For the first time in human history, people aged 65 or older outnumber children under five worldwide.
That Census Bureau bombshell, in a nutshell, is the problem with Social Security.
Don’t get me wrong; I’m delighted that advances in modern medicine allow people to live longer. Everyone wants more time with Mom and Dad before they go. But when you combine longevity with the dearth of babies being born each year, you end up with major demographic problems.
One of those is the looming insolvency of the federal government’s biggest program, Social Security. When I call it an “entitlement,” I don’t mean in the welfare sense, but Social Security is a transfer of wealth from workers to retirees. It wasn’t designed that way, but years of mismanagement, on top of the aforementioned demographic changes, put insolvency just around the corner.
Our nation just raced past $40 trillion in debt, largely thanks to income redistribution. When Social Security was created, there were 160 workers for every retiree. Each worker was to pay into a system and receive a return from the trust fund that held their money. Now, there are roughly two workers for every retiree, and the trust fund is a bit of a facade because current retirees are receiving money ostensibly reserved for future retirees.
The trust fund is projected to be gone entirely by 2032.
Twenty years ago, President George W. Bush and other Republicans proposed privatizing Social Security. Simply put, Bush said in his 2005 State of the Union, “I believe you should be able to set aside part of that money in your own retirement account, so you can build a nest egg for your own future.” Let it grow at stock-market rates of 7-10% instead of stagnating at roughly 2% in the system.
How much money did you lose in Social Security? Our Michael Swartz asked that question a year ago. The demagogues don’t want you to answer that question.
Indeed, Bush’s plan was so thoroughly derided that the backlash essentially thwarted any reform over the last two decades. President Donald Trump has warned Republicans not to cut “a single penny from Medicare or Social Security.”
All of that sets up today’s news, which is that some Republicans are considering a method for addressing the crisis: [checks notes] raising taxes.
Over the summer, our Brian Mark Weber noted, “Democrat Senator Elizabeth Warren of Massachusetts and Republican Senator Bernie Moreno of Ohio joined forces to call on the wealthy to help save the Social Security program.” In short, they want to raise the payroll cap so that taxes are taken on money earned beyond the current $184,500 annual income cap.
This month, more Republicans joined them.
“You’ll probably have to do something on the payroll half of the money being paid into the system,” conceded Congressman Lloyd Smucker of Pennsylvania.
“We’ve got too many people who say, ‘Well, we have to stay within the current income level or stay at the current tax rate,’” said Oklahoma Republican Representative Tom Cole. “I’m willing to look at the tax rate. I am willing to raise the amount of income through tax.”
Cole didn’t specify what he meant by the tax rate, but if he’s talking about raising the 12.4% workers pay (half directly and the other half indirectly through employers who then lower wages to cover the cost), then he’s suggesting a major tax hike on every American who earns a paycheck. I’m all for skin in the game, but that’s just collecting scalps.
More likely, Cole meant to support the Warren-Moreno proposal of soaking high-earners to solve yet another problem.
The Washington Post reports, “Removing the cap without increasing benefits for high-earning workers would close more than half the program’s shortfall, according to the Committee for a Responsible Federal Budget, a nonpartisan group focused on deficit reduction.”
Yet there’s a flip side: “Uncapping the payroll tax alone would push the top marginal federal tax rate over 50 percent, according to the Manhattan Institute, a conservative think tank.”
Newsweek helpfully explains, “Because earnings above [$184,500] are exempt, high-income Americans contribute a smaller share of their total income to the system than many middle-class workers.” What Newsweek neglected to mention is that higher-income folks receive a smaller return on their “investment,” too, via a progressive benefits formula.
The truth is that massive government programs that take money from one person and give it to another always run out of money. It’s why tax rates are so high in Europe, and it’s likely the only thing that will “save” Social Security.
Even that gets a qualifier, if you ask Gen Xers. “I will likely be working in retirement,” said a 53-year-old Michigander whose cynicism is typical of my generation.
According to CBS News, “In the 1970s, about half of all private-sector workers had pensions, which are employer-funded and guarantee a payout at retirement. Today, only about 14% of private-sector workers have pensions, a major transformation in the retirement landscape that experts cite as one reason many Americans are woefully short on savings.”
Fewer workers, fewer people prepared for retirement, fewer kids being born, and tax hikes on the horizon. Surely, there’s some good news somewhere.
