Mike the Mad Biologist

One of the maddening things about the Social Security ‘debate’ is the assumption that Social Security will be ‘insolvent’ in several decades (oddly enough, every year like clockwork, the several decades prediction is renewed….). It won’t be. The Social Security Trustees release three estimates of the long term health of the Social Security program. These three estimates differ in the assumptions of how the economy will perform, and can be described as: mild historical underperformance, sucky, and ‘Oh God, Oh God, we’re all gonna die!’

These estimates are mandated by law. Typically, what’s discussed in news reports is the intermediate, sucky performance (I’ll get more specific in a jiffy!).

But the key thing is that if the economy performs that poorly for that long, we have so many other things to worry about, such as three decades of piss-poor economic growth. And even in that scenario, all we have to do to pay Social Security benefits in full would be to increase the payroll tax by 0.75 – 1.5% (i.e., 6% plus that additional number). Alternatively, we could remove the income cap and the problem also goes away (currently, for married couples, the Social Security tax on income is only applied to the first ~$106,000 of income).

So, what do I mean by my highly technical terms of “mild historical underperformance, sucky, and ‘Oh God, Oh God, we’re all gonna die!'”? Well, here’s what I mean (italics mine):

The CBO forecasts that if RGDP [Real Gross Domestic Product] grows annually at approximately 2.5 percent, then in 2037 Social Security tax revenue alone will be able to pay 78 percent of promised benefits without any changes to the program. In terms of the goods and services that these 78 percent of benefits can buy, i.e., in what economists call “real” terms, benefits will be greater than 100 percent of those paid in 2011!

RGDP grew at an average annual rate of 3.4 percent over the last 80 years, including the Great Depression of the last century. If annual RGDP grows anywhere near this historic average for the next 27 years, then in 2037 and for long after, Social Security will pay 100 percent of promised benefits, again with no changes whatsoever to the program!

So, if the economy grows for 27 straight years at three quarters of the average rate of growth, we have to make minor adjustments in the program (either in the future or starting now). Do we really think that’s going to happen? As pessimistic as I am, I really don’t. And even if it does, Social Security will be an easy fix.

This is such a non-issue.

Comments

  1. #1 Min
    February 17, 2011

    The attack on Social Security is propaganda. And it has already convinced a lot of young people that Social Security may not be there for them.

    The point is, if we can convince you that you are screwed, then maybe you won’t notice when we screw you.

  2. #2 Wow
    February 17, 2011

    Well, the other reason why is that there is a $1.5Tn overpayment into Social Security that hasn’t been spent on Social Security.

    Of course, that piggy bank got raided to pay for Bush tax cuts, but that means that the tax cuts owe Social Security for their use of that money.

  3. #3 D. C. Sessions
    February 17, 2011

    Of course, that piggy bank got raided to pay for BushReagan tax cuts

    FTFY.

    Still, just to be on the safe side, we should cut benefit payments right now to 78% so we won’t have to later. We can do that by hiking the retirement age for coal miners up to the age where judges, legislators, and investment bankers normally head for the golf circuit.

  4. #4 Rob Jase
    February 17, 2011

    The righties can’t help it. Most of them are fundies who believe in an imminent apocalypse and they project that onto everything other than climate change.

  5. #5 Wow
    February 17, 2011

    Well, the biggest tax cuts of all time were Bush’s. Whether that is bigger “in real terms” could be open to question, depending on the assumptions of what “real terms” could be.

    But maybe instead of cutting payments by 78%, you could get the money back by getting the taxpayers who made out like bandidos to pay their rebate back, since it was paid out to achieve economic growth and that hasn’t happened.

    You know, increase the upper rate of tax, cut loopholes and stopping large corporations from avoiding taxes by moving abroad. An Obama call that has been kicked out by the opposition because, well, we can’t have any positives of a black president in the USA, can we? ESPECIALLY one that’s a *democrat* (forgetting that there’s not a lot of difference between R and D any more, but R’s have to play “their team”).

    After all, the only reason why you have to cut payments by 78% is because tax cuts were not self-funding and led to a huge deficit, hidden by taking the money in SS.

  6. #6 Courtney
    February 17, 2011

    As a relatively young person (I turn 28 next month), I’m uncertain about whether Social Security will be there for me when I retire. However, this isn’t because I’m worried about its financial soundness (explanations like Mike’s have convinced me that it is financially secure), but because I’m worried that the Republicans will (directly or indirectly) kill it anyway before I retire. I have 35-40 more years before I hit retirement age, which leaves plenty of time for them to manage to do it.

  7. #7 kermit
    February 17, 2011

    D.C., I used to be with you on that – raise the retirement age slightly to adjust for any shortfalls. But that would simply dump (or keep) more old people into the job market. More folks over 60 cannot get work once they lose their jobs. Folks over 60 who are known by their employer to be more valuable usually have the option of continuing to work. Isn’t every oldster working taking a slot for a young person without a job? As has been pointed out, we can cover the costs simply by telling rich folks to pay their share – remove the cap on SS tax.

  8. #8 D. C. Sessions
    February 17, 2011

    Kermit, the lab called. Your sarcasmometer is overdue for recalibration.

    Personally, I’d love to see a serious discussion on the topic of using federally-subsidized early SS to offset unemployment. That may be because I have a child with a brand-shiny-new degree in physics who can’t find anything full-time to apply for, much less get an interview.

    It is not good for us to have people’s careers flame out on takeoff in order to save fuel for taxiing to the gate ($HERSELF is retired and I’m only a few years short of SS myself.)

  9. #9 harrync
    February 17, 2011

    Social Security [FICA] is an individual tax, not a “couples” tax. So a couple could be taxed on income up to $212,000. But your basic point is still correct: removing the cap would do a lot to solve the funding problem.

  10. #10 parnell
    February 17, 2011

    Robert Reich on his blog — robertreich.org — covers the issue of raising the cap with a bit of history I wasn’t aware of. The relevant portion:

    “Back in 1983, the ceiling was set so the Social Security payroll tax would hit 90 percent of all wages covered by Social Security. That 90 percent figure was built into the Greenspan Commission’s fixes. The Commission assumed that, as the ceiling rose with inflation, the Social Security payroll tax would continue to hit 90 percent of total income.

    Today, though, the Social Security payroll tax hits only about 84 percent of total income.

    It went from 90 percent to 84 percent because a larger and larger portion of total income has gone to the top. In 1983, the richest 1 percent of Americans got 11.6 percent of total income. Today the top 1 percent takes in more than 20 percent.

    If we want to go back to 90 percent, the ceiling on income subject to the Social Security tax would need to be raised to $180,000.

    Presto. Social Security’s long-term (beyond 26 years from now) problem would be solved.”

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