The Social Security Paradox

By Frank Moraes

(Ed. note: Frank's already done five guest spots for us. So let's just drop the whole "guest" thing. He's on the team. Welcome aboard, Frank! -- MJWS)

Do you know the Social Security Paradox? It comes up all the time regarding reform of the program, but almost no one notes the paradox. Here it is: in order to stop future benefit cuts, we must cut future benefits now.

The worst case scenario is that at some point in the next 50 years, Social Security will run out of savings and only be able to pay 75% of promised benefits. This is 75% of the benefits at that time, so they are inflation adjusted. This is a problem, but not a catastrophe. And it is absolutely not the case that there will be no program for young people. That is, there will be Social Security for people retiring in 50 years, unless somehow all the Very Serious People get their way and "reform" it out of existence.

C.A. Rotwang[1] has written an incredible article about liberal efforts to "tweak" Social Security, "Mr. President: Tweak This!" Right off the top, he notes that the program will be short by at most 1.6% of GDP in any year. The actual amount of money doesn't matter. What does matter is that we are currently taking in too little money in federal taxes. In the last part of 1990, total federal taxes were 21% of GDP. Today, they are down below 16%. So just by bringing taxes up slightly, we solve any shortfall.

But such ideas are off the table. Republicans just want to destroy the program. Liberals want to "tweak" it. As I've noted in the past, just for the sake of fairness, we should get rid of the payroll tax cap, which is currently set at $110,100. This makes the tax highly regressive. Most people pay 12.4% (half directly and half via their employers).[2] For example, if Mitt Romney was paid a salary, he would only have paid payroll taxes on the first $110,100 of his estimated gross income of $20.9 million last year: $13,652.40. That would mean that unlike regular people paying 12.4%, Romney would have paid 0.065%. Of course, since all of his income was "capital gains" he paid nothing at all.

Ideas like this are simply off the table. The rich have far too much power in Washington and they will never allow their taxes to be raised in this way. (At least they won't do it without a major fight from the rest of us.) So the liberals — The good guys! — propose three ways to "tweak" the system:

1. Reduce inflation adjustments;
2. Raise the retirement age;
3. Means test.

Note that each of these tweaks do what I talked about regarding the Social Security Paradox: reduce future benefits to prevent reduced future benefits. Rotwang discusses each one of these in details and shows that they are all substantial. For example, according to a study by David Rosnick and Dean Baker at CEPR, increasing the retirement age from 67 to 70 would result in an 18% reduction in lifetime benefits for couples in the bottom 20% of the income distribution.

The main point of the article, beyond pointing out that Social Security is not in crisis, is to show that the "tweaks" of Democrats have big benefit cuts concealed in them. Rotwang ends:

Much has been made of Republicans' flagrant disregard of truth. And Lord knows they deserve it. But what of their counterparts? I suggest that if Democrats are honest, they would a) acknowledge their own exaggerations of the program's difficulties, and b) spell out the impact of their purported "tweaks." After all, if Romney ought to spell out how his magical tax proposal reduces rates and recoups all lost revenue, shouldn't Democrats do the same with respect to their Social Security reform nostrums?

In the matter of Social Security, Barack Obama and the Democrats have some 'splainin to do. The return of Occupy! cannot be too soon.

Government keep your damn stinking hands off my Social Security, indeed!

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[1] Rotwang is a brilliant robot inventor in Metropolis. So I don't know what is really going on at The Huffington Post.

[2] I am only including the Social Security part of the payroll tax. Additional money is taken out for Medicare.


(Cross-posted at Frankly Curious.)