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How Not To Get Hoodwinked About Social Security Going “Bankrupt”

All the talk of Social Security “going bankrupt” or becoming “insolvent” is just plain wrong. This is just scare talk designed to convince people that big cuts to the program are necessary and inevitable. It’s simply not true.

Social Security Administration's main campus, Woodlawn, MD.,AP Photo/Patrick Semansky // Talking Points Memo

It seems like every decade or so we have to suit up to defend Social Security from its (mostly) Republican foes. And it seems that way because it is that way. This will be a major political and policy issue for the next two years at a minimum. So I wanted to start us off with a basic explanation of why all the talk of Social Security “going bankrupt” or becoming “insolvent” is just plain wrong. This is just scare talk designed to convince people that big cuts to the program are necessary and inevitable. It’s simply not true.

DeBamboozling the Social Security Scare Talk


mentioned a few days ago that political reporters remain way behind when it comes to seeing through the flimflam of Republicans’ schemes to cut or dismantle Social Security. I was reminded in a TPM Reader email a few mornings ago how often the press accounts of the financing of the program itself remain trapped in GOP talking points. In X number of years, we hear again and again, Social Security will become “insolvent.”

But this isn’t true. At best, it’s a totally misleading way to describe how the federal government pays for things.

Social Security and Medicare are funded (almost entirely) by a payroll tax of approximately 15% on wage and salary income up to a statutory cap, which currently stands at $160,200. That tax is split between the employer and the employee. It funds the two programs. A couple generations ago, Congress increased the tax to build up a surplus to pay for the benefits of the baby boom generation. That’s the “trust fund.” Social Security “lent” that extra money to the rest of the federal government, i.e., it purchased government bonds. Eventually the Trust Fund will run out of bonds to cash in. The current estimate is that that will happen in the mid-2030s. This is when Social Security supposedly becomes “insolvent.”

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But that’s a meaningless term. The federal government has to pay its promised benefits and if they can’t all be paid by out of payroll taxes the remainder can and will be paid out of general revenues. This was actually the assumption about what would eventually happen back when the program was founded almost a century ago. (Look it up.)

This doesn’t mean it’s a non-issue. It means there will be a funding gap and that’s just a budgetary issue to be resolved. It’s not “insolvent.” That’s just scare talk. Now, how can the funding gap be resolved? You could just pay the remainder out of general revenue (the general tax base of income, corporate, capital gains and other taxes that are not tied to any specific program). But there’s another more straightforward approach: just rejigger the payroll tax.

You could simply raise the payroll rate. But that’s a bad idea. One of the first articles I ever wrote as a working journalist — 25 years ago — was on this point: payroll taxes are really regressive. (The linked article says 2001 but it was actually published in 1998.) You’re paying about 7.5% on the first dollar you make up to $160,200. No deductions or anything. Every dollar. Most economists would say you’re actually also paying the employer side too because that’s money that goes to the cost of employing people that would otherwise go to the employee. So there’s a good argument that low- and middle-income workers are paying a flat tax of 15% on every dollar they make. It makes no sense to raise that rate. The simpler and more equitable solution is just to raise the cap.

It gets raised every year by a calculus tied to cost of living and related measures, sort of like an inverse cost of living adjustment. But I mean raise it to a higher level, beyond the annual increase. There are various ways to do this. You can just raise the number from $160k to say $200k or $250k. Or, perhaps more equitably, you could leave the cap at $160k and have it kick in again starting at $500k. That way you put most of the burden on very high income earners.

Obviously there are a limitless number of ways you can do this. The point is that there are really basic budgetary changes that solve the problem — the problem being that there is a larger share of retirees to younger workers. (Another way to help with this problem is to welcome more working-age immigrants. But that’s a solution for another post.) Of course, you could just start cutting benefits — as Republicans want to do. But that’s a values question more than an economics one. Who should carry the burden of this shortfall, seniors on fixed incomes or the people getting rewarded most in the current economy? Income inequality is a key part of this equation on every front, both as a matter of equity and adjusting Social Security finances and also because rising income inequality has itself weakened Social Security financing. As more income has been pushed into the higher tax brackets, more income has been removed from the Social Security tax base.

The global point is that there’s no “insolvency” or “bankruptcy.” That makes the whole thing sound like some looming crisis, which it’s not.

The Various Ways to Eliminate and Gut Social Security

By Josh Marshall

February 13, 2023
Talking Points Memo

President Franklin Delano Roosevelt signing the Social Security Act of 1935. (Social Security administration photo)

Since we’re talking about whether Social Security survives for future generations, we should start with understanding the various ways the program’s foes propose to limit or get rid of it. Since Social Security is one of America’s most popular government programs, virtually no one says they want to get rid of Social Security. (Except Sen. Mike Lee (R-UT).) Plans to cut it or phase it out entirely are almost all framed as ways to “improve it” or “save” it.

So for instance on CNN this weekend Sen. Mike Rounds (R-SD) compared Social Security to defense spending. “We’re never going to not fund defense. But at the same time we — every single year, we look at how we make it better. And I think it’s about time we start talking about Social Security and making it better.”

So what are the options?

For years, the Republican policy of choice was converting Social Security into a 401k-like system of private accounts. This was billed as a way to avoid the program’s inevitable “bankruptcy” and make it “better.” In reality it was a plan to scrap the program and, as I said, replace it with a slighted more regulated system, like 401ks. This is what President Bush tried and failed to do in 2004 and 2005. There’s nothing wrong with a 401k. You probably have one yourself. But it’s not Social Security. Technically it’s the difference between a defined benefit and a defined contribution retirement plan. More simply, a 401k places the risk on the individual rather than socializing the risk which is the heart of what social insurance is. Social Security is a form of social insurance.

In modern thinking, ideally you want to retire with three things: Social Security, savings in a 401k or other tax deferred system and a pension. Few people have pensions these days, so it mostly comes down to one and two.

The other approach Republicans look toward is to leave the structure of the program more or less as it is and just reduce the benefits. There are three different ways benefit cuts are usually proposed, though the third I’ll discuss gets talked about less these days than it did one or two generations ago.

The first is simply to increase the age of eligibility. This has at least some surface logic because people live longer than they did when the program was first created — though there are complexities that make that less clear cut than it may seem. Regardless, it’s still a cut. Fewer years of eligibility means fewer total dollars you receive. It also means needing to work longer.

The second approach is to change the formula that determines the annual increases which allow security benefits to keep up with the cost of living. (In all of these discussions I’m omitting various details. Because the details get really complicated. I’m keeping it broad strokes.) This actually got some tentative support from people in the Obama administration when they were looking for a potential “grand bargain” with Republicans on fiscal policy. One of the roots of that openness is that there is actually some real debate about whether the current cost of living formula is the most “accurate” way to calculate cost of living and purchasing power. It’s highly, highly technical. If you’re curious to learn more look up “chained CPI” and Social Security.

But the technical issues are mostly beside the point. There’s no absolutely “right” way to measure the purchasing power required to provide a ground level baseline of retirement age support. Even if you convince yourself that “chained CPI” more accurately reflects need it’s still a cut from the current formula. A beneficiary in 2060 will get a smaller check than they would have with the current system. (Small formula changes compound over time and thus have big effects in future decades.)

This episode highlighted the more technocratic thinking that still reigned in the Obama years. These were people who cared a lot about Social Security. But they were able to convince themselves that this could be an ingenious fix. You save money but it’s not really a “cut” because it’s a more “accurate” formula. In fact, a cut is a cut.

The third broad category is what’s called “means testing.” You save money by seeing how much people really need the money when they retire. Advocates of this approach point out that presumably everyone agrees Bill Gates doesn’t need his Social Security check. They argue that this approach protects the people who really need it while saving a lot of money. The general argument against this is that it changes the perception of the program into something more like welfare and thus reduces support for it. So the arguments are as much political — preserving broad based support for the program — as purely economic.

In practice of course, it has to apply to a lot more people than just Bill Gates, otherwise you’re not saving any money. It likely reserves the program for people who have no private savings or means of support and would be literally destitute or starving without their monthly check. That’s not how most people see Social Security. Ideally, it’s part of a mix of income sources that allow people to live comfortably if not lavishly during their retirement years. Regardless, a cut is a cut.

For various reasons, people talk less about means testing these days. Phasing out Social Security and replacing it with private accounts still has supporters. But it took a beating in 2005. So it has less support than it used to. These days just plain old cuts are the approach of choice, spun as “saving” the program.

Once again, this very broad overview leaves out a lot of detail, and not just technicalities. Social Security supports a lot of people across the age spectrum, not just retirees. Because my mother died when I was a child, my father (or whoever had been my legal guardian) received Social Security checks to support the costs of raising me until I turned 18. But, big picture, this covers most of the key ground.

To go back to Sen. Rounds’ comments, no one is going to argue with “making Social Security better.” But it’s hard to see how cutting benefits make it better. It may or may not be necessary. But that’s not better. The only way you can make the argument that cuts make Social Security “better” is if you start with the claim that it’s currently “going bankrupt.” But as we discussed yesterday, it’s not. These are simply fiscal and values decisions that should be approached on that basis.

[Josh Marshall (@joshtpm)  is the founder and Editor-in-Chief of TPM.]