We cover a number of Chuck Saletta's pieces on Social Security.  This piece is worth reading because it is well written and well thought.

"Over the last several years, the news about Social Security's long-term health has gotten progressively worse. With nearly every passing year, the Social Security Administration's annual Trustees' Report has pulled forward the date when the Social Security Trust Funds are expected to run out of cash."

The article spells out the problem and the consequences.  It tells you about the problem, and what is being done about the problems.

One of the more dangerous arguments in the debate about Social Security is the growing belief that Social Security is part of the social safety-net that protects the poor.  This argument has bled into the lexicon of both parties, and become a standard for media analysis of any proposal to reform the system. 

There is one problem: Social Security isn’t a safety-net, nor is it designed to act as one. Yes, the formula rewards people progressively less as they earn more. Yes, the formula reduces benefits for people who saved for their own retirement. But nowhere does Social Security pay people based on need.

The formula has more than 2,000 rules which change the benefits based on whether you have kids or how many times you marry. The benefit formula rewards people for living longer. The benefit formula rewards people who work longer.  No where in these formulas does the system pay more money to people because they are in need.

The formula allocates the largest amount of resources to people who contributed the most in the past, live the longest, have the most qualifying ex-wives, and have the most children after the age of 65.  Social Security pays the most to someone like Pete Stark.  Who is Pete Stark? An ex-Congressman who is wealthy by Congressional standards.

He will collect the maximum payment allowed by Social Security.  He is apt to live longer than most Americans.  He married three times, giving the system three potential wives to collect survivor benefits from Social Security.  The last wife produced 3 children all of whom have been eligible for Social Security almost since birth. 

On the other side of Pete Stark, Social Security will allocate zero resources to people who worked for Central Falls, a small town in Rhode Island which faces bankruptcy.  Like many towns and municipalities, Central Falls did not put its employees into Social Security.  With their pensions gone in bankruptcy, the people who retired from the city will have significant needs and no way to collect from Social Security.  The reason is that Social Security isn’t a safety-net.

Sen. Bernie Sanders (I-Vt.) reintroduced legislation which would increase the amount of wages subject to payroll taxes.   His website provides material describing the bill, here.

In the five years that Sen. Sanders has pushed this legislation, the core problem with it has not changed.  This legislation diverts tax resources away from deficit reduction to Social Security.  Every penny collected under this tax provision could be raised as income taxes that would go to the general fund to either reduce the deficit or reduce the outstanding debt.  This idea is no different than putting your 401K contribution on your child’s credit card.

Over that time, though, the Senator’s promises have severely deteriorated.  Originally he promised that this change would make the system ‘solvent’ for 75 years.  Now he is promising to make the system ‘strong’ for 50 years.   Instead of basing his statement on current information, the news release points to research that is two years old.  He uses old data because Social Security has lost trillions of dollars of solvency over the past two years.  (To understand the difference between 'Fixed' and 'Solvent', here) 

The one thing that has not changed is the willingness of Sen. Sanders to support his ideas with word-games and sound-bites that have no factual basis.  His unique definition of words like ‘pay’, ‘owe’, and ‘cost’ tells the reader that not even the system’s strongest supporters actually believe in the system anymore.  If he still believed in the system, he would not be compelled to mischaracterize what the Trustees have said about the system.

 “Through good times and bad, Social Security has paid out every benefit owed to every eligible American”

Sen. Sanders can make this claim because Social Security can reduce what it owes to beneficiaries.  Social Security hasn’t paid out every benefit promised – just every benefit owed.  In 1983 Congress reduced what Social Security owes to people – substantially.  People who were owed benefits at 65 are now owed benefits at 67.  People who saved for retirement now face a means-tested claw-back against what they are owed.  

Sen. Reid, a co-signer, said “assuming that the only way to strengthen Social Security is to take away benefits that seniors have earned, or raise taxes on the middle class.”  According to the Supreme Court, Flemming V Nestor, Social Security benefits are not earned.  In its ruling, "the Court established the principle that entitlement to Social Security benefits is not contractual right" - (source www.SSA.gov)  In other words, Social Security does not in fact owe anyone anything.

 “Social Security officials say that simple change would yield about $85 billion a year to keep the retirement program strong for at least another 50 years.”

The $85 billion a year could be used to reduce the annual deficits which run nearly a trillion dollars a year.  Pushing this $85 billion to Social Security means that our children will face $85 billion dollars a year in more debt plus interest.  This isn’t a tax on billionaires.  It is a tax on our children. 

 “The most successful government program in our nation's history has not contributed to the federal deficit.”

Sen. Sanders does not let facts get in the way of a good sound bite.  The payroll tax holiday cost the general taxpayer nearly $250 billion dollars of dollar for dollar deficit spending.  The EITC which was designed to offset the high cost of payroll taxes on lower-wage workers is projected according to Forbes to cost $326 billion over the next five years. 

 “It has a $2.7 trillion surplus, and it can pay out every benefit owed to every eligible American for at least the next 20 years, according to the Social Security Administration.”

This is another statement that is factually inaccurate.   The Trustees of the system have said in the 2012 report that the system’s financial resources may last as long as 20 years provided that we have a good economy.  On page 58 of the Trustees Report, the Trustees warn that the system resources maybe depleted in as little as 14 years.  These are what the Trustees call the ‘high cost’ assumptions.  While the report calls them high-cost, fertility, interest rates, and wage growth assumptions actually seem fairly optimistic.

What any reader should see in the news release is a sense of panic in supporters.  They no longer use facts to explain solutions because these ideas aren’t really about fixing Social Security as much as postponing the collapse until the senator leaves office.

Jed Graham, who writes for IBD, discusses new Congressional Budget Office projection showing a worsening financial outlook for Social Security:

“Social Security's financial outlook took another hit this week, as the Congressional Budget Office hiked its estimate for cash deficits from 2013 to 2022 by $212 billion.”   (Read "Social Security Trust Fund Likely To Run Out In 2031")

The article says that "Meanwhile, workers 44 years old who may be more than halfway through their working careers face the prospect of retiring after the trust fund is bust."  It appears that the writer assumes people will retire at 62, which is an option for less than half of Americans.  For people who expect to retire at full retirement age, 49 years-old is the point where workers expect to retire after the trust fund is gone.  Anyone 66 or younger expects to live long enough to have benefits cut.

The budget deficit is the greatest threat to Social Security.  As deficit increases, interest costs create an increasing footprint on our tax base.  As interest costs go up, the ability of workers to pay into Social Security goes down.   

Some think that the problem with Social Security is the number of workers to retirees.  The flaw here is that workers do more than support retirees; specifically they pay income taxes which support the deficit.  Today, the average worker is carrying almost $100,000 of look-through debt from the federal government alone.  The additional debt burden means that the worker today is not comparable with the worker of 2000.

We are kidding ourselves if we believe that Social Security doesn’t add to the deficit.  Senator Sanders is going to introduce a bill to increase payroll taxes.  If we can raise taxes, we should raise taxes to lower the deficit, rather than to fund a retirement account.

I am a boomer, and we have left our children a staggering debt.  We shouldn’t be surprised if they resent the obligation to take care of our debt and the people who created it. 

This quote is pretty standard in the arsenal of the privatization supporters.  The quote is used to suggest that younger workers’ retirement benefits would be higher if they were able to invest their payroll taxes privately.  The data is used out of context, and can lead to faulty conclusions particularly about low-income workers.

The flaw in the reasoning is that the rates of return for individuals within the group will vary a lot from the return of the group as a whole.  Low-income workers get significantly better returns than high-income workers.  More importantly, group returns include workers who die without collecting a dime.  So the expected return of someone who reaches retirement is substantially higher than 1 to 2 percent. 

It would be more accurate to say that some workers get will benefit more from a privatized account while other workers will lose benefits if they leave the existing Social Security system.  This outcome presents a serious problem for privatization. learn more

While Ryan’s plan does not specifically state the source, the data appears to come from the ““Internal Real Rates of Return under the OASDI Program for Hypothetical Workers,” report from the Social Security Administration. (Office of the Chief Actuary, Actuarial Note no. 144)

The subject of Social Security guarantees a heated debate. Today, in Washington there is a debate. One side of experts says that there may be a problem with Social Security in 21 years. The other side of experts says that there will be a problem in 21 years.  Both sides agree that the Social Security Trust Fund will be exhausted in 2033, so the argument is centered on whether a problem in 21 years is really a problem at all.

The experts in Washington believe that the problem facing the Social Security system is that it is running out of money.  They are wrong.  The fact that Social Security is running out of money is an outcome rather than a problem – much like a fever is an outcome of the flu.  The fever is the visible outcome, but it is not the disease.   The fact that Social Security is running out of money is the visible outcome.  The disease is the fact that Social Security is a terrible investment.

It should surprise no one that a terrible investment runs out of money.  People avoid bad investments whether it is on Wall Street or in Washington.  It is a matter of economic gravity that poor returns drive people out of any financial system.

Washington will tell you that payroll taxes are mandatory – which is true. The problem is that wages are not mandatory.  People can stop working.  People can shift wages into benefits which are not captured by payroll taxes.  Businesses can shift wages into stock options which are not part of the payroll tax equation.  This is not evasion.  It is the sound of people fleeing a failing system.

The question of solvency is in reality the unavoidable outcome of poor economic returns of Social Security.  Economic returns are what you get for what you contribute, and they are terrible particularly for younger workers. According to the Social Security Administration, some younger workers can expect to get back as little as 40 cents on the dollar. That means that Social Security isn’t terribly different than spending quarters to buy dimes for younger workers.

Experts argue that raising taxes and lowering benefits for future generations are the only two solutions because the experts are focused on the solvency of the Trust Fund.  This approach is treating the symptom.  It is like trying to cure chicken pox with zit crème. 

Unfortunately in this case, their cure will make the disease worse.  Raising taxes and lowering benefits on future generations will make the economic returns of the system worse. As returns drop, so does participation. As participation drops, the system will see greater and greater cash shortfalls.

The experts do not believe in economic gravity.   In their world, no one retires earlier because of lower compensation.  No one acts in their own self interest to avoid the tax.  And no one loses a job because of the higher cost of employment.  In the mind of Washington experts, the economy is a frictionless system where rising costs have no consequence.

The problem is that Social Security is spending quarters to buy dimes.  The experts would tell you that the solution to this problem is to get people to spend quarters to buy nickels.  This is lunacy.  These solutions make the system less appealing to the working generation – without whom the system fails in spectacular fashion. 

Both Republicans and Democrats have agreed that Social Security has not contributed to the federal budget deficit.  The Democrats have been more vocal about the claim.   But both parties buy into the concept.

Let’s be very clear here.  Social Security is a signficant contributor to the budget deficit today.  Taxes increase the cost of business, and constrict economic growth.  Given that economic activity is what pays for the government, anything that reduces growth increases the deficit.  The Congressional Budget Office has put some numbers behind this theory.  It projects that cutting payroll taxes from 12.4% to 10.4% during the tax-holiday will create 2.5 to 7 million jobs.  If they are correct a small cut in FICA taxes will create millions of jobs and billions of dollars of income taxes.

One of the more vocal member of Senate on the issue of Social Security, Senator Sanders, is proposing a new tax on the high income earners to stablize Social Security into the future.  One has to ask, if these people have more capacity to pay taxes, why should those taxes be raised as payroll taxes when these taxes could be raised as income taxes to pay down the deficit. 

As a tax, payroll taxes have to compete against income taxes within the wage tax base. In this competition, they are like two straws drinking from the same soda. What one takes, the other cannot. Every dollar that is collected in the form of FICA is a dollar that the government cannot collect in income taxes.  Absent payroll taxes, our income taxes would be much higher, and the deficit much lower.

The only way that statement can be false is if the willingness to pay taxes is endless. Common sense rejects that idea. Empirical data rejects that idea. Economic studies reject that idea. Kurt Hauser will at some point win the Nobel Peace Prize rejecting that idea.  Washington is the only place on earth where payroll taxes aren’t taxes.

Washington will tell you that pay roll taxes are contributions to a retirement system. The problem is that Washington hasn’t noticed is that fewer people believe that they will get their money back.  According to ABC/Washington Post polls, more than 80% of Americans think that Social Security will go into crisis without reform.  As the return falls, people think of payroll taxes as just another tax. 

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