Q. This question is about your recent column on Social Security and Medicare. I'm an accountant in Austin. I will turn 60 in November. I have what I think is a fair amount put away in a 401(k) and an IRA.
It has been my understanding that our Social Security deductions were paid into Social Security and then loaned out. The federal government gives the Social Security fund an IOU. It has been well known that the Social Security fund would start collecting on those IOUs when the bulk of the baby boomers started to retire.
Since the government gets most of its money from income taxes (not Social Security taxes), when the Social Security fund starts collecting the money it is owed, then everyone's income tax rates will have to rise to make good on the IOUs and to make up for the shortfall in revenue from the employment tax. This is the reason, if I understand this correctly, that most of us don't think this is a problem.
Now I understand that in today's political climate this change will be something that will gag the Tea Party folks even though it was designed this way from the start.
Am I missing something? Making good on the IOUs will make income tax rates rise or make the deficit larger, or both— but isn’t that the way the program was designed from the beginning? —J.E., Austin, TX
A. No. Social Security has always had a "trust fund." Its contents were measured in a few months of benefit obligations. The fund could be used as a backup for recession periods when tax collections were down. It wasn’t adequate for big changes in benefit payments.
The purpose of the 1983 reform was to build a larger trust fund balance. The idea was to deal with the major increase in benefit commitments that would come when the boomers retired. Accumulation of a large amount— like the $2.6 trillion now in the fund— would make the program safe for the 75-year projection period.
With no actuarial deficit over that 75-year period there would have been no need to discuss raising the employment tax—or any other tax— to pay the benefits, if the government had not over borrowed for everything else. If we had had a balanced budget, the Social Security surplus could have paid down other federal debt. Then that credit could be used later to redeem trust fund assets.
But that didn’t happen. While retirees have a preemptive call on federal spending because of the trust fund, the only choices for making good on those promises will be to raise taxes, reduce benefits for future retirees, or print money. Worse, fixing the problem isn't just a matter of increasing the employment tax (or the income tax) to bring in the needed revenue. Check this paragraph from a summary of the recent Trustee reports:
"The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds is 2.67 percent of taxable payroll, up from 2.22 percent projected in last year's report. This is the largest actuarial deficit reported since prior to the 1983 Social Security amendments, and the largest single-year deterioration in the actuarial deficit since the 1994 Trustees Report."
Since the employment tax is 12.4 percent (employer and employee portions combined and not including the current 2 percent break for workers) we're talking about a 21.5 percent increase (2.67/12.4) in the employment tax to get the necessary money coming in. This would, in theory, make the program sound over the next 75 years. You don’t have to be a Tea Party member to rebel at the idea of that big a tax increase.
So there is also active discussion of cutting future benefits. As a result, today's workers could be paying higher taxes and getting less in future benefits. That’s not a very good "compact between generations." Worse, we've been told this before: 1983 reforms were supposed to make Social Security financially sound until 2060.
We should all remember that this is a wonderful problem to have. We have it because fewer children die, do we have smaller families and because we are all living longer. In "The Clash of Generations" (MIT Press, 2012) economist Larry Kotlikoff and I describe this as "Catastrophic Success."
We've succeeded beyond our wildest dreams in extending the gift of life. What we haven't done is find the courage to pay for it, either collectively through Social Security or individually through personal saving.