As the United States careens toward the day when the Social Security trust fund runs out, now estimated at 2032, press reports of reform proposals have been arriving with greater frequency and mounting expressions of fear.
The government transparency organization Open the Books reported in March that the total amount of unfunded Medicare and Social Security obligations is now an unimaginable $193.6 trillion.
The most recent proposed fix comes from the Committee for a Responsible Federal Budget (CRFB). It includes a cap on the annual cost-of-living adjustment (COLA), which increases recipients’ monthly checks to make up for inflation. CRFB co-chair Tim Penny first introduced a similar cap in Congress in 1987, where it has never gone anywhere.
Penny’s plan would cap every Social Security recipient’s annual COLA increase to the dollar amount that applies to the 20th or 30th percentile beneficiary. It would amount to a highly progressive benefit cut.
“If set at the 20th percentile, the bottom fifth of lifetime earners would see their benefits fall by just 3% in 2065, versus 19% for the top fifth of retirees,” the CRFB states. “Set at the 30th percentile instead, the bottom quintile would enjoy a 1% benefit increase, while benefits for the top fifth would fall by 17%.”
The plan would combine that with other policies, such as the proposed Employer Compensation Tax, which would remove the $176,100 annual wage cap on the employer half of the Social Security payroll tax and apply it to all fringe benefits as well. That provision would raise an estimated $2.5 trillion over a decade and 0.7 percent of GDP over 75 years.
The CRFB estimates that multiple “Revenue Options,” meaning tax hikes, and “Spending Options,” meaning benefit cuts, could compose “a full solvency package.”
I appreciate any individual or organization that dares to touch the “third rail” by offering a plan to reform Social Security. These reform plans always raise furious objections, and for very good reasons: nobody wants his or her own taxes raised, and no politician is eager to become the star of political attack ads showing Senator Evil pushing Granny off a cliff in her wheelchair.
John Hart, president of Open the Books, told Fox Business News the only way to save the system is to means-test recipients and eliminate everyone but the indigent. Host Stuart Varney rightly pointed out that no politician could survive the firestorm that would result from that.
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The big problem with all Social Security reform proposals is that they involve breaking a promise and infuriating millions of Americans. President Franklin Roosevelt sold the idea to Depression-era Americans as a savings plan in which the government would take 1 percent of an individual’s pay and an additional 1 percent “from the employer” and put it aside for that person’s retirement.
The government has raised the tax 15 times since then, to the current total of 15.3 percent. The Social Security trust fund is running out of money anyway, even though it pays off very poorly: individual, privatized Social Security accounts invested in good American companies would provide retirees with “benefits three to four times higher than the rip off that Social Security pays,” Unleash Prosperity reports.
Since 2005, the S&P 500 has risen by 844 percent, an 11 percent annual return on investment. Social Security pays a pittance compared to that.
Like nearly everything else the federal government does, Social Security is a grossly wasteful rip-off. Americans are dragooned into paying for it, and they ultimately get back whatever Congress and the president decide.
That is the entire problem with Social Security: it is run by the government. The government does not produce things. It only redistributes resources—and pain, which is the one thing it reliably creates. The plans to “save” Social Security all involve changing who pays how much and who gets how much in the coming years. They don’t expand the nation’s wealth, so there is no solution that works for everybody. Only market exchanges benefit both parties.
The CRFB’s COLA Cap would redistribute the pain by using inflation to cut the benefits of the great majority of Social Security recipients. It would ease the burden on current workers by placing it on retirees. It would expand the burden on everybody, however, by increasing inflation. It would also reward the federal government for inflation-inducing deficit spending. Funny how that works.
Meanwhile, raising the payroll tax would reduce employment by making it more expensive to hire people and pay them. That would reduce Social Security revenue well below the expected amount, and it would lower the national standard of living by reducing the production of goods and services. In addition, it would increase inflation by cutting tax revenues and causing bigger deficits, which are inflationary.
Social Security always was an income-transfer program sold via a phony “investment” public relations spin. The people who were forced to “invest” in the program believe the government should pay them their due dividend. The people who are forced to pay out that dividend don’t want to get ripped off like their parents were.
There is no magic solution to that dilemma. The only way around it is to expand economic output.
Those who call for privatization of Social Security are offering a sound long-term plan that is based on economic expansion. We will never get there before 2032 because people are afraid to have the government “speculate” with their potential benefits. They prefer the assurance of a poor return and getting robbed by the system.
However, any plan to fix the system through fiscal maneuvers founders on the hard fact that displeasure at benefit cuts will not be limited to the 77.5 million current retirees and others who receive Social Security. Millions of people about to retire will be affected, and tens of millions of other Americans will feel the sting of watching their parents’ or grandparents’ incomes decline and their ability to pay for desperately needed healthcare and other necessities.
No politician is going to want to be known for that. That is why we were always going to head for a fiscal collapse, now scheduled for 2032.
S. T. Karnick (https://stkarnick.substack.com/) is a senior fellow at The Heartland Institute and author of the Life, Liberty, Property weekly e-newsletter.
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