How the Super Rich Are Killing Social Security
How the Super Rich Are Killing Social Security, Robert Reich Blog, Robert Reich
Since Angry Bear has a well known expert on Social Security in the name of Dale Coberly, I like to post other commentary on the topic. Robert Reich suggests increasing the salary limit well beyond 2023’s $160, 200 cap. He proposes eliminating the cap over $250,000 on salary and investments.
Here’s the real reason Social Security is in danger that nobody’s talking about.
It’s not just because too many boomers like me are retiring. It’s because of inequality.
Now, I don’t want to alarm you. Social Security is still helping us oldies enjoy our golden years — but only for so long.
Social Security is one of the most popular and successful government programs ever created, not only helping retirees — but it’s also keeping 26 million people out of poverty. Yet here is the problem:
“It’s going run out of money before you can ever receive it if the rich don’t start paying their fair share.”
The trustees of Social Security — of which yours truly was once a member back when I had thicker hair — say the program will only be able to pay full benefits until 2033. After that, Social Security will only be able to dole out roughly 77 percent of benefits.
Why? It’s not the reason that many seem to think.
Boomer retirees like me might be soaking up some sun, but we’re not soaking up all of the program’s funds.
The Social Security trustees anticipated the boom in boomer retirements. This is why Social Security was amended back in 1983, to gradually increase the age for collecting full retirement benefits from age 65 to 67. That change is helping finance the boomers’ retirement.
What did the trustees fail to anticipate? How much income would be going to the top.
A big part of the American working population today is earning less than the Social Security trustees anticipated years ago — reducing revenue flowing into the program.
At the same time, a much larger chunk of the nation’s total income is now going to the top compared to decades ago.
But income subject to the Social Security payroll tax is capped. No dollar of earnings above the cap is taxed. The cap in 2023 is $160,200.
So, as the rich have become far richer, more and more of the nation’s total income has escaped the Social Security payroll tax.
For example, a CEO earning $20 million a year pays Social Security taxes on roughly 1% of their income, while a worker earning under the cap pays Social Security taxes on 100% of their income. But they both end up paying the same amount of money into the program. The belief is everyone who can pay, should pay 6.2% of their income in Social Security.
AB: We have also heard and read proposals of the United States being Monetarily Sovereign which would allow the nation to absorb the increasing cost of Social Security without a tax increase.
AB: Dale Coberly’s Northwest Plan incrementally increases the SS taxes one tenth of 1% for workers and for also for businesses. This would occur over a 10-year period. The reasoning for the incremental increases on mostly Labor is to keep Social Security as their plan. Politicians are leery of touching SS for that reason alone although the threats of doing so are becoming frequent.
Back to Robert Reich: The rise in the amount of income above the cap due to inequality has cost the Social Security Trust Fund reserve an estimated $1.4 trillion since 1983.
The solution is obvious: it’s time to scrap the cap and make the rich pay more in Social Security taxes.
One plan introduced in Congress would eliminate the cap on earnings over $250,000 and also subject investment income to Social Security taxes. It’s estimated that this would extend the solvency of Social Security for the next 75 years without raising taxes on 93% of American households.
This is where you come in. Share this video and help spread the word about the real threat to Social Security.
If we want to ensure Social Security’s long term future, and that working people can retire with dignity, we must make the wealthy pay their fair share.
other realities unknown to the ss fix:
fixing the great financial crisis: banks saved not main street.
persistent inflation
2% growth target inadequate
federal debt skyrocketing
ss trust fund receipts stopped hiding general fund deficits too soon!
was it bruce webb who argued ss is not welfare?
@paddy,
The federal debt isn’t what matters, it’s the debt/GDP ratio. Japan’s debt/GDP ratio has been far higher than ours for years and it is financially stable. “Federal debt skyrocketing” is a right-wing talking point.
And anyway, the federal debt has nothing to do with social security.
And social security isn’t welfare, it’s retirement insurance paid for by the insured.
Joel:
Sorry, I did not answer yesterday. Right on all issues mentioned.
@joel,
many differences between Japan and usa
federal debt as well as the hidden full annual cash deficit is important on the aggregate economy, which influences as.
what is wrong with my, somewhat marxist, talking point, you should refute it.
as to trust fund treasuries below:
assets in the ss trust fund are ‘special treasuries’, special because they were bought by congress, the cash sent to the general fund from fica receipts! they have congress set the interest rates, and are non term. tax money buying treasuries!
imagine if the surplus fica receipts were invested in something’s productive.
paddy:
These are just notational entries of pluses and minuses. Yes they may buy treasuries. even the purchase and sale of them are notationals.
@paddy,
Please point out which differences between Japan and the US explain how Japan can manage twice the debt/GDP with no problems but the US is headed to a crisis. Take all the time you need.
The fact that Japan has sustained twice the debt/GDP as the US for years refutes your “somewhat Marxist” concern about the debt. You’re welcome.
The treasuries in which the trust fund must, by law, be invested are productive. What they aren’t is risky, like equities.
paddy
over the past fifteen years i have written the equivalent of fifteen books about Social Security financing and answered readers’ arguments. It is usally not worth while to try to argue with people who think they know something. What they think they know is usually irrelevant, speculative, or wrong. But they can’t let go of what they think they know long enough to think about what might be right. I cannot put truth into their heads. All I can do is offer a few things for them to think about. If they won’t think about what they don’t yet know, there is nothing I can do.
I responded to your comments below. Here I am responding to your comment to Joel. I don’t see any “point” that can even be addressed, much less refuted.
Personally I leave the actuarial work to the actuaries, read the Trustees Report, not the Trustees Summary, and try to talk about what IS, not what “might be”. Your comments don’t even reach the “might be” degree of specificity that could possibly lead to a conversation that means anything to anyone. But take heart, you are far from the only one.
Dale’s fine; here’s my angle:
Isn’t the Trust Fund question just about flip-flopping income streams? My understanding is that TF bonds are cashed with income tax.
When the TF runs out, FICA can be raised while income tax is cut — not exactly the same payers for both taxes; but for most payers no giant burden.
Raising, or eliminating, the FICA cap comes to mind. Rebuilding labor union density even comes to mind — flooding FICA income.
Something like a five year, projected outgo, fund could insure Congress never takes too long getting around to resetting FICA tax level.
@Denis,
“My understanding is that TF bonds are cashed with income tax.”
The trust fund is invested in US Treasuries, by law. Treasuries are paid off from the general fund, which includes income tax money.
Lots of folks hold treasuries, not just the SS trust fund. If the government defaults on treasuries, far more than the SS trust fund is at stake: it’s the full faith and credit of the US government.
There are several ways to address the trust fund issues. The idea of incrementally raising FICA starting now is certainly plausible on paper, but it isn’t going to happen now, nor in the next ten years.
“Men and nations do behave wisely once they have exhausted all other alternatives.”
~Abba Eban
joel
the ten year deadline is not a real problem just a psch0-political one, it will raise the cost of SS a little (by losing the interest from the Trust Fund) but not so much as to make a real difference. the problem is a two percent increase in FICA tax all at once can be used to panic people into cutting benefits which would be very damaging, probably fatal to some people, but no one would see that coming or know where it came from when it hits.
I hate it when the good guys start lmitating the bad guys by telling creative lies about Social Security.
First: Social Security was designed to be worker paid NOT government paid insurance NOT welfare. That’s why it has worked so well so long. There is a cap on the income “taxed” for Social SEcurity exacly so no one pays more for thier Social Security benefits, including insurance, than it is reasonably worth to them. Pay inequality is a problem in America, and does contribute to the projected shortfall in Social Security’s ability to pay “promised” benefits. But that is a problem that needs to fixed on it’s own merits, NOT by turning Social Security into welfare…the “rich” paying for your groceries when you retire,
Social Security’s projected shortfall can still be paid for entirel and forever by simply raising the payroll tax one tenth of one percent for the workers and one tenth of one percent for the employers.
The self-employed will still pay both shares. That is not a burden for them, and it is completely fair if you look at it with an open mind. It only looks unfair to those still stuck at the age where complaining that your sister got the bigest share of the burfday cake seems like a demand for justice.
The same infantile understanding of “fairness” is what is behind calling for “the rich” to “pay their fair share.” here the idea is that if a millionaire pays the same for a loaf of bread as you do, it’s no fair because since he has ten times as much money as you he should pay ten times as much for a loaf of bread.
You are paying for your own Social Security benefits, including insurance, and so is the “rich” guy. That is the normal understanding of “fair” to grownups. It is absolutely essential to keep SS worker paid and not welfare. The rich no how to cut welfare. They will be so glad when you throw them ib the briar patch where they will know how to destroy Social Security in everything but name and a meaningless “balance sheet” that no longer works as meaningful savings and insurance for old age.
Reich should know better. But telling white lies is what politicians do. Social Security has been saved from the bad guys (essentially the insane Right who think only about amassing more money and not giving a damn about people. It is a shame that the Left should start thinking the same way. Killing Social Security in order to save “the poor” a dollar per week is exactly the same kind of money-fetish that the Right has been selling for 80 years (or eight thousand years, depending on when you start keeping track). Social security has beeen saved from attack by the Right because the people understood it’s value enough to fight for it…meaning mostly putting the fear of losing elections in the hearts of the politicians. That’s the only way it can be saved now..But if the Left is selling the same poison, there will be no one out there waring the people that they are being fooled.
Note: the one tenth of one percent “price” for saving SS will not last…we already los the chance to save Social Security from “short term (actuarial) financial inadequacy by starting the one tenth percent gradual increase when it would have avoided that. But the one tenth percent gradual increasw would still save us from “long term actuarial deficit” and also from the need for traisng the tax two percent (each) all at once when the Trust Fund runs out. Even that will not be a huge burden (incomes will have increased a real 20% by then, but you won’t know that and that 2% will look huge and people will panic..though if no one said anything about it, they wouldn’t even notice it:
say you are making 50 k per year now (about 1000 per week. your Social Security costs you about$60 per week. in 20 years (asuming the gradual increase in the tax) your income will be more than 1200 $ per week and your Social Security will be about $80 per week, so yout take-home will be 1120 $ per week, 120 $ more than today, plus you will be saving enough via SS to avoid the otherwise expected cut in benefits of about 20% of a about 500 $ per week pension cutting it to 400 dollrs per week. This is all approximate here, but accurate enogh to help you understand “the math” so you can begin gto think straight about what the choices are, If you don’t think you will need that SS pension, ask the 25 million people who would be in erious poverty today without their pensions…that’s 50% of people over 65…about the same percent as old people in serious poverty before SS… note the difference between “were poor” and “would be poor.
Bruce Webb was a good guy, and he understood this, and he brought my calculations to the attention of some people who could have made a difference …but all those people (mostly) have gotten on the “tax the rich” badwagon (sic? ), while those who still understand it have no voice that can be heard.
There are not-undrestandings in some of the comment above. It would take too long for me to address them right now. But the simple answer is that most of the “other” theories of fixing SS won’t work. they miss the point.
SS is paid for by the workers themselves. All SS does in provide a very safe place to save your own money for your own retirement…and insure yourself in case your lifetime savings don’t, even with interest, add up to enough to provide adequately for a decent retirement.) All the magic thinking about the debt. fungibility of money, theft of the Trust Fund.. etc are wrong, they rise from incorporating the lies the highly paid non partisan expert liars have planted in the conventional wisdom over the last 30 or 80 years into “our” thinking. We unconsciously assume them (the lies) so we get croooked answers in spite of our best intentions.
If you can teach yourself to think about it as “paying for your own needs (icluding insurance) everything will fall into place and you will understand why SS is neither cheap (goota pay for twenty years of groceries) nor is it expensive…you own’t notice the extra two percent you will need to save because you are going to live longer than your grandparents… and all the other distractions are just trying to weasel out of paying for your own needs in the belief that it is more “fair” for someone else to pay for them, or they can be paid for with nagic money from “the government” . or that you will keep it if you don’t make sure congress understands it’s worth their jobs not to mess with it.
math error in the above, along with many typos. i hope you can figure out what i am trying to say and correct the math error. it will not change anything important.
for what it is worth, i am getting old. there are brain-typos and finger -typos that i can’t see well enough to fix them before you see them. i hate this because there is a huge part of the population who think that typos or mis-speaks are a sign of “false in all things.” this is why i invite you to try to think through it for yourself. i did the work behind it year ago when i did not have these problems and the deputy chief actuary at SSA confirmed than i am right.
Since Soc Sec benefit rates are progressive, being based on the annual income you had from the last few years you were working, maybe it’s time to make FICA payments progressive also, with FICA withdrawal percentages higher for those with higher annual incomes. Along with raising the income cap of course.
sorry for my bad manners, but this is exactly what I was talking about. you want to change SS wthout knowing anything about how it works. Forget all that “progressive/regressive nonsense. it’s just words that liberal college professors use to fool themselves…they want a world where the rich pay for the poor. they don’t give a damn about the facts. just saying “regressive” makes them feel wise and kind.
And SS benefits are based on the best 35 years of your adjusted income (adjusted for change in value of money and average income over time) which is the same thing as “adjusted based on what you paid in), not “the last few years” which is a description of how private pensions are calculated…when there were private pensions.
I stand corrected on ‘how benefits are computed’, but the Soc Sec Admin does say they only consider the most recent 35 years.
‘We Base Social Security benefits on your lifetime earnings. Adjust or “index” your actual earnings to account for changes in average wages since the year the earnings were received. Calculate your average indexed monthly earnings during the 35 years in which you earned the most.’ – Soc Sec Admin
I know better than to use the word ‘regressive’ around you.
Given the ‘flate rate’ computation of FICA, they (SSA) should figure out how to make wealthy earners pay more, because they are going to get more out for sure.
Dobbs
the best 35 years, not the last 35 years.
the adjustment for “progressive” benefits comes in the benefit caculation formula: your initial benefit is calculated as 90% of the first 500 dollars or so average adjusted monthly income, plus 30% of the next two thousand (or so) dollars average adjusted monthly income, plus 15% of average adjusted monthly income over 2000 dollars up to the cap [which is currently at about 160,000 dollars per year….so i suspect a good chunk of “the rich” are paying “their fair share.”]
the percents in the formula have stayed the same since i have been watching (about 20 years) the dollar amounts change to reflect the change in average wage levels.
so the wealthy earners pay more (12% of 160,000 is more than 12% of 20,000) and they get back less as a percent of what they paid in, but still get more absolute dollars than they pay in..last time i looked, enough to make what they get back equal the real value of the dollars they paid in plus about 2% real interest. that is to say that if you paid 12% tax on your income for 40 years you would get back about 25% of your income for 20 years life expectancy at age 65….or more if you live longer. I find it hard to imagine anything more fair or more progressive that would work. but of course everybody is sure that someone else got the biggest piece of the burfday cake.
@Fred,
You posted ” . . . but the Soc Sec Admin does say they only consider the most recent 35 years.” No, it doesn’t. The quote from the SS Admin that you posted immediately below it says “Calculate your average indexed monthly earnings during the 35 years in which you earned the most.” It says nothing about “the most recent 35 years.”
Y’know, I assumed that ‘the 35 years in which you earned the most’ would be the most recent ones. Sorry about that. Thanks for picking that nit.
In my case, I started paying into FICA in 1964, stopped in 1994, and resumed for about two & a half years from 2001 to 2003, which was enough to get ‘full’ Soc Sec benefits, but not quite 35 years. So my pay record extends back to my first (minimum wage) job of about $1.85 per hour as I recall.
Joel
jsut so you know i noticed…your comments are right as far as i can tell. not sure everyone would understand them. but then i have the same trouble.
If the wealthy pay more into Soc Security, they are going to get more out. That’s the way the system works. Their benefits will be taxed however, so that’s good. Better to do that than to do’means testing’ perhaps.
Means testing for Soc Sec benefits
paddy
your telegraphic style assume the reader will know what you are talking about. i can’t really tell. i will attempt a few answers that may or may not address your contribution:
“fixing the great financial crisis” has nothing to do with Social Security. Social Security is designed to protect you from financial crises. the value of your benefits may change a small amount from time to time, just as the value of any savings will depend on interest rates, inflation, recessions, war, famine, and personal bad luck. but the system is designed to limit the damage and still provide an adequate pension and a reasonable return on your money, plus a significant boost if your lifetime income falls so low that your savings would not pay enough to keep you out of serious poverty.
“persiten inflation” SS finesses the inflation problem by paying benefits in the same inflated dollars as incomes (FICA CONTRIBUTIONS.) that’s the magic of pay as you go financing, which most people don’t understand, just as they don’t understand that ALL savings are paid out of the incomes of the people following you pay into whatever bank, stock, business, or family your savings are kept in. in the same way ALL onvestments can be called “Ponzi schemes” by the ignorant who do not understand that the point of a Ponzi scheme is a fraud, NOT the(mere) fact that “profits” for earlier investors are paid from the money of later investors.
“2% growth target inadequate” compared with what you won’t get 2% real growth from any “safe” investment. SS “returns” growth equal to inflation plus growth in average wages over time…and for the very lowest earners something close to 10% depending on circumstances that “average” does not mean anything for.
“federal debt skyrocketing.” SS has nothing to do with the federal debt. unless you are the kind of person who borrows five hundred dollars from your grandmother and then accuses her of adding to your debt.
“ss trust fund recepts stopped hiding deficit” yes, it’s true. we have a Congress that thinks it is lowering the debt by counting money borrowed from the Trust Fund as “income” that does not have to be repaid. and counting money to repay that debt as “deficit” on it’s budget. these people are the “damned liars” that are referred to in the adage “there are liars and damned liars and statisticians.”
the Trust Fund was increased (by increasing payroll taxes ) so the baby boom genration would pay it’s fair share for its own benefits and not rely on the following smaller generation to pay more than they should under the normal Pay As You Go financing. the government borrowed the extra money (while waiting for the boomers to retire) just like they borrow any money, just like any trust fund or business surplus buys safe bonds to store it’s temporary surplus. A lot of people thinks this is the government stealing the Trust Fund. that is a lie. the government pays interst and principle on the Bonds it sells to Social Security just the way it pays interest and principle on the bonds it sells to you, your rich uncle, or the givernment of China.
at the risk of sounding offensive…because it is important..i will say that your “understanding” of SS amounts to a dog’s dinner of all the lies you have been told. don’t feel bad. you are the victim, not the perpetrator. Even those on the Left who think they are defending Social Security end up incorporating those lies into their arguments because having heard them so many times they have become a part of the hard (semi-hard) wiring of the brain which you use without even noticing when you think you are thinking about something
coberly,
life is short, no worries.
i’ve been around long time, I read the audit of federal debt before winter holidays
all debate ignores, ss is not immune to tectonic shifts of the vast mismanagement of the macro economy.
meditation and brevity is good.
One of the important points of what Dale said is that inequality is a problem that should be solved on its own. People want to attach their solutions to Social Security because it is successful. SS has done such a good job of solving the problem it was designed to solve.
For a different problem, you need a different solution.
To solve the inequality problem you need to convince people that successful people should be paying for services that benefit less successful people. Roads benefit the people going to stores to buy stuff. They benefit the workers who commute to their jobs each day. If you can’t see that the benefit to the store owners and other employers is at least as great, your mental block will not let you solve inequality.
Arne
thanks. of course you are right. it would help if the successful people were willing to pay the less succesful people a fair wage. then they would not have to pay taxes for the services to the poor. but then, there is that mental block.
If I am still in the phase of brainstorming solutions (meaning I don’t make judgement whether they can work), I observe that the definition of a fair wage could vary dramatically.
I believe that most of the profits that derive from having a healthy educated workforce goes to the business owners. It would be entirely fair to have them pay for healthcare, childcare, education, environmental protection, military, police, and much more. In such a case, a living wage would be far lower.
Arne
yes (i think). a living wage that would be enough to pay for retirement, health insurance, unemployment insurance, decent housing, decent food, decent clothing
etc would be higher than a “minimum” wage that didn’t. so we get to fight to make the rich pay enough in taxes to make up the difference. i would prefer the “living wage” to the “tax the rich” approach, but the rich can’t bring themselves to pay a living wage as long as the poor have no market power to “demand” one…and they intend to keep it that way…and damn any government that interferes with their “freedom” to pay “what the market will bear.”
this requires keeping the people ignorant.
people create governments…or put up with them…for mutual protection against enemies foreign and domestic…including local gangs of thugs who would rob them. things always go bad when the local gang of thugs becomes the government and makes the laws.
this seems to happen all the time. [but David Graeber, “the Dawn of Everything” writes that from time to time people have just walked away from such governments.]
Denis
unions raising wages would be the ideal solution, but until we can do that, we need to manage what we have. SS works on a ten year projection period (not five as you suggest). congress ignores it. the 75 year projection period was put in by the Right who wanted something to scare people with (20 Trillion Dollar Deficit….over 75 years and 200 million people making 60,000 per year works out to about 20 dollars per week, which can be reached with one dollar per week raises per year while wages are going up about ten dollars per week per year.
no need to raise income tax or raise the cap. either would turn SS into welfare as we knew it. there is nothing at all wrong with paying for your own future groceries while you still have an income. you would understand this if the liars had not filled your head with the sky is falling rhetoric.
certainly no need to cut income tax in order to raise payroll tax. what would that accomplish? you still have to buy all those ships and planes to keep the Russians away.
stop trying wiggle out of paying for your own future groceries. the cost is fair. the peace of mind is priceless.
fixing the math error:
say you are making 50 k per year now (about 1000 per week). your Social Security costs you about $60 per week, leaving you with 940 $ after paying FICA. In 20 years (asuming the projected growth in real wages of one full percent per year) your income will be more than 1200 $ per week. If Social Security tax increases one tenth of one percent per year, Your FICA deduction will will be about 96 $ per week, so after paying FICA you will have 1104 $ per week, 164 $ more than today. But the extra “tax” will not be lost to some government black hole, it will be saved at “interest” to pay for your needs when you can no longer work. The interest comes from pay as you go financing in a growing economy . This will be enough to avoid the otherwise likely benefit cut of 20%…which would be a 20% cut in a benefit of about 500 dollars per week..down to 400$ per week. You can live on 500/wk. You can’t live on 400/wk.
note that the needed one tenth percent per year tax increases stop after 20 years. note also that if you are not paying the gradual increases you will reach the needed full 2% increase in about ten years. This is because every increase pushes back the date the TF runs out. With the gradual increase you reach a total tax increase of !% in about ten years, and the full 2% after about 30 years because of that pushing back effect. so the real increase is much less than an average of one tenth percent per year. that is, it takes 20 years to reach the ultimate 2%, but the increases don’t have to occur every year.
note also that this increase is what it is going to take to meet your needs whether there is Social Security or not. You will end up paying it anyway, through income taxes or higher prices the rich will charge, or lower wages they will pay, in order to make up for the extra tax they would pay. Even if you win on the stock market, the same money will come out of your winnings…and go into the price of the stock to the guy who buys yours when you need to cash out. There really is no free lunch but lots of ways to miss lunch altogether by trying to get someone else to pay for it.
oh, yes, you can win on the stock market. but you can also lose. if you want to invest in stocks or personal business there is nothing stopping you. you already have more than twice what your grandparents had after paying for SS. should be enough for a smart investor like you to make your fortune..and you still get your SS money back with interest.