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Fixing Social Security

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Social Security is a pay as you go program, meaning it’s self-funded by payroll taxes — in fact as a matter of current law it can’t be funded in any other way.

The problem with this is the current revenues from the payroll tax — 6.2% of individual income up to, in 2023, $160,200, plus an equivalent employer contribution — are no longer sufficient to cover current outlays. The deficit is being covered by a so-called trust fund, i.e., three trillion dollars of surplus revenues that the program generated during the previous generation. Those revenues will be exhausted in about 12 years, at which point by law all benefits will be cut by about 20%, since again legally the deficit in the program can’t be ameliorated by other government revenues.

BTW I’ve seen head in the sand comments at LGM that these are all just projections so who knows what’s actually going to happen etc. Actshully, actuaries identified this eventual insolvency issue 30 years ago — one last gift of my Baby Boom generation to the nation (you’re welcome) — and there’s been very little change in their projections since. In any event insolvency is now just around the corner in economic if not political terms, so there’s no genuine uncertainty left about what’s going to happen if nothing is done.

Now one very interesting thing about Social Security is that it is fantastically popular — so popular that even the bastard child of John Calvin and Ayn Rand known as the contemporary Republican party can do very little to defund what is by far the single most important element of America’s pitifully inadequate social welfare state.

So, somewhat surprisingly is this age of right wing radicalization, one option that’s not really on the table is to do nothing — that is, to simply allow benefits to be cut across the board by about 20% in the middle of the coming decade.

Because of the program’s immense popularity, some sort of political compromise is going to have to be hammered out to ameliorate or hopefully eliminate the coming funding deficit.

Here’s a very fun, for certain values of fun, interactive tool that allows you to customize your own Social Security solvency plan.

My own modest proposal, after playing around with it, consists of raising the payroll tax by .8, from 6.2% to 7%, taxing all wages above $400,000, applying the payroll tax to income that’s currently excluded by the effect of above the line deductions for various cafeteria plans, and using chained CPI instead of the current COLA formula.

Note that the only people who would really feel any pain from all of this are the tiny percentage of people who are making way more than $400,000 per year in individual income ($400,000 happens to be the exact cut point for the 99th percentile of individual income currently).

For example, an upper middle class* household with a one million dollar annual income would pay a total of $107 $214 more, oops there goes the condo in Aspen, per month in taxes under it, if that income consisted of two $400,000 salaries and $200,000 in investment income.

You should play around with it yourself, to get a sense of what the options are.

Anyway, the point here is that the coming Social Security crisis is real, fiscally and politically speaking, but would be easily fixable with some modest changes that would avoid a massive disaster for the tens of millions of Americans who are going to be largely and indeed often solely reliant on the program when it runs out of money three presidential election cycles from now. And it’s a testament to the dysfunction of our political system that those changes weren’t made long ago, and aren’t going to be made, if at all, until the roof is already caving in on our most popular and important form of social insurance.

*NOT

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