Social Security

Social Security is funded on a “pay as you go” basis. Thus, workers are paying payroll taxes into the system (6.2% for Social Security plus a matching 6.2% paid by their employers) to cover benefits for current beneficiaries. It is understood that they will receive comparable benefits in their retirement years, but there is no mechanism for linking the taxes a worker has paid in to the benefits he or she will receive.

For years, taxes dedicated to Social Security substantially exceeded program outlays. The temporarily "excess" revenues were credited to one of two trust fund accounts (Old Age and Survivors Insurance; Disability Insurance) for accounting purposes, but spent for other purposes. Now the situation is reversed, with outlays exceeding dedicated taxes. Given a declining ratio of workers to beneficiaries, a rapidly growing shortfall is projected between Social Security benefits and the taxes earmarked to pay for them.

The increasing prevalence of long-term disability awards has contributed importantly to the overall Social Security deficit. On several occasions, most recently in 2015, Congress has increased the amount of tax revenues dedicated to the DI trust versus the OASI trust so as to prevent the former fund from running dry (and triggering an across the board reduction in disability payments). Time to do something about the Social Security disability program, 6/1/15.

Certain reforms to the disability program were enacted in 2015 (HR 1341), but they didn’t appear strong enough to have a major effect.

Action is also required to shore up the traditional Social Security program (retirement and survivor benefits), which is generating cash deficits now (made up from general revenues) and will exhaust the OASI trust fund in due course. There are basically three ways for the government to make ends meet – raise taxes, cut benefits, or borrow money (contributing to the outlook for soaring government deficits).

Even if the solvency issue could be resolved in some way, moreover, the current structure of Social Security would remain inequitable. Long-lived beneficiaries may receive far more than they paid into the system, while others receive far less (or even nothing). There are also issues re spousal and survivor benefits, which only become available when couples get married and stay that way for at least 10 years.

The best way to fix Social Security (make it equitable as well as solvent) would be to give younger workers the option of using the Social Security payroll taxes they pay to fund personal retirement accounts in lieu of traditional retirement benefits. There would be no effect on the benefits of retirees or workers nearing retirement.

The Cato Institute proposed a Social Security reform plan along these lines in 2004. See The 6.2 Percent Solution, Michael Tanner, and the informative pamphlet “It’s Your Money” (contact us if you would like a copy).

The Bush Administration proposed a watered-down version of the Cato plan in 2005, which was fiercely resisted. One of the most effective objections was that up front money (several trillion dollars over a period of years) would have been required to fund the creation of personal accounts. Although the outlays would have been fully recouped later, opponents labeled them a “cost.”

Despite our best efforts – SAFE contacted Delaware’s members of Congress, sent a memo on Social Security financing to all U.S. Senators
SSF, and gave a talk at the Retired Men’s Luncheon Club Newsletter - the president’s proposal fell short and was abandoned. The idea of having personal accounts appears to be politically "dead" for the time being, and recent discussions have focused on trimming benefits and/or enhancing funding for Social Security so as to defer the day when the government would be forced to make more drastic adjustments.

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