Social Security and Medicare payments, the major American
social safety net programs, account for most of the $2.45 trillion each year in
mandatory spending – spending required by law. Let’s examine these in more
detail.
The original theory of Social Security was as a
pay-as-you-go system. Workers would put money in, and that would provide funds
to pay out to retirees. In 1945 there were 41 workers paying in for each
retiree receiving payouts, and the system ran a surplus. By 1960, with an aging
population, that ratio had dropped precipitously to 5.1 workers per
beneficiary, and now it stands at about 2.9 workers per beneficiary, and is
estimated to be at about 2 workers per retiree by 2030. The system was stable
at about 3 workers per retiree, but now we take in less in payroll taxes than
we pay out each year.
By the way, the Social Security Trustees annual report in
all its detail is available for reading or download here.
In 1983 President Reagan, foreseeing problems in Social
Security with the approaching wave of baby boomer retirements, increased the
payroll tax that supported Social Security by enough to produce a surplus that
would sustain Social Security for another 30 years. The surplus in the Social
Security Trust Fund was, by law, require to be invested in government bonds,
and as of the 2016 Trustee’s Report should support the system through
2034. In theory there are about $2.8
trillion in the Trust Fund as of last year. Actually, there are two such funds,
the Old Age and Survivors Insurance (OASI) Trust Fund to the Disability
Insurance (DI) Trust Fund, but we will treat them as one.
Unfortunately that pot of money was just too tempting for
Congress, and both parties have essentially raided it in ensuing years to fund tax
cuts, wars in the Middle East and vote-getting social programs. Putting it in
government bonds makes it sound respectable, and makes it look for accounting and
political purposes like the Trust Fund has actual money in it, but in effect
Congress took the money and replaced it with paper IOUs (government bonds) which
can only be redeemed out of current income or current borrowing, so in effect there
really isn’t any surplus real money stored up for Social Security.
So for practical purposes, Social Security is now again a
pay-as-you-go system, and the system is currently projected to run a real
deficit of around $84 billion per year through 2019. I say “real deficit”
because politicians like to include the interest on the Trust Fund bonds as
income to the program, so that it will look like it is running a surplus. But
of course interest on the Trust Fund bonds also comes out of taxpayer money or government
borrowing, so it really isn’t income to the Trust Fund except for accounting
and political purposes.
So the real cost these days of Social Security is the
approximately $84 billion per year deficit – the difference between what the
government takes in in payroll taxes and what it pays out in Social Security
checks each year. And we can just ignore the Trust Fund as a political
accounting fiction – it is really just government bonds we will have to pay
back (or default on) someday.
On the scale of other things the government spends money on,
$84 billion per year to keep Social Security going isn’t too bad. But it would be even better if the program
were permanently self-funded. An increase of about 10-12% in the payroll tax,
indexing the payroll tax to inflation and/or eliminating the cap on income
taxed for Social Security could easily cover the current deficit, if Congress
could get its act together enough to make the change. Beyond 2019 of course, if the ratio of
workers to retirees really drops to 2 or less as currently projected, larger
increases in the payroll tax will be necessary.
Of course Social Security is supposed to be only a
supplement to a retiree’s own savings and pensions, not a complete retirement
package in itself. So tax laws that would encourage more saving for retirement,
and encourage more companies to provide more generous and more portable (across
jobs) pension plans would also help the problem.
Posts
