Why the Fiscal Cliff Deal Should Have Included Social Security

Social Security may not add to the deficit, but it does add to the national debt. Fortunately, it's easy to fix this.

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JIM LO SCALZO / EPA

The U.S. Capitol is pictured on Dec. 31, 2012.

Yesterday’s deal to avoid the fiscal cliff offers quick fixes for the country’s most urgent financial problems but will also add almost $4 trillion to the deficit over the next 10 years. Cuts in discretionary spending and entitlements have therefore become even more essential, but the fiscal cliff deal has postponed negotiations over spending for at least another couple of months.

Moreover, one major government program is likely to be omitted from those discussions: Social Security. Although much attention has been paid to ending the temporary reduction in Social Security payroll taxes, little has been said about modifying the program’s benefits. Indeed, these are likely to be kept off the table entirely during future negotiations over spending cuts. This omission is usually justified on the grounds that Social Security does not contribute to the deficit. However, the program does add to the growth of the national debt.

How can Social Security have no deficit and yet add to the national debt? Chalk that up to the Social Security Trust Fund. Money that workers pay into the system goes largely to fund benefits for people who have already retired. Any surplus goes into the Trust Fund – now more than $2.7 trillion – which invests in government bonds. In 2010, however, the amount that Social Security took in fell short of the amount needed to pay benefits. That gap is growing and is projected to surpass $100 billion a year before the end of the decade.

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This shortfall can be covered by taking money out of the Trust Fund. But every time that’s done, the government has to redeem some of the bonds in the Fund for cash. It gets that money by selling other bonds to the public. And while bonds in the Fund represent money that the government owes to itself, and therefore don’t count toward the national debt, bonds sold to the public do add to the debt. Since Social Security will likely continue to pay out more in benefits than it takes in, the government will have to make up the difference with additional public borrowing.

Fortunately, the funding gap could be eliminated and the Social Security system could be brought back into balance with five minimally painful nips and tucks (AARP has analyzed some other possible fixes, as well). Here’s what can be done:

Tweak the formula for initial benefits. The amount that each retiree initially receives is calculated based on salaries and wages over 35 years. If someone has worked for fewer years, the years needed to reach 35 are simply counted as having zero income. Lengthening the period to 38 years would reduce benefits slightly while preserving them for people who worked the longest. Amount of the funding gap eliminated: 13%

Adjust eligibility for lengthening life spans. Since Social Security was created, the life expectancy for 65-year-olds has increased by more than three years. But the age for full benefits is being increased by only two years – from 65 to 67 in 2027 (retirees would still be able to take reduced benefits at an earlier age). More could be saved by adjusting the retirement age to reflect future increases in life expectancy, which would raise the age for full benefits to 68 by 2049. Amount of the funding gap eliminated: 23%

Switch to a different cost-of-living adjustment. Benefits for people who are already retired are increased each year in line with the cost of living. The inflation measure that is used, the Consumer Price Index, is slightly higher over time than an alternative index, known as the Chained CPI. Switching from the CPI to the Chained CPI would almost invisibly rein in the growth of benefits (my column three weeks ago discusses this further). Amount of the funding gap eliminated: 23%

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Increase the payroll tax cap. The Social Security payroll tax exempts income above a certain cutoff. This prevents benefits from becoming ridiculously large for millionaire retirees (because of the earnings-based benefit formula). But it also means that the payroll tax is regressive – it is higher in percentage terms for average workers than it is for the richest. Historically, the payroll tax fully included 90% of workers. Today, though, only 84% of workers are fully taxed. Raising the cap from $110,100 to $215,000 would again fully cover 90% and make the tax a bit less regressive. Amount of the funding gap eliminated: 36%

Trim benefits for the affluent. The previous four fixes would almost restore Social Security to its original financial footing – by adjusting for longer life spans, longer working lives and greater income inequality, as well as using a more accurate inflation measure. Taken together, these changes would eliminate 95% of the funding shortfall. The remainder could come from trimming benefits for the most affluent. Reducing benefits by up to 12% for the richest 20% of the population using a sliding scale by income would close the last 5% of the gap.

What is most important, some commentators argue, is that Social Security should be preserved as a self-financing program rather than starting to rely on general tax revenue. Their argument is that broad popular support for Social Security depends on it being viewed as the equivalent of a pension plan rather than as a welfare program. Fixes made now that are scaled or slowly phased in can keep the program financially sound for the rest of the century – and stop it from contributing to the national debt as well.

28 comments
MichaelLyon
MichaelLyon

re "Social Security adds to the debt":  So you're finally admitting it.  Social Security does not contribute to the debt, but Congress and the Presidents pissed away the Trillions of dollars  Social Security loaned them on oil wars, tax cuts to the rich, and bank bailouts, so they can't afford to pay Social Security back.  and Social Security is just going to have to eat it.  Your deadbeat brother-in-law spent all the money you loaned him and can't bay it back, so you're out on the street.

bobwolfson
bobwolfson

No, no, no!  When you borrow money from me and spend it all, it's not my problem if you have to borrow from somebody else to pay me back!  I am not responsible for your increased debt, YOU are.  

What's really ugly about these attempts to tie SS to the debt is that the borrowed money was collected from regressive payroll taxes and used to keep progressive income taxes low.  Reducing SS benefits to keep from raising the debt will, in effect, transfer money from the 99% to the 1%.

The General Fund has to pay back the money it has borrowed from Social Security.  Congress can do so in 4 ways - borrow from elsewhere, raise income tax rates, stimulate the economy (which will create more income tax revenue), or decrease spending on general fund expenses (like the military).  Do not let anyone get away with telling you that reducing SS benefits should have anything to do with it.


pradish
pradish

The Best way !!! Wipe out Social security !!! Let individuals decide what they want to do with their money !! Amount of the funding gap eliminated: 100%

wndrng
wndrng

Why do the posters all seem more informed than writers for Time? And the government even?

Seriously.

Let's start petitions.  Isn't it Time to put your good thoughts to work? We need you.

wndrng
wndrng

We have been trusting gov't leaders to make these social security and other budget decisions all these years.  Now that we know more due to the internet and everyone researching and sharing what they have learned, we find out how crazy the dealings have been.  It's almost too much to absorb.

Biggest question for me is about all the incredible waste.  Suggestion: if the  bloggers and online news sources can find them, why can't we start a petition drive with 500 or so waste  items we demand eliminated asap? The budget would look radically different right off.
 

Why sit and wait on this information?

Irwin
Irwin

TIME has been hijacked by a shill for those drooling over not repaying that $2.7 Trillion in government bonds.  Perfect opportunity for a  $2.5 Trillion tax break for the very wealthy!

The slowly increasing shortfalls in S.S. payroll tax revenue was known 30 years ago, the payroll tax was then drastically increased. 

NOTHING needs to be done for a minimum of TWENTY YEARS.  THEN tweaking benefits to reflect revenues can be addressed.

@nedo: don't forget rubbing icy snow in the very elderly's faces as they are forced into the cold.

nedo
nedo

How about..Trim benifits for the older, current recipients - They put in so little..and they've taken out so much.  They were first in on this Ponzi Scheme...and they won't get out!!!  I bet half (spouses didn't work in the 50's, 60's, 70's) of the poeple over 80 that currently collect SS never put in one dime!!!

Galen
Galen

SS has nothing to do with it. Ignorant article! Its been paid for since day one, its just the politicians can't keep their hands out of the trust fund.

eb3188
eb3188

Always too little too late!!! When the government seen the rise of babies being born after WW II to the late 60's, did no one realize that there would be a large increase in SS recipients. Hindsight always comes out 20.20!!! Leave the Social Security system alone. People who have to stop working because of health issues that SS Disability don't recognize will at least have a bit to fall back on if they have to limit the hours they work. I am so upset with people calling this an entitlement or welfare program. Recipients had to voluntarily let the SS Administration  take monies from their payroll as well as the employers. I call it an investment for the future.

HerbZydney
HerbZydney

This article gets an "incomplete". Sure wish the author took into account the income tax paid by recipients on their Social Security payments. The IRS should sent that back to the SS fund. Makes the payments far more progressive.

rjsigmund
rjsigmund

so social security contributes to the debt because the government pension plan owes american workers a tiny retirement stipend for having worked and contributed to the trust fund over their working lives...and because we owe the old folks for all that, (because it contributes to the debt), we should figure a way to renig on that obligation...

RonMoxley
RonMoxley

This presentation seems simple and makes sense. It would be great if lawmakers would consider such measures in order to stabilize a great American idea, Social Security. The gradual increase in retirement age seems to need to continue, though the early disability provision will still cover those who can't work until full retirement age. Also, as I am learning now, people need to have additional retirement means since Social Security doesn't generally provide enough to cover retirement completely. Thanks for your valued suggestions.

sunflower58
sunflower58

No, no, no. Raising SS age is an affront to working class Americans who have kept their end of the bargain by paying into the system 100% while the richest have dodged and resisted more taxes. Take your hands off of my grandmother's, my parent's and (eventually) my own SS benefits and increase any perceived shortages by raising the limits and amounts for the top 2%. It is extremely easy for white-collar , CEO types to espouse their dogma about raising the age limits when they are not the ones digging ditches and cleaning the toilets of others. It might seem fine to one who sits at a desk all day, pushing papers and writing reactionary ideas on their word processing computer, to raise the age limits, but forcing blue collar and low skilled people to work into their late 60's is wrong. People who do hard physical labor should not be the scapegoats to a system of SS,  that the rich are too obstinate to support. And, yes there is class warfare at the very heart of any SS cuts. 

j_bamford
j_bamford

SS does not contribute to the deficit and can be solvent indefinitely with small changes to payroll tax, starting with eliminating the limit. Only the top 2% are calling for cuts to SS.

PaulDirks
PaulDirks

Any time someone talks about how much this legislation adds to the deficit, you know they are being dishonest. The bill reduces the deficit by raising taxes on incomes 400K or more. Delaying the bill past midnight doesn't change  its net effect on revenue and to suggest that it does is a deliberate deception. Of course, once that's done the rest of the arguments in the article are similarly tainted. 


j45ashton
j45ashton

No, Michael Sivy, security security should not be hit & here is why you're wrong.  The Social Security Trust fund is being tapped as 'social security reserves' because fewer people are working and contributing to social security.  ALL tax revenue is down because of fewer people working.  Fewer people are working because of the downturn in the economy which was greatly exacerbated by the financial crisis which was brought on during the Bush administration's free market lack of vigliance...a lack of overseiing the securized debt obligiations being sold based on garbage loans. As the economy comes back, social security reserves will start growing again just as all tax revenue will start growing.  But if you have your way, socail security will have been cut back even though therfe will have been no need to cut it back.  Please...at least for the time, let's leave social security alone. 

Galen
Galen

@HerbZydney 

A worthless article. This guy must be one of those conservative fools!!

aee50
aee50

@HerbZydney  

I agree that taxes on SS benefits should go towards SS. But they will tell you it would cost them money take transfer the money!  I wish the article had bothered to mention, the FICA not collected from the employee has created a greater unfunded liability, the government does not have the money to put into the SS fund!  And as for giving people more to spend yes. My good friend's son has asked her for a loan after using the SS money he did not have to pay to take his kids to Disneyland for a couple of days, now needs money to buy his small children winter clothes! She was so mad she went to Goodwill with the kids and bought them coats and he was mad at her because he wanted the cash! 

tom.litton
tom.litton

@RonMoxley From what i understand the gains in life expectancy have been greatly tilted towards those that are well off.  The poor haven't seen nearly as much benefit.

Also remember, just because you live longer doesn't mean you can perform the same kind of tasks at an older age.  Those that work in physical jobs will be put at an even larger disadvantage if the age is raised. 

I'm not saying we shouldn't do some or all of those.  I'm just saying that it's usually more complicated. 

Galen
Galen

@RonMoxley 

Ignorant suggestions!

SS has been paid for from day one, it gets robbed every year by politicians. 

Your post seems simple and makes NO sense!

sunflower58
sunflower58

@RonMoxley It is often ignored the fact that forcing older people to work beyond 65 also stifles employment for younger people, especially when unemployment is high as is currently the case, since there are more people in the job market and more people looking for jobs. If people are allowed to retire at the traditional age of 65 then those jobs will then be available for the younger people to take on.

Galen
Galen

@grapefriend1 

You must be one of those deeply intellectual conservatives, daaaaaaaaa!

PaulDirks
PaulDirks

Which is a shame, because the rest of the article is fairly sensible.


Galen
Galen

@j45ashton 

Excellent!

Little deep for the ones doubling down on stupid though :).

Galen
Galen

@PaulDirks 

Not the SS part. Its self funded and always has been.