The National Commission on Fiscal Responsibility, charged by President Obama to recommend ways to reduce the federal deficit, appears fixated on Social Security. The commission co-chairs and several members have advocated reducing benefits and raising the retirement age, another benefit cut. The question is why? Could it be because Social Security:
• Pays its own way, does not and cannot add to the deficit, but produces surpluses, already totaling $2.77 trillion and projected to exceed $ 4 trillion? • Pays benefits only to those "entitled" by satisfying prescribed eligibility requirements - extensive periods of work and contribution? • Insures family members - starting at birth - against income loss due to an earner's death, disability or retirement? • Reduces poverty program more effectively than any other program, especially for older women? • Generates billions of dollars in beneficiary purchasing power that fuel hundreds of billions in sales and millions of jobs? • Has non-benefit costs below one percent of benefits paid? None seems like a reason to diminish the program.
Social Security is a model of fiscal responsibility. Three dedicated sources fund it: a modest payroll tax; income taxes on the benefits of high earners; and market-rate interest the U.S. Treasury pays on funds it borrows from Social Security. They will suffice to pay for benefits in full for decades. The Earned Income Tax Credit (EITC) purposely ameliorates the impact of the payroll tax on low earners by reducing their incomes taxes. That explains why many people pay more in payroll taxes than in income taxes.
Moreover, the law permits benefit payments only if there are funds on hand to pay them; and Social Security has no authority to borrow. So, Social Security not only does not increase the deficit, it cannot.
Social Security's trust fund derives from its revenue not immediately needed to pay benefits. The U. S. Treasury issues certificates of obligation to the Social Security trust fund for those surpluses. Starting around 2024, Treasury will begin to repay those loans. This can be done most readily by: expanding the economy thereby improving wages and enlarging payroll tax revenues, and gradually raising the cap on taxable wages (now at $106,800 a year), to its historical level. Increasing the payroll tax rate by only 1 % on employer and employee, starting years from now, if needed, would complete the program to achieve long-term actuarial balance.
The commission seems to ignore justifiable and politically palatable ways to trim the deficit, such as tackling the hundreds of billions in tax subsidies enjoyed by those already best off: for example, tax deductions for interest on mortgages for second homes. There's much more where that came from.( If we ignore those sources, Treasury will have to borrow to pay - not for Social Security - that's already been paid for without borrowing - but for the other non-Social Security outlays hitherto paid for by borrowing from the Social Security trust fund.
Some commentators, such as New York Times political columnist Matt Bai, inaccurately assert that the U.S. Treasury bonds in the trust are merely worthless IOUs. Can they really not know that governments and private trust funds buy such obligations by the billions because they are regarded as valuable and reliable?
Some assert that Social Security is unsustainable because retiree ranks are growing faster than the working population. You've heard the litany: in 1950, 16 people paid payroll taxes for each retiree; today that's 3.3 people; in a few decades that will be 2.2 for each retiree. It seems plausible that this apparently worsening "aged dependency ratio," spells calamity for Social Security.
But if that trend were so lethal, with the shrinkage from 16:1 to 3.3:1, Social Security should have run aground. Instead it creates huge surpluses. For one thing, technological advances enable most of today's employees to produce more goods and services than comparable individuals did in 1950.
Agriculture provides a dramatic demonstration. In 1900, almost 40% of the work force farmed; today fewer than 2% do. By the "logic" of the aged dependency ratio, we should be starving. But farms produce quite enough for us to eat, with plentiful leftovers to export.
The slogan "We live longer, so we should work longer" attempts to justify the proposal to raise Social Security retirement age. We don't have to raise it to provide incentives to work longer. Present law provides them: each year of delayed retirement generates higher benefits. And it is perverse to try to goad people to work longer when we see the doleful effects of mass unemployment - which can recur.
In 2009 (the last year reported), Social Security paid out $658 billion in benefits to 52.5 million beneficiaries, including almost 3.5 million children. Those payments quickly translate into business income and wages rapidly and repeatedly; economists call that "the multiplier effect."
Some use an entirely inapplicable meaning of "entitlement" to sneer at Social Security and Medicare. With these social insurance programs, "entitlement" means a legal right earned by satisfying statutory eligibility requirements - years of work and contributions. Alas, Alan Simpson qualified for commission membership even though unable to tell the difference between an earned entitlement and a cow's tits (his unfortunate language).
Advocates of knifing Social Security argue that it would show "the markets" that we are serious about addressing U.S. deficits. That sounds quite as effective as appeasing the gods by sacrificing live virgins.
Simply put, misinformation and misunderstanding, much of it deliberate, fuel the mistaken notion that we can pare the federal deficit by trimming Social Security. That path would lead to undiminished deficits, more poverty, less purchasing power, less business income and more unemployment