Saving Social Security - Island of Sanity

Taxes & Spending

Saving Social Security

Right now, social security is paying out more money in benefits than it takes in in taxes. It is collecting roughly \$3 for every \$4 it pays out. There are some reserves, but those will be exhausted in about 10 years at present rates.

One could quibble about the size of the reserves -- there are some accounting tricks in there. And one could certainly quibble about how fast those reserves will be used up, as that depends on predictions about the future that may or may not be accurate. But let's ignore those issues for the moment, as they're not relevant to my point here.

So social security is going broke. What can be done to fix the problem?

There are really only two possibilities: cut benefits or increase taxes. Politicians like to engage in fancy talk about other solutions, but they all have to come down to one of those two things, or a combination of the two, or they don't address the issue.

That said ... The most straightforward thing to do would be to directly cut benefits and/or increase taxes. But to balance the system, benefits would have to be cut by 25% or taxes increased by 33%.

Side note: Why a 33% tax increase but only a 25% benefit cut? You might wonder why the two numbers are different. The simple answer is, because the second number is bigger, so the number of dollars is a smaller percentage. Let's round number off a bit and say that income is \$750 million and outgo is \$1 billion. (Actually both numbers are larger than that, but I'm rounding down to make the arithmetic here simpler.) To balance the system, you could increase taxes by \$250 million, or you could cut benefits by \$250 million. \$250 million is 33% of \$750 million, so that would mean a 33% tax increase. But \$250 million is "only" 25% of \$1 billion, so that would mean a 25% benefit cut. It's the same number of dollars either way, but it's different percentages. But anyway ...

Raising taxes or cutting benefits would be painful and politically almost impossible. So I suspect that Congress will try to do this indirectly. Options include:

• Instead of cutting benefits and/or increasing taxes all at once, do so gradually over a period of years. In the long run this will hurt just as much, but by doing it slowly you give people time to adjust. I doubt this will be done, though, as it requires Congress to take action before there is a crisis instead of waiting until the roof falls in, and Congress just doesn't work that way.
• Reduce the inflation adjustment. Right now benefits are increased every year to keep pace with inflation. Instead of increasing benefits by the amount of inflation, increase by something less, say. So if inflation this year was 4%, instead of increasing benefits by 4%, increase them by, say, 3%. No one's benefits would go down in nominal dollars. They would lose purchasing power but psychologically it would be easier. If the difference was 1%, then this would save 1% the first year, 2% the second year, 3% the third, etc. In 7 years this would total 28% and the system would be back in balance (all else being equal).
• Raise the full retirement age. This accomplishes two things: One, it reduces the benefits paid to people who retire early. (Benefits paid to early retires are reduced for every month they retire before full retirement age.) Two, it would encourage people to work longer, thus reducing the number of people collecting benefits and increasing the number of people paying taxes.
• Increase the portion of social security benefits that are taxable. We have a strange rule right now that says that if your income is low, your social security benefits are not taxed, but as your income goes up, a percentage of your social security benefits become taxable, reaching 85% if you have a very high income in retirement. This creates a situation where if you work a part time job after you retire, you might face an effective tax rate on that income of 50%: the tax on the income itself, plus the tax on the portion of your social security that is now taxable. Why bother with the complex formula? Make social security taxable or don't.
• Tighten eligibility requirements. For example, make illegal immigrants ineligible for benefits.
• Broaden the tax base. Get more people working and paying taxes. In the long run, create policies that encourage people to have more children. This is a very long run strategy: if you implemented a policy today that successfully encouaraged people to have more children, it would be 18 years before those children would enter the work force and start paying taxes. But in the long term, this is a painless solution.

Note that for most of history, people expected their children to take care of them in their old age. This is still how it works in much of the world today. Social Security shifted this from an individual family responsibility to a collective society responsibility. That is, instead of my own children taking care of me, now my children and everyone else's children pay into a pool that supports all retirees. The advantage of this is that it provides for people who were unable to have children, or whose children are not able to support them. The disadvantage is that we still need children to make the system work, but it takes away some of the incentive for a person to have children. When you needed children to support you in retirement, you had to have children. Now you can avoid all the trouble and expense of raising children and let somebody else's children provide for you. Children are no longer an investment in your future.

I suspect that Congress will be unwilling to vote for a straight benefit cut or tax increase. I also doubt they will take action soon; they will wait until the last possible moment. Then they will hastily throw together a package of indirect benefit cuts and tax increases to try to hide the fact that they are cutting benefits and increasing taxes. And they will proudly tell the voters, "See, we didn't cut anyone's benefits." When they really did, they just did it indirectly.