Millions of Americans are worried about Social Security — whether they will receive the full pension checks they were promised in the coming years. And many younger people believe, wrongly in my opinion, that Social Security will no longer be there for them when they are ready to retire.
The issue is considered so sensitive in Washington that most politicians tread carefully. The Social Security Trust Funds’ most recent annual report from May said benefit cuts of around 20 percent would be expected starting in 2033 if no action was taken.
But when you stop and really look at the problem, it turns out that what it takes to fix Social Security is no big deal.
That’s not a bold claim. It’s based on hard numbers calculated by Alicia Munnell, an economics professor at Boston College who is one of the country’s leading social security experts.
A 3.5 percentage point increase in the 12.4 percent Social Security payroll tax — borne half by employers and half by employees — is all that is needed to maintain full Social Security benefits in the 2030s and beyond, Professor explained Munnell in a telephone conversation.
She also emphasized that even if Congress did nothing at all to improve Social Security, you would receive most of your promised benefits. That’s because most of the money that funds Social Security checks comes from payroll taxes paid regularly by working people. Revenue from the system’s dwindling trust funds supplements it. Enough money will flow into the system from taxes to fund about 80 percent of benefits, even if trust funds fall to zero. But Professor Munnell doesn’t expect that to happen.
Why a solution will come at some point
Benefits for people who are already retired or soon to be retired are unlikely to be cut because older people vote in large numbers. Taking away promised money would be politically explosive, as President Ronald Reagan discovered in the 1980s when his administration supported such a move, only to quickly back down.
At some point the political class will find a way to avoid this calamity. Millions of people are already experiencing anxiety and confusion about retirement. It would be much better for everyone if the repairs were done sooner rather than later. Because of the flaws in the rest of the country’s pension system, maintaining Social Security benefits – rather than cutting them – is critical to the well-being of current and future retirees, Professor Munnell said.
Still, raising taxes on Social Security will never be a popular move. It isn’t even openly discussed by presidential candidates, although both the Biden and Trump campaigns say they are committed to keeping Social Security intact.
In an election year, candidates are not rushing to solve a problem that will not hurt people financially for another decade and that involves a tax increase, even a relatively small one.
“It’s going to be difficult because you have to raise people’s taxes before they see anything concrete,” Professor Munnell said. “You have to raise their taxes so they can get what they already think they are getting. That’s why I’m afraid that politically in this country we have a tendency to push ourselves to the edge and only act when we’ve reached it. We did that in 1983,” the last time Social Security was substantially overhauled.
Numbers, big and small
Professor Munnell, 81, has been conducting serious research on social security since the 1960s. As deputy finance minister for policy issues from 1993 to 1995, she officially dealt with social security. She has led the Center for Retirement Research at Boston College since its founding 26 years ago and produces her own clear annual reports on the state of the Social Security trust funds shortly after the Social Security trustees issue their reports.
As she delves into the complexities of Social Security, she uses common sense and provides easy-to-understand answers.
How big is the problem of the social security funding gap? It can look big or small depending on how you frame the numbers.
If you want to scare people, she said, point to the estimated total size of the gap between costs and revenues over the next 75 years: $22.6 trillion. That’s big!
But the US economy is huge and growing. Relative to the share of the entire economy over the next 75 years, the funding gap for social security is tiny: just 1.2 percent of gross domestic product.
The key factor to keep an eye on is payroll taxes, as they account for the majority of Social Security funding. Based on the total amount collected through payroll taxes, the financing gap is around 3.5 percent.
For this reason, Professor Munnell recommends an additional payroll tax of 3.5 percentage points, which would be paid on top of the 6.2 percent that employers and employees are each currently responsible for. (Self-employed people pay the entire 12.4 percent tax themselves.)
Raise taxes just so much without changing anything else, she said, and much of the problem will be solved.
Roots of the problem
People in my generation, the baby boomers, are retiring in droves. At the same time, due to a long-term decline in the birth rate, comparatively few people of working age pay taxes to ensure the financing of the system. Immigration has helped strengthen the workforce, and much more immigration would solve the problem, but given American politics, it would be unwise to count on it.
These demographic problems were well understood in 1983, during the Reagan administration. At that point, a bipartisan commission led by Alan Greenspan, the future chairman of the Federal Reserve, was drawing up the outlines of a legislative package that would put the system on solid financial footing for a while.
Congress and the president eventually agreed to some important changes. These included raising the payroll tax to the current rate, subtly cutting Social Security benefits, and building a surplus into trust funds, the size of which has fluctuated since Social Security was created in 1935. The idea was that as the baby boom generation retired, more money would flow in. If more was withdrawn from Social Security each year, the trust funds would make up the difference.
Stephen C. Goss, chief actuary of the Social Security Administration, said in testimony before Congress last year that officials in 1983 had expected the trust funds to last until the mid-2050s. “It was clear that further action would be required at this point,” he said.
Instead, the day of reckoning comes around 20 years earlier.
Two things went wrong, Mr. Goss said. The first was the deep recession of 2007/2009, which destroyed long-term forecasts.
Second, and more importantly, income inequality in the United States grew much faster than economists had expected. Earnings for the top 6 percent have grown “much faster than the overall average,” Mr. Goss said. In 1983, the Social Security payroll tax was levied on 90 percent of the state’s wage income. Now, with taxable wages capped at $168,600, only about 82.5 percent of the country’s wage income is taxed for Social Security, he said. The cap would have to be raised above $300,000 to return to the Reagan administration’s 90 percent coverage.
Such a cap increase — taxing wealthy people more and taxing everyone else less — would reduce the 3.5-point tax increase needed to fully fund Social Security to just 2.45 points, the Social Security system estimated.
Lots of options
Professor Munnell’s solution is simple and straightforward. It would install an automatic circuit breaker that could temporarily freeze cost-of-living adjustments or tweak taxes or benefits to prevent the system’s finances from ever getting out of hand again.
Your suggestions make sense to me, although I would take into account rising income inequality, raise the wage cap, and reduce the overall payroll tax increase. This is hardly a radical idea. It would be a return to the bipartisan spirit of Social Security reform championed by President Reagan, a notoriously conservative Republican, and Speaker Thomas P. (Tip) O’Neill Jr., the Massachusetts Democrat.
There are endless ways to repair the system, and once serious efforts are made, many of them will be discussed.
However, cutting benefits should be ruled out, Professor Munnell said. Only about half of workers in the United States are covered by a pension plan other than Social Security. Even for those with corporate retirement plans, the overall retirement readiness picture isn’t pretty. The financial services industry is happy to step in with solutions, but always for a fee.
The reality is that Social Security is just as important to most people today as it was 40 or 50 years ago.
The White House and Congress may wait until the 2030s, when benefit cuts will be imminent and general fear of retirement will increase.
Yet there is no doubt at all that millions of people would be better off if Social Security were regulated and benefits were secured, and that is what happened now.
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2024-05-31 13:00:08
www.nytimes.com
