by Dale Coberly
For some time now the Social Security Trustees have been reporting in the “media” using scare tactics like this: “Social Security Going Broke Sooner Than We Thought! Faces [fill in the blank] Trillion Dollar Deficit!”
And I have tried to explain that what those numbers mean is that we need to raise the amount of money we save for our Social Security pensions by about eighty cents per week each year in order to pay for our longer life expectancy.
Mathematically, the X Trillion Dollar Unfunded Deficit and the eighty cents per week per year raise in the payroll tax are the same thing. The “Going Broke” and the exclamation marks are what I call lies.
Now, the Congressional Budget Office has replied to a request from Senator Orrin Hatch for some numbers that would show the effect of different proposed payroll tax increases, and the effect of different increases in the tax “cap” [the level above which payroll taxes are not assessed, on the theory that Social Security is insurance for which “enough is enough”].
The CBO numbers are the same numbers I have been telling you, except that they do not contemplate the effect of increasing the tax gradually. Raising the tax immediately by 2.8% would pay for all “scheduled” Old Age and Survivors benefits for the next seventy five years. Paying for Disability Insurance over the same time would require another 0.7%, for a total increase of 3.5% But, and this is the part CBO leaves out, it is not necessary to raise the tax the full 3.5% “immediately.” By raising the tax one tenth of one percent per year…. about eighty cents per week per year…. not only would the tax raise be too small to notice each year, but the gradually increasing tax rate would fall more heavily on those taxpayer- beneficiaries many years from now who will be making more money than we are today, and who are expected to live longer than we will. This would be the fairest way to make the needed increase.
While this CBO report is refreshingly straightforward, it does stray into “misleading statistics” by describing the tax increases as “28%.” One needs to remember that this is 28% increase of a 6% tax. Many people will confuse it as an increase of 28% of their wages, and there are “nonpartisan experts” who would want you to make that mistake. It is 3.5% of your wages with most people seeing only a 1.75% increase in the tax with their employer paying the other 1.75%
Raising the “cap” would only reduce the needed payroll tax increase by a few tenths of a percent. [At the cost of destroying the very nature of Social Security, which is retirement insurance paid for by the workers themselves. This would lend tremendous ammunition to the people who want to destroy Social Security altogether, by raising the taxes of people who will not get a commensurate increase in benefits. It would in fact make the lies P.Peterson has been telling “come true”: turning Social Security into welfare paid for by a huge tax increase on “the rich.” And it would encourage the rest of us to expect to have our needs paid for by someone else…. turning us into Mitt Romney’s famous “47 per centers.” Most workers would rather be able to say “I paid for it myself.” Unfortunately many people who think of themselves as “progressives” can only think in terms of making the rich pay for the poor.]
CBO does point out that the 3.5% increase would be about $900 per year for a worker making 50k, or 1800 dollars per year for a self employed person making 50k. This may look like a lot of money to some people. But that large an increase won’t be needed for at least twenty years. By that time, with very modest growth in the economy, that 50k worker will be making more than 62k per year. That is, he will be paying the 900 dollars out of a salary that is 12 thousand dollars more than he makes today. AND he will not be losing that money: He will get it back in the form of a pension that will pay him at least enough to live on for twenty years or more. In fact he will get back more than twice as much as he pays in because “pay as you go financing with wage adjustment” is equivalent to a real interest rate of about 2%. (Actually most workers will get back more than three times what they pay in, because that “equivalent interest” is more like 5% when inflation is taken into account. That would not be “real” interest but ANY personal savings plan would have to earn at least that much just to keep up with inflation… something worth keeping in mind.
And this is the point I wish to make here: We are all going to get old some day and not be able to work. We will need money to live on after we can no longer work. It will take about $20,000 per year (in present dollars) to live very modestly after we can no longer work. So if you are thinking that an extra $900 a year is “too much,” it’s because you are not thinking about the $20,000 a year, for 20 years or more, that you will need to live on when you are too old to work.
Maybe you are thinking you can get the money you will need without paying for it yourself? Some people expect to win on the stock market, some will and most will not. Some people are thinking “the government” should pay for them; but, they are not thinking about where the government will get the money. Others think “the rich” “should” pay for them; but, this is exactly what the rich fear and this fear is why some of the rich want to destroy Social Security.
What I am trying to make you think about… if you haven’t already… is that if you are going to be able to retire when you are too old to work, you need to do what people have always done, tried to do, or wished they could do: Save enough money while you are working in order to have enough to live on when you can no longer work.
Approximately before 1936 most working people were not able to save enough and they either had to be taken care of by their children, live in the poorhouse, or they lived on the street. Social Security invented a way for workers to save enough of their own money without losing it to inflation or bad days on the stock market. It did NOT simply create a tax and spend welfare program which is why it has worked so well for over seventy years. Workers were glad to be able to say “I paid for it myself,” while the rich were glad not to have to pay for welfare.
There were of course always some… the insane rich… who called Social Security a “socialist plot” to steal the workers money. Or they called it a plan to steal the rich man’s money to give it to “the poor.” Or a plan that would increase deficits and become a staggering burden on the young. And they told many more lies to try to kill Social Security. Over the years billions of dollars have been spent turning those lies into “what everyone knows.”
In other writings I have tried to explain the falsity of the lies being told; but today, I just want to try to convince you to understand the CBO numbers: “They are saying you can pay for it yourself and they tell you how much it will cost. From there it’s up to you to think like a grownup and understand that this is what it will cost you to pay for housing and groceries and a few small luxuries when you are too old to work.
If you think you are going to save yourself some money by “demanding” someone else pay it for you… you are going to end up in the poorhouse. And if you think you are going to make a lot more money on the stock market… you are making the same mistake that more than half the people make and don’t realize they are making until it is too late.
Once you understand that, we can go back to talking about how much better it would be to raise the tax one tenth of one percent at a time… about eighty cents per week each year. In any case, the only hope you have of keeping the “nonpartisan expert” liars from destroying Social Security is to find a way to make sure your congressman knows that all the people are willing to pay the cost of the basic retirement themselves. All they need from the government is a way to protect their savings from inflation and market losses.
And that way is Social Security, as currently designed, with small adjustments from time to time to keep up with “the cost of living.” Including the cost of living longer.