HOW TO PAY FOR SOCIAL SECURITY

by Dale Coberly

HOW TO PAY FOR SOCIAL SECURITY
BALANCE THE BUDGET CUT THE DEFICIT
and REDUCE THE NATIONAL DEBT

Big Numbers and Mental Hygiene

We have been treated recently to a great deal of hysteria about “the deficit” and the huge horrible Burden of Social Security, including the mysterious Trust Fund: is it real? or only Phony Iou’s? has it been Looted? or will it Cripple the Economy to pay it back? and why should I Pay Twice for my Social Security? And how did Social Security run up such a Huge Debt anyway? and when exactly is it Going Broke?

All of this is nonsense: Carefully constructed nonsense by the highly paid non partisan experts who dwell in Big Think Tanks dwelling on these things, thinking of better ways to fool the people into cutting off their heads to save the cost of tomorrow’s dinner. They don’t have to convince you, exactly; they just need to get you to stand quietly or cheer, while they “fix” Social Security. Of course, in their minds “fixing” it means ending it. They don’t like the idea that the hired help can retire just because they saved enough of their own money to be able to afford to.

I have shown elsewhere how Social Security can pay for itself with a tax raise that amounts to 20 cents per week per year. In that paper I assumed that the Trust Fund would be used as it was intended… that is the money saved in the Trust Fund, when payroll taxes were higher than needed for current benefits, would be used to help pay for future benefits when payroll taxes might otherwise not be enough to pay for promised benefits. This money has been lent to the government at interest. The enemies of Social Security claim that the United States of America cannot afford to pay back the money it borrowed… cannot honor its debt to Social Security. In this paper I will show how the country can pay back the money it borrowed from Social Security without imposing an Intolerable Burden on anyone.

A good place to begin would be with a set of numbers a Regular Reader sent us last week showing “the Social Security deficit.” Regular Reader thinks we need to Look Upon the Very Big Numbers and Be Afraid. Here they are:


Year……Deficit in Billions of Dollars
2010…………..41
2011…………….7
2012……………-2 (surplus)
2013……………-5 (surplus)
2014……………-4 (surplus)
2015…………….3
2016…………..11
2017…………..25
2018…………..45
2019…………..71
2020…………..101
2025…………..275
2030…………..457
2035…………..622
2040…………..758
2045…………..892
2050…………..1073
2055…………..1344
2060…………..1726
2065…………..2225
2070…………..2909
2075…………..3822
2080…………..5006
2085…………..6535

Well, these are indeed Very Big Numbers, but we can do better than just stare at them and be afraid. For example, we can compare them to the income of the people paying the Social Security tax: The following tables Table VI.F9 from the Trustees Report will help us.

Table VI.F9.—OASDI and HI Annual Income Excluding Interest, Cost, and
Balance in Current Dollars, Calendar Years 2010-85
[In billions]

Note that the numbers in the fourth column, under OASDI and Balance, are the same as Regular Reader’s. Note also that these are Current Dollars… that is they include inflation. A lot of inflation. Most of the bigness is due to inflation.

[We are only talking about "social security" in this paper. Medicare presents other problems we need to take up separately.]

And note that the Income does NOT include the “interest”… that is the money owed to the Trust Fund. This is “the deficit” only if the government does not pay back the money it borrowed from Social Security.

We can stop scaring ourselves with inflated numbers if we just compare the inflated deficit with the inflated incomes of the people paying the payroll tax.

The second table shows Taxable payroll Table VI.F6., in the fourth column, for the same years, also in current dollars.

Table VI.F6.—Selected Economic Variables,
Calendar Years 2009-85
[GDP and taxable payroll in billions]

[by the way: that is indeed 157 Trillion dollars in "taxable payroll" for 2085. This is not "runaway inflation;" it's just what you get when you start with a big number and have it grow 5% per year for 75 years... you get a Very Big Number.]

If we divide “the defict” from the first table, by the “taxable payroll” in the second table, we can find the percent the payroll tax rate would have to be increased to cover the deficit without collecting any money from “the budget,” that is, without the government repaying any of the money it borrowed from Social Security.

year……….payroll……….deficit……defict as a percent of payroll
2010……….5459……………41………..0.75 (this is three quarters of one percent)
2011……….5690…………….7………..0.12 (one eighth of one percent)
2012……….6069……………..(these three years there is no deficit
2013……….6454……………..(but a small surplus
2014……….6852……………..(that doesn’t affect our analysis)
2015……….7243…………….3………..0.04
2016……….7656……………11………..0.14
2017……….8052……………25………..0.31 (about three tenths of a percent)
2018……….8446……………45………..0.53
2019……….8834……………71………..0.80
2020……….9226…………..101………..1.09 (about one percent)
2025………11431…………..275………..2.41
2030………14215…………..457………..3.21
2035………17746…………..622………..3.51 (3 and a half percent)

And here we are going to stop for a look at what this means so far. Because at this point the Trust Fund would have been paid back if the Congress was honoring its debt to Social Security. ( “Paid Back” is what you have been hearing called “Gone Broke.” )

First note that the first year, 2010, is this year. This year Congress has found the money to pay the deficit… that is pay the money it owes to the Social Security Trust Fund. That is, it is paying the “phony iou’s.”)

Second, note that… if Congress does not pay back the money it owes for any future year, a payroll tax increase of about one tenth of one percent per year would allow the workers… the people who will eventually need to collect Social Security benefits … would allow the workers to “pay as you go” and pay for all promised benefts until 2020.

One tenth of one percent of payroll is $43 dollars per year for the average worker in 2010 (see table VI.F6 above, third column). This is about 80 cents per week. Note that while incomes are rising, the 80 cents will get bigger, but it will “feel” the same to the person earning the increased income. Note also that even though the “one tenth of one percent increase each year” adds up to 1 percent after ten years, in any given year the raise will “feel” like 80 cents per week would feel to you today.

Go back to Table VI.F6 for the average wage projected for each year, and watch the effect of the tax increases on the “take home” of the average worker.

year wage taxrate tax take home
2010 43084 0.124 5342 37700
2011 44687 0.125 5585 39101
2012 46758 0.126 5891 40866
2013 48978 0.127 6220. 42757
2014 51215 0.128 6555 44659
2015 53397 0.129 6888 46508
2016 55738 0.130 7245 48492
2017 58103 0.131 7611 50491
2018 60522 0.132 7988 52533
2019 63017 0.133 8381 54635
2020 65465 0.134 8772 56692

Notice that even though the tax rate is increasing by a tenth of a percent every year, the “take home” increases** by about 2000 dollars per year. For those who say, “yeah, but I could have had more,” it is necessary to remind them that they haven’t lost anything. The tax will come back to them when they retire and need it most. And notice also that even in 2020 when the tax is one percent higher than it would have been, the difference is only 12 dollars per week, out of an income of 1200dollars per week. And you get it back with interest.

The same analysis would give essentially the same result over the years from 2020 to 2035, but the rate of increase in the tax would be a 0.15% (one and a half tenths of a percent) per year, a little bigger than for the first ten years, but still not a “burden.” I’ll leave the details to you.

[There is a small error in the above table that actually makes the tax bite look worse than it should. The "wage" given is the "nominal wage." The employee's tax rate on this wage is only half the given tax rate. If you wish to insist that the "employer's share" is "really the employee's money" then you would need to add half the "tax" to the "wage" to get the employee's "true wage" before you subtracted the full tax. Then you would get a take home equal to the "take home" as given PLUS half the "tax" as given.]

So let us look at where we have come. We have shown that even if the government does not pay back the money it borrowed from Social Security, the workers can continue to pay all promised benefits themselves, on a pay as you go basis, with a tax increase that would be barely felt. It is important to understand this. Because while Congress not repaying the Trust Fund would be a theft.. a breach of the “Full faith and credit of the United States,” it would be better for the workers to just write it off as a bad debt and pay the extra costs themselves.

It would be better for them to lose a little money than to lose the Social Security program to those who want to “fix” it by raising the retirement age, or cutting benefits so the workers can’t afford to retire, or “means testing” it, or even raising the “cap”, so that Social Security becomes just another welfare program and can be killed off later. Moreover, the workers don’t WANT welfare. They want a way to insure their savings against inflation and market losses and personal losses of various kinds. That way is Social Security and it has worked for over 70 years. Social Security benefits are more than half the income of more than half of all retired people. A great deal more than half for more than 40% of them, and not an insignificant part of the income of even those who are doing better than most.

However, let us not write off the bad debt just yet. Because there is another table you need to see:

Inspection of this table shows that the Adjusted Gross Income of those taxpayers with AGI greater than 100k/yr (in 2006) is nearly the same as the total AGI of those taxpayers with AGI less than 100k/yr. Since the payroll tax is paid on wage income less than 100k, and wage income over 100k and all non wage income, pays NO payroll tax, the money owed to Social Security, that we have just shown could be made up by a tax increase of about one tenth percent per year, up to 3 and a half percent over 25 years, could be paid instead by the same tax rate on those making more than 100k/yr.

Since the approx 3% tax cut in 2001 went mostly to those making over 100k, it would not seem obviously unfair to ask those making over 100k to pay the 3% tax increase necessary to make good on the loan they got from SS. It might be more fair to apply the tax increase to income over 100k (people who make over 100k also make under 100k). This would change the top marginal rates, but that should be done in a way that increases the tax on incomes over 100k the same 3% “on average.

Whether or not it is “fair” (it is), it is plain that the “Social Security deficit” could be paid for with a tax increase on those making over 100k of one tenth of one percent per year, reaching 1% by 2020 and ultimately reaching 3.5% in 2035 and THEN STOPPING. After 2036 the Trust Fund would be fully repaid. So “the rich” would face a “surtax averaging less than 3% per year for ten years to pay down that part of the national debt owed to the people who already paid for their Social Security. This is not a crushing burden.

In no case would anyone be “paying for Social Security twice.” SS was paid for once. Paying back the Trust Fund would be paying, the first time, once, for whatever the Congress bought with the money it borrowed FROM Social Security. Even if the workers decided to write off the bad debt and pay for Social Security going forward, pay as you go, with a payroll tax raise greater, or sooner, than they expected, they would still be paying for their Social Security only once. They would expect to get back even their increased payment in the form of an adequate retirement benefit for their own longer life expectancy. As the ad says, this is “priceless.” There might be some minor “inequity” in the “rate of return” from one generation to the other, but no more than the inequity that comes from a change in the price of bread, or bonds, or going to war, or living through a recession. The point is that it is the workers ONLY way to INSURE that they will have “enough” when they need, or want, to retire.

As to whether or not a 3% increase in the effective tax rate of the top 10% of earners would be unduly oppressive, let us look at another table:

Note that a 3% tax increase would bring the tax rate up to less than it was in 2000, and would range from 16% to 27%. No fun for them perhaps, but not a crushing burden, and it would be for less than ten years.

Before leaving I would like to point out two other things, which I will not “prove.” First is that if a 3% increase in the tax on the wealthiest 10% for ten years can pay back the Trust Fund, and reduce the National Debt by about 6 Trillion dollars from what it would have been, it ought to be apparent that a 3% increase for more than ten years ought to be able to reduce that part of the National Debt that was borrowed from “the public.” How long that takes to bring the Debt down to a “sustainable level” depends on other spending.

The other thing is that it is dishonest to count “projected deficits” that include future increased costs of Social Security or even Medicare. I have shown how with a tiny increase in the payroll tax, Social Security can and should pay for itself. A similar increase would cover Medicare… though there the real savings needs to come from controlling health care costs. In any case people will need health care and cutting Medicare will not help them pay for it.

Let’s look at one more table:

This is a continuation of the table above comparing the Social Security “deficit” to the taxable payroll. But this time we are going to look at what happens after 2035:

year……….payroll,,,,,,,deficit……….percent
2035……….17746………622……………3.51
2040……….22198………758…………….3.41
2045……….27713………892…………….3.22
2050……….34504………1073……………3.11
2055……….42876………1344……………3.13
2060……….53269………1726……………3.24
2065……….66177………2225……………3.36
2070……….82183………2909……………3.54
2075………102035………3822……………3.75
2080………126624………5006……………3.95
2085………157169………6535……………4.16

Remember that after 2036 the Trust Fund is paid back. Social Security is on its own, pay as you go. Remember also that we left the tax rate at 3.5% in 2035 higher than it is in 2010. These are the further increases (total increases) that would be needed to pay for the projected “Social Security Deficit” after that time… the biggest of the Big Numbers.

What I want you to notice here is that in fifty years, the needed increase in the payroll tax would be 0.65%, or 0.65/50 = 0.013%, about one eight of one tenth of one percent per year. Remember that in today’s terms one tenth of one percent is 80 cents per week. One eighth of one tenth of one percent is ten cents per week per year. And the worker only pays half of that. That is your huge horrible hairy “social security deficit.”

**[note: this is not quite correct. Since we are dealing with "inflated" wages, you have no easy way to know how much of that 2000 dollars is "real." Easiest way for me to give you a better idea is to say that the Trustees predict that real wages will grow by about one full percent per year. So for any year, for every thousand dollars per week you earn, your wages next year will grow by ten dollars in real value, and the one tenth of one percent payroll tax increase will take back one dollar to save for your longer retirement. So you will only be nine dollars better off than you were the year before in terms of money to spend immediately. You will be enormously better off when you retire and find you have enough to live on after all.]]

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