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Home Publications Blogs Beat the Press The Primary Cause of Social Security's Bleak Outlook Is Upward Redistribution

The Primary Cause of Social Security's Bleak Outlook Is Upward Redistribution

Tuesday, 24 April 2012 05:27

In an article on the release of the 2012 Social Security trustees report the Washington Post told readers that:

"Social Security’s bleak outlook is primarily driven by the ever-larger numbers of people in the baby boom generation entering retirement."

Actually the fact that baby boomers would enter retirement is not news. Back in 1983, the Greenspan Commission knew that the baby boomers would retire, yet they still projected that the program would be able to pay all promised benefits into the 2050s.

The main reason that the program's finances have deteriorated relative to the projected path is that wage growth has not kept pace with the path projected. This is in part due to the fact that productivity growth slowed in the 80s, before accelerating again in the mid-90s and in part due to the fact that much more wage income now goes to people earning above the taxable cap.

In 1983 only 10 percent of wage income fell above the cap and escaped taxation. Now more than 18 percent of wage income is above the cap.

Comments (16)Add Comment
Fully fund Social Security
written by Robert Salzberg, April 24, 2012 7:01
According to the CBO, eliminating the cap on wages subject to the Social Security tax would extend the life of the trust fund until 2083.


But why stop there? Income from investment is protected from taxation far more than wages from work. If all income were subject to the Social Security tax, Social Security would be fully funded for eternity.
News Hour on Social Security
written by Bart, April 24, 2012 7:27

Last night the lead to the Social Security segment was that it would "run dry" earlier than expected.

And sure enough this morning their web site has this -

Report: Social Security Slated to Run Dry in 2033

The liberal media strikes again.
The Bush Collapse Also Contributes
written by Charley James, April 24, 2012 7:34
While it might only be a statistical blip, it strikes me that millions of people becoming unemployed after the Bush collapse - the Lesser Depression, as Paul Krugman dubbed out economic problems - hasn't helped the actuarial forecasts.

When working people have no income, there is no money going into the Social Security Trust Fund. As long as unemployment remains unacceptably high, FICA's funding problems will become more acute.
written by skeptonomist, April 24, 2012 8:41
In retrospect, building up a large balance in the Trust Fund for boomers was probably a mistake. It should have been realized that the payout would have to come from current revenues regardless of the money in the Trust Fund account. The accounting that seemed clear to Greenspan is evidently beyond the grasp of most people, who have been convinced that they will get no retirement benefits if the Trust Fund balance goes to zero. There is a good chance that the benefits that the boomers paid for will be taken away so that the taxes of upper-income taxpayers can be kept low.

The deterioration of wage growth is a real problem with respect to any projections of benefits, but this real problem is not what most of the political "debate" is about - the debate and false alarm is based on the supposed disaster when the Trust Fund goes back to a low value.

If the program had remained strictly pay-as-you-go there could be no false clamor for paying now for future benefits, and the connection with productivity would be clearer (wouldn't it?). There would be no need to try to make projections 30 years into the future.
they raised benefits when they raised the cap
written by pete, April 24, 2012 8:56
This is a silly argument with surprisingly good economics. While I am all for increasing the flat tax to higher incomes instead of having progressive marginal rates, that is beside the point. Hell, make it 9% on all income (oops, he lost) with 0 dedcutions. But consider that framed as a defined benefits package, with payouts related to previous incomes, raising the cap would just raise the payouts. So doctors and trial lawyers making $750K a year would get SS payments on the order of $200,000 or $300,000 a year? How could this possibly solve anything?

Most critical is, as skepto is suggesting, to completely end the facade of framing SS as a defined benefits program (it is not, you can read this in your annual statement), and simply re-frame it as old age and disability insurance, with some base levels and trickling off for the wealthy (a SS Buffet rule). That was the original intent, only modified to bring in the Republicans in the 30s, while ignoring demographics. Then the funding can be done optimally, rather than fraudulently confounding the benefits with the payroll deductions. This is the same problem as medicare/medicaid. Provide health, optimally tax, do not mix them up.
Optimal taxation is not flat rate
written by David, April 24, 2012 9:44
"Flat" tax rates are never flat. The rich always get preferential treatment over the poor, in practice. Just like the space-time continuum is not flat but curved by those entities with large mass, so it goes in tax policy space. The only real solution is to take away some of the mass of the fat cats/800 lb gorillas, so that the playing field becomes relatively flat, instead of us all having to struggle against the event horizon known as the Koch brothers.
"Year of combined trust fund exhaustion" estimates
written by AndrewDover, April 24, 2012 9:48
The estimates have not really changed much since the middle 1980s.

Year, Exhaustion year
1983, solvent
1985, 2049
1993, 2036
1995, 2030
2003, 2042
2012, 2033

Social Security's bleak outlook is a result of politicians misunderstanding finance
written by Tyler, April 24, 2012 10:28
If our policymakers understood that the federal budget is nothing like a household budget, we wouldn't ever discuss Social Security's solvency again. Here's why: http://monetaryrealism.com/joe...nning-out/
How many local newspapers used the term "Bankruptcy" in their headline this AM?
written by jumpinjezabel, April 24, 2012 11:24
Out local misinformation newspaper shilled again for the Republicans by using the term Social Security funds drying up even faster"
written by J, April 24, 2012 12:11
This seems like a headline more worthy of the National Enquirer than a respected newspaper. No wonder newspapers are going out of business with all this yellow journalism. They are competing with the ever larger market for funny papers rather than differentiating themselves with actual responsible reporting.

This pandering to large business interests for financial incentives in the guise of supporting small business or the industrious has eliminated security for most workers unless they were fortunate to already to be retired or vested into a system from a different era. I cannot get over the amount of apathy from our elected officials. This is what happens when wealthy people or people without a sense of empathy to the less well to do govern our country.

How can a millionaire relate to an unemployed person? How can a person that has never experienced failure other than not getting everything they wanted in life relate to people? How can a person in an elected office with other wealthy people relate to struggles of trying to establish a career over the past 10 years when there is persistent economic calamity? Congressmen cannot relate and this failure to understand will damage many lives beyond repair.

It is a shame the republican party, which has some respectable supporters, would rather destroy so many peoples lives in order to deny a democratic president any opportunity to claim credit for helping people. It is a shame the democratic party doesn't have the courage to fight against this complacency, this in action. This is a not a democracy. It is not a republic. I don't know exactly what we are but I don't like it.
not bankrupt
written by Barkley Rosser, April 24, 2012 12:28
As usual, Dean, you are on the money. It is astounding how widely believed the myths are. Most of my students are fully convinced they will never get any SS benefits. I point out to them that the "bankruptcy" would lead to them still receiving more in real terms than current recipients get. They are astounded that this is being presented to them as it is.

I also note that they are being asked to support cuts now to their future benefits on the basis of the argument that if those are not cut now, they might have to be cut in the future. When that is posed to them, they also rather shake their heads in disbelief about how seriously this whole thing has been misrepresented to them.
written by Jeff N., April 24, 2012 12:45
Does anyone know how the trustees report comes up with its numbers for tax revenue going to social security? For example, does the report assume that the Bush tax cuts will expire and that people will be paying more into SS in coming years, or does it assume that tax receipts will remain constant at their current levels?
written by AndrewDover, April 24, 2012 2:13

"7. Income From Taxation of Benefits

Current law credits the OASI and DI Trust Funds with income taxes from the taxation of up to the first 50 percent of OASI and DI benefit payments. (The HI Trust Fund receives the remainder of the income taxes from the taxation of up to 85 percent of OASI and DI benefit payments.)

For the short-range period, the Office of the Chief Actuary estimates the income to the trust funds from taxation of benefits by applying the following two factors to total OASI and DI benefit payments: (1) the percentage of benefit payments (limited to 50 percent) that is taxable; and (2) the average marginal tax rate applicable to those benefits.

For the long-range period, the office estimates the income to the trust funds from taxation of benefits by applying projected ratios of taxation of OASI and DI benefits to total OASI and DI benefit payments. The income thresholds used for benefit taxation are, by law, constant in the future, while income and benefit levels continue to rise. Accordingly, projected ratios of income from taxation of benefits to the amount of benefits increase gradually. Ultimate tax ratios for OASI and DI benefits used in the projection rely on estimates from the Office of Tax Analysis in the Department of the Treasury. "


I suspect that assumes expiration of Bush tax cuts.
The Social Security red herring
written by Solonsays, April 24, 2012 5:38
Dragging Social Security into the $15 trillion budget battle is a red herring. Social Security has been subsidizing the General Fund since 1935. Budget adjustments are designed to ease the cash flow requirements of IOUs owed from the General Fund in order to fund additional tax cuts for the wealthy. The working class has loaned their surplus taxes paid into SS to the government and the government should not treat them as 2nd class creditors or short change their benefit programs due to employment trends which will reverse over time. It is time to cash out Social Security and the other government pension funds and separate them from the General Fund under a new governing authority. The $4 trillion in IOUs owed the funds could provide the reserves for a public banking system. From this point there are many creative ways to reform the system to enhance cash flows into the funds as opposed to remaining a source of liquidity for tax cuts for the wealthy. If the Federal Reserve is going to loan trillions of dollars using toxic crap as collateral, then the IOUs owed the nation's trust funds should be a welcome addition to their balance sheet.
written by bkrasting, April 24, 2012 9:29
I would like to see cepr's numbers on raising the cap.

There is a formula to the SS payout. The more one pays in, the more one gets back. For every dollar that comes in, three will go out. So when you raise the cap you just increase future liabilities. It does not fix SS.

Now if you raise the cap and at the same time change the formula, that would work. But that would be the end to your favorite program. You will have socialized the whole thing and wrecked the only good thing about it.

Is FICA a tax, or is it forced savings? If its a tax, then the system is just a social program for seniors. If it's forced savings, then you can't fix it with just raising the cap.

If you do have those numbers, send them along.
written by AndrewDover, April 24, 2012 9:50

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.