TM: Social Security has had a surplus. That surplus was used to finance other programs. The ‘lockbox’ idea was a metaphor to represent what Social Security’s finances would be if no borrowing had taken place. But that image is unnecessary. The Social Security accounts are what they are, and the reality of the surpluses—and the expected payments on these repayments—mean Social Security has not itself contributed to the deficit.
TL: Is Social Security broke, or are the terms “broke” and “bankrupt” meant to scare people?
TM: Social Security in 2010 reduces the deficit from what it otherwise would be; more FICA taxes are taken in than pension benefits paid out. But then revenues will be less than taxes paid until 2016. But that doesn’t mean people won’t get their benefits. The suggestion that it’s insolvent is an absurd way of talking about the program. This is not a private household. The U.S. government is not a person, so analogies to individuals and their own budget problems are not appropriate. Governments can tax. People can’t. Governments can reduce the level of benefits, or adjust who receives them. Private citizens have no such capacity. The analogy to personal finances, when addressing Social Security (or government altogether) is a mother lode of nonsense.
Another element of the insolvency claim is the notion of unfunded liabilities. That’s an expression appropriate for private pension plans, where the promise to pay a future benefit must be balanced by holding adequate financial reserves now. That’s not the case with Social Security. The government has the authority to raise taxes and adjust benefits. Private trust funds do not. Failing to understand that is the cause of much confusion and mischief.
TL: Are such words part of a scare tactic on the part of the program’s detractors?
TM: The short answer is yes. As I said, the popularity of Social Security means critics turn to affordability rather than attack the program’s desirability. And that has been especially the case since the economic stagflation of the 1970s.
TL: What happens after 2016?
TM: The current FICA taxes of 2016 will no longer be enough to finance the expected pensions of that year. That means Social Security will draw down on its claims against the U.S. Treasury. When you add in the interest payments on Social Security bond holdings, there is more than enough to pay for those pensions. The critics want to treat that as a threat to the program, but that is propaganda.
There is no case to be made to reduce forecasted benefits for seniors in 2016. Past generations of workers from the 1980s on have taxed themselves (through their contributions) to sufficiently fund their pensions until the early 2040s or late 2030s, depending on the CBO projections or projections from Social Security actuaries. The money is adequate to fund estimated benefits in full until 2039. After that, there is enough to fund three-fourths of projected benefits until 2042.
TL: What changes will be needed to pay full benefits after that?
TM: Then, relatively small adjustments need to be made. Small increases in taxes or small decreases in benefits would easily address any gaps out as far as the eye can see.
TL: Can you name some of these?
TM: Social Security is indexed to the cost of living. So a small adjustment downward in the COLA formula would be one remedy, one that would have to be justified as measuring inflation in a more accurate way. Increasing the FICA tax revenues by slightly increasing the wage base (the amount of wages subject to Social Security taxes—now $106,800) is another. We could also modestly increase the tax rate itself, which is 6.2 percent on both employees and employers. None of these methods call for hand-wringing today.
TL: How does raising the wage base fit in with the income redistribution that goes on with Social Security?