San Antonio Express-News (Sunday)
No need to panic over Social Security
In early June, the trustees of the Social Security trust fund noted in their annual summary report that the primary trust fund for paying reserves will run out in 2034 — 12 years from now.
Amazingly, that projection is very close to one made by Peter Ferrera in his book “Social Security: The Inherent Contradiction,” published in 1980. Besides my admiration for so accurately forecasting a complex actuarial system, two other things strike me. One is that baby boomers have had at least 42 years to fix this. Like, what the heck? I will become eligible for Social Security retirement payments in 2034, the last year the report says the trust fund will be able to pay full benefits.
More seriously, however, the real thing we should understand about the trust fund is this: It’s a fiction that, while useful, isn’t particularly important.
Benefits get paid from current Social Security payroll taxes. The government is not actually investing our dollars. Technically, yes, a partial and temporary surplus of payroll taxes gets parked in low-interest Treasurys, but by no means is this the real source of our Social Security payments. It’s a pay-as-you-go system in which current workers pay for past workers’ benefits.
Understanding this fiction is the key to remaining calm about Social Security. Rather than panic about the trust fund running out, we should take comfort in the fact that it has never particularly mattered.
As Ferrera wrote in 1980, the idea of a trust fund is “a carefully contrived deception meant to mislead the public.”
Ferrera continued: “The entire purpose of this deception is to hide the welfare elements in the Social Security system and attempt to create the impression that Social Security is simply insurance without any welfare elements.” I agree.
Whenever I write about Social Security, I receive panicked — or, conversely, overly certain — emails asking or informing me about the Ponzi scheme underlying our biggest government program. This is neither true nor helpful. Ponzi schemes are not backed by mandatory payroll taxes. Social Security is.
I don’t worry at all about Social Security running out of money. As I said, it’s never been a true trust fund.
Ferrara’s big idea from 1980 was that Social Security has two functions, insurance and welfare. Most Americans focus on the insurance aspect, in which they think they pay into the system during their working years to get a return on investment in retirement. That insurance function is the fakery and the trust fund a symbolic misdirection to assist in the illusion. The true function of Social Security is as a welfare transfer.
Although I haven’t spoken with Ferrera, I’m certain we
disagree on whether the welfare element is good. I think it is. He thinks it isn’t.
An insufficiently understood aspect of Social Security benefits is that it deeply favors modest lifetime incomes over higher incomes. This is partly accomplished through “bend points,” meaning Social Security payments are based on 90 percent of an extremely modest lifetime salary, 32 percent of a medium lifetime salary and only 15 percent of higher earnings. While I’m simplifying the language around these bend points, the idea is that the welfare benefit of Social Security favors the neediest. To match this focus on welfare, annual income above a certain amount — $147,000 in 2022 — is not taxed for Social Security.
I am confident that in my own life, under reasonable assumptions, I will have achieved a greater net worth if I had never been taxed for Social Security and instead had invested those funds myself. The “welfare” part of Social Security will turn out to be a net loss for me.
For most of my fellow citizens, however, the welfare benefit of Social Security is a net gain. And that’s fine by me. This is socialism and should be understood as such.
I say that not as a slight to Social Security. In fact, 96 percent of adults polled consider Social Security an important government program. I mean to point out to a Texas readership with all of its preconceptions that a little bit of socialism can be pretty comfortable, very popular and, indeed, necessary. Not having elderly people die of starvation, for example, is a win in my book.
As for Social Security staying solvent, the real key is understanding that this is solved with a series of technocratic tax rule adjustments. The issue is not running out of money in the trust fund — again, the trust fund is largely irrelevant — but rather deciding what small adjustments, such as delaying and diminishing benefits or boosting taxes, will be made to render the entire system solvent.
That was addressed in another 1980s throwback recently by former U.S. Sen. Rudy Boschwitz, R-Minn.
Boschwitz, who served in the Senate from 1978 to 1990, wrote a key memo in 1982 with proposals for shoring up the program. Yes, it’s clear that folks were worried about this issue in the 1980s.
Earlier this month, in the Wall Street Journal, he listed the various ways to do it again:
• Raise the full retirement age beyond 67.
• Raise the early retirement age beyond 62.
• Adjust the bend points so payments are even less generous to higher earners.
• Slow the rise in benefits by linking to a different, probably better, inflation index.
• Slow the rise in benefits for higher earners.
• Make adjustments for inflation less frequently.
• Tax Social Security income more heavily for higher earners.
• Raise the payroll tax slightly to generate more revenue.
This can all be phased in with many years’ lead time — in a boring, technocratic way. No need to panic. Which, again, is why I don’t worry about the so-called trust fund running out of money in 2034.
Thanks: Big thanks to reader Steven Alexander, who contributed data and analysis to Ferrera’s 1980 book, crunching numbers on computers in the 1970s that accurately modeled things like return on investment and the end of the trust fund in the 2030s. I was reading his copy signed by the author.
Michael Taylor is a columnist for the San Antonio Express-News, author of “The Financial Rules for New College Graduates” and host of the podcast “No Hill For A Climber.” michael@michaelthesmartmoney. com | twitter.com/michael_taylor