 1980s, there are only enough funds to pay 76 percent of their schedule benefits; for today’s children born in the 2000s, this falls to 69 percent. And, taxes are already so high relative to benefits that young people will receive far less than they could receive if they invested their taxes privately.
The Trust Fund will save Social Security. Defenders of the current Social Security system point out that the Social Security Trust Fund contains roughly $2.8 trillion in government bonds that, in theory, can be used to pay benefits until 2034. I’m not sure that’s a great deal of comfort to today’s 47-year-old who is scheduled to retire in 2035. But more important, it misunderstands the nature of the Trust Fund. It is true that those bonds are backed by the “full faith and credit” of the U.S. government and are one of the safest investments in the world. But when the time comes to redeem the bonds, they will have to be paid back out of general revenue. And, as you may have noticed, the federal government doesn’t have a spare $2.8 trillion lying around. Perhaps the best explanation of the Trust Fund came from the Clinton administration (Hillary, take notice):
These [Trust Fund] balances are available to finance future benefit payments . . . but only in a bookkeeping sense. . . . They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.
The Trust Fund has been stolen. Many conservatives suggest that Social Security would be fine if only the Trust Fund hadn’t been stolen. Sometimes, this is misattributed to the creation of the “unified budget” by Lyndon Johnson, although Social Security didn’t run more than nominal cash-flow surpluses until 1985. (Those surpluses ended in 2009.) More important, it misunderstands the federal government’s structural inability to actually save money. During the brief period when Social Security did run a surplus, that money had to go somewhere. It can’t be buried in a cigar box out behind the Treasury building. The Social Security Administration, therefore, buys Treasury bonds with the money as noted above. Once that money buys a bond, it becomes general revenue of the federal government and is spent on whatever the federal government spends money on. Those bonds will be paid back, but, as noted, that will have to come out of general revenue, meaning from current or future taxpayers.
Social Security can be fixed by lifting the cap on taxable earnings. As always, the Left’s answer to any problem is to “raise taxes on the rich.” Currently, Social Security payroll taxes are paid on the first money that you earn. (After that, you continue to pay Medicare payroll taxes, but not Social Security.) Opponents of more comprehensive reform suggest that Social Security’s problems could be solved if that cap were raised or even eliminated. Of course, such a tax hike would fall not just on the rich but on upper-middle-class professionals. Someone earning $118,500 is certainly not poor, but not exactly a Koch brother, either. More important, it wouldn’t work. Estimates showing that such a tax increase significantly reduces the program’s shortfalls rely on building up bigger balances in the Trust Fund. But as we’ve seen, such balances are meaningless except as an accounting measure. In reality, eliminating the cap entirely (without providing any additional benefits in exchange for the higher taxes) would buy Social Security just eight additional years of cash-flow solvency. By 2024, Social Security would again be paying out more than it takes in.
Social Security is not an entitlement. Many seniors object to calling Social Security and Medicare entitlements, claiming that the term brands those programs as a form of welfare when, in fact, seniors have paid taxes into those programs. However, even setting aside the issue of whether those complaints properly characterize payroll taxes, they misunderstand the meaning of entitlement. Entitlement is actually a legal and budgetary term that describes a program not subject to annual appropriation. There is no discretion about how much to spend. It’s pretty much on autopilot. By this definition, Social Security and Medicare, as well as programs such as farm-price supports, are entitlements, but — perhaps ironically — many traditional welfare programs such as Temporary Assistance to Needy Families (TANF) are not. Moreover, most of those on Social Security today will receive much more in benefits than they paid in taxes. That won’t be true for today’s young workers. Could they have done better if they had been allowed to keep those taxes and save them for themselves? Of course. But the same could be said about most taxes you pay versus what you receive from government.
Social Security taxes are saved for your retirement. Perhaps the confusion about whether Social Security is an entitlement stems from misunderstanding the relationship between payroll taxes and benefits. Social Security is, in essence, a Ponzi scheme. When you pay your Social Security taxes, none of the money you pay is saved in any way for your retirement. Instead it is used to pay benefits to those already retired. When you retire, you will rely on the next generation of workers to pay taxes to finance your benefits. That works reasonably well when there are lots of workers and only a few retirees. But we are living longer and having fewer babies. That means the burden on younger workers grows bigger and bigger.
Social Security is now 80 years old. A hard look at the facts suggests that there is not much reason for celebration.
— Michael Tanner is a senior fellow at the Cato Institute and the author of Going for Broke: Deficits, Debt, and the Entitlement Crisis. You can follow him on Twitter @mtannercato, or on his blog, TannerOnPolicy.com.