Social Security: The insolvency problem & a balanced solution to it - AMAC
What’s all this talk about Social Security’s problems all of a sudden?
- The problem is not new. The program was last “rescued” in 1983, and the reform measures were designed to buy solvency for about 75 years. But many factors, some projected and some unforeseen, have changed. Longevity continues to increase. Birthrates continue to decline. FICA taxes were designed to capture 90% of the total U.S. payroll but now capture just 82.5%, a reflection of recent wage gains going to the highest incomes (where FICA tax is not paid).
Why not just leave the program alone?
- It’s possible. But “leave it alone” will mean the program will only be able to pay 77% of everyone’s monthly benefit starting in 2033. Or, put another way, everyone’s payment will be cut 23%. The Congressional Budget Office (CBO) actually projects 25% cuts as soon as 2032. The cuts will be automatic, without a vote in Congress. Note, Social Security can only pay benefits commensurate with income coming in from workers plus any past reserves (surpluses); all past surpluses will be exhausted around 2032-33.
Is Social Security going bankrupt?
- No. Bankruptcy cannot happen as long as even one person is working and paying the payroll tax. But with fewer people paying this tax and those collecting it living decades longer than when the program began, Social Security is facing insolvency—an inability to pay full promised benefits under current law.
So what can be done?
- Choice one is to do nothing, and that is the current first choice of most current and aspiring political leaders at the federal level. The other choices are to raise taxes to generate revenue, change benefit levels to those receiving them, or increase the retirement age to reduce the number of years people can collect.
Are there pros and cons to each?
- Yes. In any economic decision making, there are never “right” choices, only tradeoffs.
Why not just raise taxes?
- Raising taxes has the maximum deleterious effect on the most, as it would slow overall economic growth, depending on how big the increases were. Any money taken from individuals and businesses and given to the government means less money circulating in the economy. Economic activity would be less, and thus Gross Domestic Product would decrease some, meaning everyone would be slightly less well off than without the increase. Lowest income individuals would have the hardest time paying any increase.
How about just “soaking the rich?”
- This usually means raising the payroll tax cap. Currently no payroll taxes are paid once one reaches $168,300 in income (2024 data). But note, if people pay more into Social Security, then they qualify for more benefits, though it is on a declining scale. Little to nothing would be saved for the program overall. Most advocates of this approach say raise the taxes but do not entitle anyone to further benefits. However, this changes the nature of Social Security from social insurance program to welfare. That is a significant change in concept for the program.
But isn’t Social Security already an anti-poverty program?
- Yes, but a change to a welfare model is different. The original aim of the program was to give retirees a modicum of decency and respect to prevent abject poverty once they stopped working. It achieves that purpose still. It is and always has been a progressive program. It replaces a larger percentage of income for lower income workers. Income replacement percentages decline as income rises, on the theory that each added dollar for a wealthier person is less important to survive than an added dollar for a poorer person.
What about cutting benefits? Won’t that hurt people?
- Yes, but the most harm will come from doing nothing and letting 23-25% cuts take place. Less severe changes can be implemented if enacted before insolvency. Most experts who study the issue suggest trimming benefits for upper income individuals with minimal if any changes to lower income beneficiaries.
Isn’t cutting benefits for upper income beneficiaries unfair and punishing success?
- Not at all. Everyone who pays into Social Security is entitled to get something out of it. Those who worked and/or earned more will get more. That will likely never change. But in this era of scarce and declining resources, choices must be made. Social Security has been wildly successful in reducing poverty. Seniors face the lowest rates of poverty in America. But the program has evolved unintentionally into becoming quite rewarding to wealthier people.
How does Social Security benefit wealthier people?
- Ask 10 Social Security recipients in a room what they got for their last COLA in 2024 (it was 3.2%), and you’ll get 10 different amounts. One will say he got $45/mo, another $112/mo, another $98/mo, and another $32/mo. He who got just $45 would obviously wonder why he didn’t get $112. The $112/mo increase totals $1,344 annually (3.2% of $3,500) and is reserved for those making near the 2024 Social Security max benefit of $3,822/mo. Translation—the highest yearly increases go to the wealthiest. That’s hardly in keeping with the program’s intent. In fact it’s the opposite.
But wouldn’t benefit cuts to the highest earners (“the top”) be Marxism?
- No. It’s not redistribution of wealth, though it is redistribution of income. Cuts at the top would save the program from insolvency and those terrible consequences. Remember, default is 23-25% cuts for all. Someone earning at or near the top and taking that cut per month would face minor inconvenience at best. Those in the middle would face significant hardship, and those at the bottom could face homelessness, hunger, and even death if unable to afford medical care and prescription drugs. It’s not hyperbole to say there would be a return to Breadlines across the country, just like were the norm before Social Security was enacted. [Social Security ended Breadlines.]
What about making people work longer?
- No one would be forced to work longer. AMAC’s plan keeps early retirement at age 62. It’s already the case that starting benefits then means a lower monthly payment for life (but potentially more of them) than waiting until full retirement at 67. Full retirement age would gradually increase over a period of time and not affect anyone currently collecting or eligible for benefits. It always sounds so negative to say “increase the retirement age” but people are living about 18 years longer than when Social Security became law in 1935.
What does preserve and modernize Social Security mean?
- AMAC’s plan is to maintain the program for current beneficiaries but Revise it for future beneficiaries so that they have a shot at getting benefits at a rate at least close to the level of generosity that their parents and grandparents got.
Generosity? Social Security isn’t generous. It’s peanuts. No?
- It’s stingy only in the sense that it usually replaces a mere 40% of pre-retirement income, but it’s a lifeline for those that have only Social Security income. It has always been true that Social Security was never meant to be one’s sole source of retirement income. For those where this is the case, life is difficult. But beneficiaries receive back everything they ever paid into the program in taxes within about 4.5 years plus a nominal rate of interest. That’s generous. It’s also a source of the program’s troubles. The law never kept pace with increasing life expectancy. Consider someone starting benefits at 62 and collecting until 100—38 years of benefits. You only need 10 years of work to draw a benefit for 38 years of nonwork. What a deal. It’s unfathomable, and it’s unsustainable.
What is AMAC’s blueprint of possible solutions – in English?
- It’s a balanced approach that singles out no group for any considerable change. It alters COLAs to be same dollar for all rather than same percentage for all. The current method of same percentage for all yields higher monthly increases the wealthier one is. AMAC proposes a 1% floor for all recipients, because three times in the last two decades there was a zero COLA. No more zero increases going forward. The thresholds where income tax kicks in would increase. Income levels have never been adjusted for inflation, and thus more people are considered “rich” each year and have to pay tax on benefits. The earnings test would be eliminated, meaning people could work and earn any amount. Currently between 62 and 67 beneficiaries are severely restricted in what they can earn, meaning that exceeding the low cap equates to benefit reductions. Full retirement age gradually increases, but early retirement remains at 62. Widows and widowers would see slightly enhanced benefits. The formula for income replacement would be tweaked slightly for the highest earners, those with the least need for additional income.