January 21, 2022

Everyone talks about the Social Security funding problem, but . . .

The phrase “everyone talks about the weather, but nobody does anything about it” is commonly attributed to Mark Twain, although he never claimed to have coined it. It’s not in his writings, and versions of it had been circulating for years before the first mention of him saying such a thing.

It doesn’t matter, the thought is a good one and has been applied in many other situations to express the futility of recognizing a problem but not being able to act on it. That has even been the case with Social Security, which has a widely recognized funding problem that has gone unaddressed for decades.

The difference is that tackling that problem is not a matter of ability, but of willpower. And the consequences go far beyond being bothered by heat or cold or rain or the lack thereof.

The last time Social Security faced a similar problem, in the early 1980s, a bipartisan committee laid the groundwork for a law that, among other things, put more money into the program by raising payroll taxes and requiring new recruited federal employees to pay the program through a new creation called the Federal Employees Retirement System. It also made benefits partially taxable above certain income levels, putting that money back into the program and gradually raising the age for full benefits.

Even then it was recognized that the solution was not permanent. At the time, the baby boomer boom was just entering its peak years, with more money being paid out than withdrawn and a surplus built up in the trust fund over three decades. But it is inevitable that workers will become retirees, which started ten years ago for that generation.

Over the past twelve years, Social Security has paid out more than it has received in payroll taxes, and the surplus will be exhausted for about the same number of years going forward. At that point, the program will only take about 75 percent of what it needs to cover its projected expenses.

This is not a theoretical exercise for what are already some 65 million beneficiaries, many of whom rely on it as a major, if not the only source of their retirement income. It’s also not something that can just be glossed over. Notes a recent Congressional Research Service report:

“Under current law, Social Security does not have the authority to borrow money from the general fund of the Treasury. Therefore, the program cannot use general revenues to offset the difference between incoming receipts and distributions when the program no longer has asset reserves to draw from.”

“The Social Security Act does not specify what would happen to the payment of benefits planned under current law in the event of the depletion of the Social Security trust fund. Two possible scenarios are (1) paying the full monthly benefits on time or (2) paying a partial (reduced) monthly benefit on time.”

The solution is simple enough: increase income, slow spending growth, or both – preferably in a combination to lessen the pain of any change. There are many ways to approach each. Just to name a few, the age to receive full benefits could be raised yet again; the payroll tax could be increased or applied to more income; and inflation adjustments can be limited.

Every year that date gets a little closer and the options get a little more painful as neither political party wants to take responsibility for action, no matter how obvious the need for it. The idea of ​​a bipartisan commission providing the political cover to actually accomplish something important seems rather odd these days, a bit like a story about a bet on which of two frogs can jump further.

But there is movement in a Social Security reform bill that has received some bipartisan support in the House. The measure was the subject of a favorable hearing in December, a possible prelude to an attempt to advance the bill this year, either as a stand-alone measure or as an appendix to another bill.

The measure would make more money by reintroducing the 6.2 percent payroll tax, which will cut to $147,000 in income by 2022, for income above $400,000. Sponsors expect that subsequent legislation will be enacted to subject income between the two levels to that tax as well.

However, other features of the bill would increase spending. It would use a more generous formula to determine the benefits; base inflation adjustments on an index that matches the spending habits of retirees, which also results in an expected increase; introduce a new minimum benefit for people with a low professional income; end the waiting period for receiving disability benefits; and extend the child benefit to the age of 26.

And of particular importance to current or future retirees under the civil service pension system, it would end two cuts in social security benefits also introduced as part of the latest reform – the “windfall allowance” and the “state pension compensation” – which Social Security benefits from those who receive annuities from a retirement program that does not include Social Security, such as CSRS.

Whether all that can be done and still put Social Security on a stronger financial footing remains to be determined. It would be just a start to subject income above $400,000 to payroll taxes. But it would at least be a step from talk to action.

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