Fixing Social Security

A new poll shows a majority prefer to raise taxes and/or raise the retirement age for Social Security rather than cutting benefits. All of this angst over Social Security cold have been avoided had two things been done.

First, the federal government should have never been allowed to borrow the surpluses in the Social Security trust fund. The size of the baby boomer retirement class has been known for years. In fact, it was precisely because of its size that contribution rates were increased. It was known that there would be more people withdrawing money from the program than putting money in. Had the federal government not borrowed those surpluses, we wouldn’t be having this discussion about the money coming from the general fund. What is coming from the general fund is the repayment of those borrowings.

(The size of the deficit has been masked by the inclusion of the Social Security trust fund as well.)

The other piece of the puzzle is the cap on Social Security earnings. Years ago, at an Economics Club luncheon, I raised the question with our speaker, Mark Zandi, about raising the cap. He said yes, removing the cap would go a long way towards solving the problem. But there was no political will to do so. All these years later, there’s still no political will to do it.

Nearly all of the money contributed to Social Security in my name has come out of my own pocket. I first started contributing in 1974, with my first summer job. When I worked for the government, I did not contribute to Social Security. I’ve been self-employed since 1986, which means all the contributions since that time have been my own.

Social Security gets the first dollar of profit, before even income taxes. (Social Security is imposed on net earnings from self-employment in excess of $400.) Combined with a minimum federal and state rate, roughly a third of the profits of a self-employed person are already committed,. Out of the remaining two thirds, such a person is to pay his or her own living expenses plus put money away for a rainy day, including retirement. No wonder our savings rates are so abysmal!

Before they raise the contribution rate, before they raise the retirement age (again), removing the cap on earnings – such a move was done on Medicare back in 1984 – should be done.

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2 thoughts on “Fixing Social Security

  1. The first question is, if the feral government were NOT borrowing the surpluses, what would the Social Security Trust Fund do with the money? It would have to be managed like the TSP (except the G Fund) but not on an individual basis.

    The second question is, if we remove the cap on taxes, will we then impose a cap on benefits? Right now, benefits are capped by virtue of the fact that they are directly tied to the taxes one pays into the system. If we simply remove the cap on the taxes, benefits (still tied to taxes paid) will also be unlimited.

    Finally, Congress missed the boat last time by simply raising the eligibility age. That eligibility criterion should be tied to the census, so that the oldest x-percent of the population is eligible, based on the previous census. As the population ages, the eligibility age will go up with it, and keep the worker-to-retiree ratio reasonably stable.

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