This post will be very wonky.
From a New York Times op-ed by Brian Riedel of the Manhattan Institute as published in this Why Evolution Is True post:
In his State of the Union speech this month, President Biden pledged to block any reductions in scheduled Social Security and Medicare benefits. He also promised that any tax increases would be limited to families that earn more than $400,000 — roughly the top-earning 2 percent of American families.
Together, these promises are almost certainly economically impossible. [emphasis mine, Rules of Logic]
Over the next three decades, the Social Security system is scheduled to pay benefits $21 trillion greater than its trust fund will collect in payroll taxes and related revenues. The Medicare system is projected to run a $48 trillion shortfall. These deficits are projected to, in turn, produce $47 trillion in interest payments to the national debt. That is a combined shortfall of $116 trillion, according to data from the Congressional Budget Office. (To inflation-adjust these figures, trim by roughly one-third.)
These unsustainable figures result from demographics, rising health care costs and program design. The ratio of workers supporting each retiree, which was about 5:1 back in 1960, will fall to just over 2:1 by the next decade. People who live until age 90, a fast-growing group, will spend one-third of their adult life collecting Social Security and Medicare benefits. Today’s typical retiring couple will receive Medicare benefits three times as large as their lifetime contributions to the system, and also will come out ahead on Social Security (adjusted into present value), according to the Urban Institute and the Brookings Institution.
The president’s implication that full benefits can be paid without raising taxes for 98 percent of families has no basis in mathematical reality.
First, note that the projected Medicare shortfall is more than twice that of Social Security, but all of the news is about the latter. The idiot politicians of both parties who point to Medicare as an example that government programs can be efficient and pay for themselves are LYING.
Second, the notion that Social Security can be made more solvent by not raising taxes on 98 percent of families is beyond a pipe dream. The fact that most on one side of the public political spectrum believe it is frightening.
So, what’s the answer? Does one even exist? I do not have access to actuarial models that could create hard data so I am just spitballing here. (I will only discuss Social Security.)
Do you know how your Social Security benefit is calculated? The Social Security Administration determines something called your AIME, Average Indexed Monthly Earnings. If you have more than 35 years of recorded earnings, the highest 35 are used. Your earnings are indexed for inflation until age 62, the first age at which someone could draw retirement benefits.
Your PIA, Primary Insurance Amount–the amount you would receive if you waited until your specific full retirement age–uses tranches, or slices, of your AIME. At present, that calculation is 90% of the first $1,115 of AIME, 32% of the amount from $1,116 through $6,721 (if applicable) and 15% of the amount over $6,721 (ditto).
The 2023 cap on the amount of earnings that are taxed for Social Security, and the max amount that can be used in the calculation of AIME, is about $160,000. That’s a long way from $400,000.
The notion that Social Security can be made more solvent by only increasing taxes on “the rich” is either a serious hallucination or a bald-faced lie. Census Bureau data on distribution of income by household is not as granular as one might think, at least not the data I have been able to find.
I can tell you, however, that 6% of American households reported income between $160,000 and $200,000 (not the $400,000 cutoff in the pipedream) in 2021. About 12% of American households reported income of $200,000 or more. Certainly, a large percentage of those are under $400,000. Based on the op-ed, we can extrapolate that about one-sixth of American households earned between $160,000 and $400,000 in 2021. The notion that their Social Security taxes won’t have to increase is just preposterous.
My solution, such as it is, is actually quite simple. First, tax all wages and salaries at the current rate, 6.2%, with no cap. Second, change the percentage of the two highest AIME tranches used for the PIA calculation from 32% and 15% to 30% and 10%. Again, I don’t know how much that would decrease the shortfall. However, and using very rough calculations, we can estimate that about 22 million American households earned between $160,000 and $400,000 in 2021. (About 2.6 million earned $400,000 or more.)
Let’s assume that 80 percent of that income is potentially taxable under Social Security. Without getting into the calculations, my very rough estimate is that my proposal would raise an additional $7 billion a year for Social Security, just from the families earning between $160,000 and $200,000 a year. On average, that would be about $100 per month per household. I don’t think that’s a lot to ask of people earning an average of $15,000 a month.
I can hear the anti-tax Right telling me that all taxation is theft. Sorry, but it is also pie in the sky to think we can dismantle Social Security and replace it with some nebulous plan.
In my plan, people/households earning under $160,000 a year, about 82 percent of the US population, would have no tax increase. That sounds eminently fair and would seem so to more people except one side of the political spectrum loves to use the politics of envy as a way to pander for votes.
Sorry I have rambled on about this. My wonderful wife and I are among the fortunate who will not need to rely on Social Security retirement benefits. Still, this is a program that millions of people need. Yes, it would be better if more people were more careful with their money while they are working. It is also true that being poor and old is brutal.
If you like this blog please tell your friends and share the blog URL (https://disaffectedmusings.com). Thanks.
2 thoughts on “Trying To Do The Impossible”
I am not an economist or mathematician, but the Social Security quandary is worse partly because politicians keep kicking it down the road. Eliminating the salary cap would be a prudent fix that won’t impact those who least can afford a tax increase. It won’t be a final solution, but it would be a good start.
Thanks for your comments, JS. Unfortunately, politicians have incentive to keep kicking the Social Security can (among others) down the road because incumbents, for the most part, are not held accountable for poor or non-existent governance. Also, moral hazard–where a person will not suffer direct consequences from a decision–plays a role as policies can have bad ramifications that don’t manifest for many years.
LikeLiked by 1 person