Social Security. Again.

Since the new Social Security Trust Fund report has come out and created a kind of a mini-stir in the Washington Post and other conservative newspapers, I suppose I should say something about it, what with this being an economics blog and all.

So the first thing I should say is: don't panic. 

The report says that the Social Security Trust Fund will be depleted in 2033, three years earlier than last year, and there have been frantic cries of imminent doom from the usual suspects.  Here's the terrifying news from the summary report:

"After 2020, Treasury will redeem trust fund assets in amounts that exceed interest earnings until exhaustion of trust fund reserves in 2033, three years earlier than projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2086."

But two points should be emphasized: first, this estimated date has fluctuated up and down over the years.  The current change largely reflects the ravages of the recession and the fact that, due to a dysfunctional Congress here and a mistaken dependence on austerity in Europe, we did not provide sufficient direct stimulus three years years ago, or even two years ago, to stop this recession.  As the economy recovers that estimate may change.  And second, even after the trust fund is exhausted, Social Security tax receipts will be enough to pay 75% of the total scheduled benefits---forever.  Let me repeat that: the annual Social Security dedicated tax receipts will be enough to cover 75% of scheduled benefits under the current benefit formulas forever.  The Trust fund is only to cover that last 25%.

 But isn't the Social Security tax burden going to just overwhelm us at current rates, given the fact that the population is aging and the ratio of retired people to people in the working population is rising?  Well, here's the size of that issue as reported in the Trustees Report Summary:

"Program costs equaled 4.2 percent of GDP in 2007, and the Trustees project these costs will increase gradually to 6.4 percent of GDP in 2035 before declining to about 6.1 percent of GDP by 2050 and then remaining at about that level."

So the whole Social Security bill, if we pay every penny of Social Security obligations under current law, with the existing benefits and retirement age, is currently 4.2% of GDP, rises to a maximum of 6.4% in 2035, and then falls after that.  This is what it will cost us to care for the generations that preceded us at work in this country.  6.4%, max, and that huge sum for only a few years in the mid-twenty-thirties.  What on earth is the panic about?  Is that really too big a burden for us, too overwhelming a sacrifice for us to bear?  

Having said "don't panic", though, I should make it clear that I don't mean do nothing.  The fact that the trust fund is expected to ever be depleted  means that we should do something to correct that.  So the real question is what we should do.   So here are my opinions, in brief:

 We should do the very thing that the Samuelson in the Post, Paul Ryan in Congress, and the Tea Party everywhere want desperately to avoid: we should raise taxes sufficiently to cover those costs.  And we should do it soon.   There are a lot of options: we could make it a flat tax on all income, rather than a payroll tax on low incomes.  Right now there is a cap: no one pays a penny of SS tax on income above $110,100, and that cap is indexed for inflation.  a few years ago AARP estimated that raising that cap so that 90% of all income was in the Social Security tax base would cover 39% of the current SS projected deficit; simply eliminating the cap altogether would cover a good deal more of it, and it would go a long way toward making the total tax burden in this country more progressive. 

Or we could increase the payroll tax rate by 0.5% (one half of one percent): according to the same study that would close 23% of the gap. 

 Or, of course, we could simply supplement the dedicated Social Security revenues from the general fund, that is, through normal income taxes.

Finally, I don't like reducing benefits, but if we have to reduce them at all the reduction should fall on those most able to afford it: the same AARP study estimated that progressive price indexation by their formula would close 76% of the gap. 

But we should not, big emphasis on not,  privatize a program that has worked extremely well, providing some retirement income security for the last 75 years, with very little management overhead.  We should not eviscerate the program or reduce benefits for those who need them.  We should not raise the retirement age just to balance the Social Security budget.


(If you have a great urge to read the SS Trustees report itself, you can download it as pdf here, or just read the summary here.)