The release of the 2009 Social Security Trustees Report indicates that the current economic crisis has negatively impacted the Social Security budget. It’s now projected that by 2016 Social Security spending will exceed revenues. According to the report, the financial condition of the Social Security program “remains challenging” and “need(s) to be addressed soon.” A look at the numbers shows us the severity of the Social Security budget problem.
Social Security is a “pay-as-you-go” system. This means that when you work, the government takes your money and gives it to Social Security recipients. In order to get workers to accept this system, the government promises to take other people’s money and give it to you when you retire. Think of it as an exponentially larger version of Bernie Madoff’s Ponzi scheme.
As long as a lot of people die before collecting any benefits, or die without collecting many benefits, the system is financially sound. In 1950, the worker-to-beneficiary ratio was 16.5-to-1. With people living longer, the worker to beneficiary ratio has fallen to 3.1-to-1 and within 20 years it’s expected to drop to 2.1-to-1. Due to this falling ratio, over the years the feds have raised tax rates and now must consider further adjustments.
Let’s look at the revenue side of things. Each worker’s income below about $106,800 is taxed at a 12.4 percent rate. There are no deductions for this tax. All income is taxable income. Even those in the lowest income brackets have roughly one-eighth of their income taken from them to fund the Social Security system.
Few workers, however, understand the tax burden of the Social Security system. On their paychecks, they see that 6.2 percent of their gross pay goes to pay for Social Security. What they don’t see is that employers match this tax payment with an equal 6.2 percent payment. It may seem that employers are paying half of the Social Security taxes, but that’s not the case. Even though the employers are legally liable for one-half of the tax, they shift the tax onto workers in the form of lower gross wages. Therefore, the Social Security tax burden, 12.4 percent of each worker’s gross pay, falls on workers. Half of this burden is hidden from the workers.
Currently, the Social Security Administration is running a budget surplus. For 2008, Social Security revenues totaled $805 billion and benefit payments and administrative costs were $625 billion, resulting in a surplus of $180 billion. Over the years, the system has run up an overall surplus totaling $2.4 trillion.
What has happened to this surplus? The SSA took in $180 billion more than it spent in 2008. However, the federal government spent this $180 billion on other programs. Since the funds were spent on something other than Social Security, the government declares that it loaned itself the $180 billion, calling such “lending” intragovernmental debt. For all Social Security revenues that are spent on non-Social Security programs, the Treasury department issues bonds to the SSA and those bonds are held in the Trust Fund. Surely we can have confidence in anything called a Trust Fund.
Think of this type of lending for a moment. The federal government is in debt to itself. Compare this to debt in the private sector. No business declares that it’s deep in debt because it loaned itself money. It’s the same with families. Parents don’t lay awake at night trying to figure out how to repay the money they loaned themselves. The government, however, thinks that it makes perfect sense to collect $100 of tax revenue, spend the $100, and then declare that it now owes itself $100. This scheme is not limited to Social Security. Currently, federal intragovernmental debt for all programs totals $4.3 trillion.
How should we think about this intragovernmental debt? The Treasury department collects $100 in Social Security taxes, the SSA spends $70 on Social Security benefits, and the other $30 goes to, let’s say, military spending. Since $30 was collected for Social Security, but spent on the military, the Trust Fund now has $30 of bonds. The bonds are simply promises of future taxes. The feds collected the money for Social Security and now they are going to collect taxes again for Social Security spending. The $2.4 trillion of bonds in the Trust fund represent Social Security revenues that need to be collected a second time, since the tax revenues did not go towards Social Security spending when they were initially collected. In fact, all of the intragovernmental debt represents future higher taxes.
The interest on the bonds in the Trust Fund is another issue. In 2008, the SSA racked up $116 billion of interest payments on its $2.4 trillion of bonds, interest payments that were made in the form of more Treasury bonds for the Trust Fund. The government loans itself money and then issues bonds (read, higher taxes) to pay itself interest on that lending. This is not an insignificant amount. In the last ten years, the SSA has collected $754 billion of interest on its share of the intragovernmental debt.
Though the SSA is currently running a budget surplus, its financial position is rapidly deteriorating. With the glut of upcoming retirements, the worker-to-beneficiary ratio is falling and Social Security spending is rising much fast than its revenue source. A year ago, the SSA estimated that the system would be solvent until 2017. Falling revenues due to the recession have resulted in a new estimate of 2016. At that point, the system will need additional tax revenues to be able to pay the promised benefits.
The Trustees Report declares that, starting in 2016, the “deficits will be made up by redeeming trust fund assets until reserves are exhausted in 2037.” This is sleight of hand. The actual day of reckoning is 2016, not 2037. By 2037, the Trust Fund will be depleted. But the Trust Fund is irrelevant. Regardless of the status of the Trust Fund, if the current estimates are correct, beginning in 2016, the system will need significant additional tax revenues.
The shortfall starts in 2016, but increases rapidly. According to the report, Social Security–tax income will only be able to finance 76 percent of scheduled annual benefits in 2037.
The report calls for “an immediate 16 percent increase in the payroll tax (from a rate of 12.4 percent to 14.4 percent) or an immediate reduction in benefits of 13 percent or some combination of the two” to bring the system into actuarial balance.
Social Security: another legacy of FDRMaking the system sustainable will require higher taxes or benefits reductions. These reductions could be achieved by either reducing the benefits per recipient or reducing the number of beneficiaries — say, by raising the minimum age requirements. The solution is to give workers a negative rate of return on the money that is taken from them. It would also help if some workers collected no benefits at all. Workers who are taxed and then die before collecting any benefits are a boon to the system. Maybe the federal government should rethink its war on tobacco.
This system is a massive income-redistribution scheme, taking one-eighth of most workers’ incomes. The total tax burden is hidden from the workers. The tax revenues have been used to cover the deficits in the rest of the government’s budgets, and the only way to make the system sustainable is to give the participants a negative rate of return on their money.
The Social Security system has run its course. It’s unfair and it’s economically destructive. It’s time for the program to be abolished.
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