The simple Social Security fix no one wants to talk about

One change could eliminate the long-term shortfall, promote tax equity and allow a modest benefit increase now

The 2012 Social Security Trustees’ Report shows the nation’s most important and popular social insurance system is on sound financial footing for at least another generation. With $2.7 trillion in its trust fund, Social Security can pay full benefits through 2033.

After 2033, the program can still pay 75% of benefits, even with no action by Congress. And because of how Social Security calculates benefits, that “75%” of benefits in 2033 will be about the same (in inflation-adjusted dollars) as benefits today.

But America can do better than that. Under the “Scrap the Cap” plan, Social Security can pay 100% of benefits after 2033, and even modestly expand benefits today, if Congress makes one simple change: eliminate Social Security’s cap on taxable income (now set at $110,100) so high income earners pay the same tax rate as middle class workers.

Eliminating Social Security’s cap on taxable income (now set at $110,100) means
high income earners would pay the same tax rate as middle class workers

The additional funding could boost benefits for low-income earners, add credits for individuals (often women) who take time from work to raise their family, and restore benefits for college students that were cut in the 1980’s.

“These improvements immediately boost the American economy, build economic security for women, and safeguard educational opportunities for young people who have suffered the loss of a parent,” according to Marilyn Watkins, policy director for the Economic Opportunity Institute.

Social Security benefits are more critical to American economic security than ever. According to estimates, nearly one-half of Americans will be unable to maintain their standard of living in old age. About 1 in 4 Washington households – more than 1 million Washingtonians, including 73,000 children – received old age, survivor, or disability benefits from Social Security in December 2010.

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Posted in A Fair Deal at Work, Retirement Security, Social Security


  1. Oldngrumpy says:

    What is so complex about Social Security that defies the understanding of so many pundits and politicians?? Considering that the entire program is explained in a layman’s terms and searchable database on it’s website, it is inexcusable that this author would mention disability payments without informing readers that these don’t draw down retirement funds or the surplus. The department administers several programs because it is efficient to do so, but the funding for those comes from general taxation, not Social Security deductions.

    The politicians are selling a scare campaign based upon the “fact” that the surplus (an invention of Reagan’s commission that made boomers pay for a part of their own retirement, which was not the practice prior) will be eventually drawn down “BY DESIGN”. That the same commission also advised that the subject be revisited once per decade to insure it’s health in a changing economy is also largely ignored. Even tho many politicians have been in office for two of those decades without acting on that advice, they are now acting as if this issue had some stealth ability during their tenure.

    The American middle class drew the short straw in 2001 when the surplus was used as justification for ill advised tax cuts, which benefited it very little. It is only fitting now that repayment of whatever amount is required to assure that middle class of it’s security in retirement be shouldered by those who “did” benefit from those cuts. Increase the benefits and adjust eligibility to compensate for those who would lose benefits only by the effects of inflation, but remove the cap, AND apply the deduction to “ALL” income types. The program will be secure in perpetuity. If this scam is successful, and the surplus is not properly repaid to boomer retirees “IN FULL”, it will destroy the credibility of the US Treasury which holds the funds, and it will effectively raise middle class tax rates by at least 4% “RETROACTIVELY” since 1983.

    • Alex Stone says:

      Of the 6.2% FICA that workers and employers contribute to Social Security, 0.9% goes to Disability Insurance (the ‘DI’ in OASDI). The remaining 5.3% goes to OASI (Old Age and Survivors Insurance, aka Social Security). These funds are separate and by law cannot borrow from each other.

      If viewed separately, the DI trust fund can cover full benefits until 2016 with no changes, while the OASI has until 2035. The Trustees’ projected the combined OASDI system would be able to pay full benefits until 2033 because Congress has the authority, as they have done before, to reallocate funds between the two trust funds to maintain full benefits. But neither OASI nor DI funds come from general tax revenues.

      Also, for many years Social Security was a pay-go system, and no trust funds existed. The trust fund was established so the Baby Boomers could finance their retirement with the surplus from the trust fund. There’s no indication a trust fund will be required to pay Social Security benefits after the Baby Boomer generation.

  2. I think the push back is the idea that those who now benefit from the cap shouldn’t have to pay more in to SS because they aren’t getting the benefits back out…thereby making it more “redistribution of wealth” than anything else.

    I think it would be interesting to see how much of SS each income bracket uses…and how that matches up with the cap.

    • Alex Stone says:

      In 1983, the last time Social Security reform took place, 90% of total income in the U.S. was subject to Social Security taxes. Now, because of the upward stratification of income, it’s about 83%. One of the lesser-known affects of stagnant middle class wages is relatively less income goes toward Social Security than in past decades.
      As for scrapping the cap, it would be simple to establish another bend point for income above the current cap of $110,100, as Senator Tom Harkin suggested in legislation he recently introduced.

      Currently, there are 3 bend points:
      (a) 90 percent of the first $767 of his/her average indexed monthly earnings, plus
      (b) 32 percent of his/her average indexed monthly earnings over $767 and through $4,624,
      (c) 15 percent of his/her average indexed monthly earnings over $4,624.

      Senator Harkin’s legislation would add a fourth bend point of 5% for income above the cap ($9175/month for 2012).

      Social Security is a progressive system, but it’s not welfare – there’s a historic benefit-contribution link that ensures workers – and/or their family members – get back a percentage of what they put in during their working years. So scrapping the cap and establishing a new bend point would maintain that link while putting Social Security on sound financial footing.

      • Oldngrumpy says:

        I would be very interested in how the 90% of “total income” was calculated. Does this account also for “earnings”, such as capital gains and interest income? I think everyone knows of someone who was excluded from Social Security deductions up to the last 10 years of their career when they dummied up some “wages” to gain entry into the benefits. When I see people complain that almost 50% of Americans pay no taxes I always remind them that almost a quarter of that number are $millionaires. There are many tax sheltered investments that can afford one an attractive retirement and also not disqualify one from benefits.

        • Alex Stone says:

          Social Security is collected only on wages and salary income. It is not collected on dividends, capital gains, stock bonuses, golden parachutes, etc. Also, the notion that 50% of Americans pay no taxes is simply not true. Here in Washington state, anyone purchasing good pays a state sales tax, which is paid at a much higher rate by lower income people. See this post for more on WA’s regressive tax structure

  3. Garry Gentry says:

    I would not want to see the CAP removed but it should be raised to around $160K and then we should increase payroll taxes by 1/2 of 1/10 of 1% per year to pay for increased benefits and to bring the funds into balance long term. If you remove the CAP it opens even more the ideological attack and make it truly more like a Welfare program which it is NOT right now. We should also make the minimum payout per monthly $1,200 and index that for inflation as time passes. I do value this program and it is critical to workers as most do not make enough to save for retirement.

    • Alex Stone says:

      As I mentioned in a previous comment, “In 1983, the last time Social Security reform took place, 90% of total income in the U.S. was subject to Social Security taxes. Now, because of the upward stratification of income, it’s about 83%.”

      To give you an idea of the income stratification that has happened since then:
      1) In 2006, when the cap was $94,200, the cap would have to have been lifted to about $171,600 to cover 90% of wages.
      2) In 2009, when the cap was $106,800, the cap would have to have been lifted to about $213,000 to cover 90% of wages.

      If the cap were extended up to $250,000 today, just 1% of workers would have income over the cap.

      It is extremely important to maintain the benefit-contribution link in the Social Security system, which is why I support a solution – like Senator Harkin’s bill proposes – that maintains that linkage.

  4. Garry Gentry says:

    Also, for anyone truly interested insome good writing on this issue Google Angry Bear Blog and search for article on SS by Coberly.

  5. Garry Gentry says:

    I am OK with changes to the way the CAP is done and while I have not studied Senator Harkin’s proposal at length he usually has good ideas. I simply do not want the CAP removed because SS was well designed and FDR realized it’s long term survival was critical and by having working class people pay for their own retirement it mimizes the ability of the right to charge SS is Welfare. The Peter Peterson Foundation has already spent about $1 Billion over the last 15 years to convince young people SS will not be there when they need it. I am a strong supporter of SS and if you look at what I proposed someone making $40K per year would pay 40 Cents more per paycheck split between the worker and employer. This would let the workers pay for their own retirement as has been the tradition. The CAP is left like it is would need to be raised to around $160K or so and then indexed for inflation. We also need to pursue policies that increase wages for workers as right now 54% of workers with 40 hour a week jobs are making $26K a year or less and that is hurting SS funding also.

  6. coolmusings says:

    I seem to remember a discussion here on how the U.S. has borrowed from the Social Security Trust Fund and used the money for other purposes. The articles here pointed out that these were not “IOUs” but treasury bonds similar to what any other investor ( e.g. China ) would buy and expect their principal returned with interest at maturity.
    If this is true, then it seems to me it should be the number one topic regarding Social Security’s future.

    • According to the Social Security Administration:

      The Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund comprise the Social Security trust funds. Both funds are managed by the Department of the Treasury through their Bureau of Public Debt. Since the beginning of the Social Security program, all securities held by the trust funds have been issued by the Federal Government. There are two general types of such securities:

      -Special issues—available only to the trust funds
      -Public issues—marketable Treasury bonds available to the public

      The trust funds now hold only special issues, but they have held public issues in the past.

      See also this information from the SSA:

      As stated above money flowing into the trust funds is invested in U. S. Government securities. Because the government spends this borrowed cash, some people see the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future. Without legislation to restore long-range solvency of the trust funds, redemption of long-term securities prior to maturity would be necessary.

      Far from being “worthless IOUs,” the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.

      • coolmusings says:

        Thanks for that response. Now the next question is whether the latest announcement about SS having to cut payments in 2033 takes into account these special-issue securities. Are we already at the point where money flowing into SS from payroll taxes is less than what is being paid out?

        • Alex Stone says:

          In 2011, Social Security had an income of $805 billion and pay out $736 billion, leaving it with a surplus of $69 billion. The balance in the Trust Fund was $2.67 trillion. For 2012, S.S will collect $846 B and pay out $789 B, leaving a $57 billion surplus, and boosting the Trust Fund to $2.73 trillion.

          The Trustees’ report estimates the first year the Trust Fund will need to be drawn on is 2021, at which point it will have a surplus of $3.1 trillion. Then in 2033 the Trust Fund will be drawn down completely, and with no changes form Congress, Social Security will revert to a pay-go system and 75% of promised benefits will be able to be paid, which is about the same amount (in inflation adjusted dollars) as full benefits in 2012.

  7. Garry Gentry says:

    You are correct about the Trust Fund Bonds but we must be realistic about what can be accomplished in Washington due to the political situation. A good example is My Senator Chambliss from GA at a town hall meeting referred to the Trust Fund Bonds as worthless IOU’s. I called him out on that and asked him if we could also default on the Treasury Bonds China owned, that the huge Banks owned, and I told him I owned several hundred thousand of those Treasury Bonds. He said no problem that all those bonds where backed by the full faith and credit of the USA and were safe and that is was only the SS Bonds in jeopardy of default. The Plutocrats who own our government are determined to cut taxes MORE for the wealthy and raise taxes on working class people. That is why I suggest raising the CAP as much as is politically possible and raise the payroll tax NOW the 1/2 of 1/10th of 1% each week. If wages go up the average of 1.2% per year a worker making $40K should get an $8 a week increase in wages and the payroll tax would go up by 20 Cents pr week on the worker and 20 Cents per week on the employer and then SS is solvent again. Medicare is a different beast but it is still not as big a problem as the media is making it to be. The payroll CAP being raised would help and raise the Medicare tax would need to be raised from 1.38% of payroll to 1.81% and that makes Medicare solvent. Another reason for the attack on SS by the Elites is they have an Ideology that anything Government is bad and if they admit SS and Medicare are well run programs and are working then they are admitting something Government is working and they simply can’t do that.

  8. coolmusings says:

    Ok what still isn’t clear to me is whether the Trust Fund that will be an estimated $3.1 trillion in 2021 includes these Bonds that you are suggesting won’t be paid back. If the $3.1 includes the bonds then sounds like bad things happen long before 2033. …”2021, at which point it will have a surplus of $3.1 trillion. Then in 2033 the Trust Fund will be drawn down completely,” If the $3.1 billion referred to does not include bonds not expected to be paid back, do we know the “value” of those bonds? Seems like boomers in particular need to be pinging their representatives and/or storming Washington.

    • Alex Stone says:

      The bonds will certainly be paid back – I’m not sure what gives you the idea they won’t! Treasury Bonds are backed by the full faith and credit of the U.S. government – they’re no different than the bonds owned by you, your pension fund, or other countries that buy U.S. debt. The reason the U.S. government has a AAA bond rating is they ALWAYS pay their debts. The federal government will no sooner not pay back those bonds than they will stop paying troop salaries!

  9. coolmusings says:

    I was just referring to Garry Gentry’s comments above, where he is skeptical about those bonds being repaid. But what is still unclear to me is if the trust fund balances referred to above and in the news announcement include those bonds.

    • Alex Stone says:

      The Trust Funds are indeed invested in U.S. Treasury bonds, as is required by law. If the current projection remains accurate, The Trust Funds will begin to be tapped in 2021.

  10. John N Florida says:

    If you don’t want to scrap the cap, make the cap the same as Congressional pay. TIE it permanently to the pay rate. Pay goes up a $, Cap goes up a $.

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