Social Security Reform: Within nine years, the persistent and expanding deficits of the Social Security system are projected to lead to the insolvency of the trust fund, necessitating a reduction of 23 percent in benefits. Nevertheless, due to widespread misconceptions about Social Security’s finances, the majority of legislators are unwilling to discuss solvency reforms.
Certain fallacies have a semantic basis, such as the claim that “Social Security does not constitute an entitlement.” Simply put, it is a budgetary concept. Additional fallacies distort historical events or downplay the gravity of the issue at hand. The subsequent ten misconceptions are impeding our progress away from insolvency.
Social Security deficits are not feasible. Such is not the case. By 2024, Social Security will spend $1.459 trillion on benefits, compared to $1.308 trillion in payroll taxes. In order to cover the $151 billion shortfall, deficit spending will increase. Social Security’s surpluses accumulated between 1983 and 2009, so the law allows it to accrue deficits until 2033. Additionally, the Social Security system receives $62 billion in annual interest payments from the Treasury. These factors collectively contribute to budget deficits.
“The “insolvency” of Social Security is an illusory scare tactic.” Following the repayment of the $3 trillion in prior surpluses, the system will be legally unable to obtain any additional general revenues or borrowings at that point. Then, program expenditures must decrease to match system revenues, resulting in an automatic 23 percent reduction in benefits for all. This interpretation fails to acknowledge the previous cautions. The Social Security trustees issued a warning in 1999 that the old-age benefits trust fund would become insolvent in 2036. They predicted that it would become insolvent in 2033 in 2023. Therefore, the anticipated date of insolvency has advanced rather than regressed. The failure to implement systemic reforms at that time will result in more severe and arduous reforms in the future.
“The trust fund is legitimate; Congress conducted a raid on it.” Until Congress intervened to use the trust fund, it was thought to be a substantial savings account reserved for future retirees. There was no legal or practical way for the federal government to “save” the $3 trillion surplus. Using the trust fund balance, the system qualified for future deficits of equivalent magnitude (i.e., by depleting the balance) by monitoring the initial cumulative surplus. The net effect is therefore nil. As such, the Social Security Administration (i.e., future retirees) holds the bonds as assets, while the Treasury (i.e., the future taxpayers repaying those bonds) holds them as liabilities of equal value.
“Reform can be postponed until the approach of insolvency.” Seventy-four million baby boomers will have qualified for Social Security retirement benefits by 2030. Delaying reform until the insolvency date of 2033 would render these baby boomers, some of whom will soon turn 80, too elderly to comprehend programmatic changes. Moreover, increased benefit levels and heightened national debt will exacerbate the fiscal crisis and require more extensive reforms. Costs will only increase over time; the implementation of reforms in stages will allow seniors to modify their financial strategies.
“Seniors only receive your initial investment back.” Adjusted for net present value, the average middle-income retiring couple will have contributed $783,000 to Social Security and will receive $831,000 in benefits as of today. Individuals with lower incomes and one-earner couples frequently emerge significantly more favorable in terms of their lifetime payroll taxes.
Government Shutdown: Are Social Security Benefits At Risk?
Likewise, most seniors do not have the financial means to assimilate reforms. Even though some seniors struggle mightily at present, they are the wealthiest age group and cohort in the history of the United States. The senior population exhibits the most modest poverty rate among all age cohorts, while the growth rate of their mean household incomes has been four times that of the average worker since 1980. Millions of retiree households maintain revenues exceeding $100,000 beyond retirement, primarily propelled by millions of dollars in non-housing net worths. As the majority of retirees are more affluent than the taxpayers who fund their benefits, Social Security redistributes income primarily in an upward direction rather than a downward one.
“The earned benefits constitute a sacred commitment that is immutable.” The parameters of Social Security have never been impenetrable. There have been increases in payroll tax rates, Social Security benefit taxation, and eligibility age. Two months before the 1972 election, President Richard Nixon signed into law a permanent 20 percent increase in benefits. Legislators prevented an imminent insolvency of the trust fund in 1983 by increasing taxes, reducing benefits, and raising the eligibility age.
“Sixty simple adjustments can save Social Security.” From 2023 to 2053, Social Security will incur $92 trillion in benefit expenditures and $69 trillion in payroll and benefit taxes (plus $15 trillion in interest expenses). Benefits, payroll taxes, and eligibility age serve as three reform mechanisms in social security reform. However, to close a $23 trillion shortfall, substantial reforms will be necessary, encompassing each lever.
“By allowing youth to opt-out, the system can be fixed.” Nonetheless, under the current system, each generation is responsible for funding the benefits of the preceding generation. Hence, redirecting payroll taxes away from Social Security would deprive it of the funds it needs to support current and future retirees. The remaining $23 trillion wouldn’t cover the promised benefits for current seniors if someone misappropriated one-third of payroll tax revenues, amounting to $69 trillion, and invested it in the personal accounts of taxpayers. Consequently, the 30-year shortfall would double to $46 trillion, including interest. This assumes the trust fund functions as a legitimate savings account and that the system continues to generate annual surpluses.
Eliminating the FICA tax limitation on Social Security taxes would restore permanent solvency, as it restricts benefits to the initial $168,600 of an employee’s wages, potentially increasing benefits concurrently or transforming Social Security into a welfare program. Furthermore, the removal of the limit would not result in lasting solvency or prevent the necessity for modifications to benefits. According to the Congressional Budget Office, Social Security deficits will eventually stabilize at approximately 1.8 percent. By 2029, the system would once again be in deficit.
California and New York have 37% income taxes, 2.9 percent Medicare taxes, 0.9 percent additional Medicare taxes, and state taxes of more than 10%. With an uncapped 12.4% FICA tax on Social Security, additional revenue could approach zero in the 1960s. To maximize Social Security benefits, we must spend the remaining tax revenues on the wealthy.
Dissuading from Social Security reform will not resolve the organization’s funding issues. Using gimmicks or self-righteous criticism of Congress, trust funds, or previous policies will not solve the system’s real challenges. By rejecting all feasible reforms, politicians are automatically reducing benefits by 23 percent by 2033.