One of the most effective lines of attack by the opponents of Social Security over the past three decades has been the notion that Social Security faces a catastrophic financial crisis, and therefore cannot survive in its present form. Therefore, they say, benefits will have to be cut, the retirement age raised, or the whole program replaced with private investment accounts.
The argument that Social Security is in “a crisis” has, in various forms, been written, spoken, and endlessly regurgitated by politicians, “think tanks”, the mainstream news media and others. Scare stories about Social Security being “insolvent” or “near bankruptcy”, and that “entitlement programs” and “greedy senior citizens” are draining the economy and causing the federal budget deficit, have circulated for so long and so widely that many people now believe them. But these stories simply aren’t true.
Social Security really has nothing to do with the federal budget or the deficit because Social Security is self-funded through its own dedicated tax – the payroll tax known as FICA (Federal Insurance Contributions Act.) The tax is 12.4 percent of a worker’s wages, with half of that paid by the worker and half paid by the employer.
But the payroll tax is “capped”, and high earners stop paying it when their taxable income for the year reaches $113,700 (in 2013.) That cap increases slightly year to year as average wages go up, but it remains fundamentally unfair. It means that affluent people are taxed at a lower rate than people with low to moderate wages or salaries – and the very rich are taxed on only a tiny fraction of their earnings. For example, Jeffrey Immelt, the CEO of General Electric, received total compensation in 2012 of $20.6 million, but only his salary – which was a “mere” $3.3 million – was subject to the payroll tax. Because of the cap (which was $110,100 in 2012), Immelt was done paying the FICA tax less than two weeks into the year, while most GE workers and the rest of us paid the tax all year.
Social Security was not set up to be “pre-funded” like most pensions, but on a “pay-as-you go” basis. The payroll taxes paid by each generation fund the retirement benefits of their parents’ generation. When Social Security’s revenues from taxes exceed its payout in benefits, the surplus is held in the Social Security Trust Fund, invested in U.S. Treasury bonds. Historically the trust fund has not been very large, and it was not intended to be.
Throughout its history, Social Security has faced periodic funding shortfalls, where changes in the economy or in generational demographics meant that the system’s revenues were not going to keep up with payouts. This was never a real crisis – Congress simply increased the payroll tax rate to meet the benefit projections. (The original rate was 2 percent, with half paid by the worker.) In 1977 Congress voted for the biggest increase in payroll tax rates, to be phased in over several years, and in 1983 Congress and President Reagan agreed to accelerate those increases. As a result of the 1983 amendments, the trust fund grew very large and its surplus is now around $2.6 trillion.
The trust fund’s Board of Trustees is required by law to issue an annual report which includes both short-term (10-year) and long-term (75-year) projections. Their estimates currently project that, with more people retiring and if there is no increase in revenue, Social Security will have to start spending the trust fund surplus around 2021. Benefits would still be fully paid, but using a combination of current tax revenue and money from the trust fund. After that, if there’s still no tax increase or other changes, the trust fund surplus is projected to be gone by sometime around 2033. At that point, Social Security would still be able to pay 75 percent of promised benefits, from current tax revenues alone.
This anticipated shortfall has been known since the trustees’ report of 1984. It’s a small problem – not the looming catastrophe it’s been portrayed as – and easily fixed. Easily fixed, that is, if we can prevent the politicians from first doing something horrible, like cutting benefits, raising the retirement age to 70, or privatizing Social Security into millions of risky “individual investment accounts.”
Slightly increasing the payroll tax rate would eliminate the long-term shortfall. Another idea, favored by progressives and Social Security supporters, is raising the tax cap or eliminating it altogether, to make high-earners and the rich pay a fairer share. Delegates to UE’s 2011 Convention passed a resolution calling on Congress to “remove the cap on Social Security taxes so that all contribute the same percentage of earnings to the trust fund.”
PAYING FOR EXPANSION
UE’s convention resolution, titled “Retirement Security”, went a step beyond its call for removing the cap in order to keep the current Social Security system financially sound. It called for doubling Social Security benefits to answer the loss of pensions and retirement security for millions of American workers, and to pay for that, it called for additional taxes on business.
Steven Hill and his colleagues at the New America Foundation, who advocate a doubling of Social Security, call for paying for the expansion through more equitable taxes. In their April 2013 paper “Expanded Social Security”, they call for lifting the payroll tax cap in order to tax more of the salaries of top executives and corporate lawyers. But they also suggest “taxing unearned income such as capital gains, investment income, and dividends at the same payroll rate that affects earned labor income. As it stands, unearned income is exempt from payroll taxes.”
Tax reform is also needed to make the rich and corporations pay a fair share of federal income taxes. The top marginal rate (applied to the rich on their highest tier of earnings, currently everything over $425,000) was 94 percent under President Eisenhower, 70 percent under President Carter, but now it’s only 39.6 percent. After loopholes are applied, they pay even less. The corporate income tax rate is by law 35 percent, averages about 12 percent in fact, and some of the richest corporations such as GE often get away with paying zero.
Another part of the answer could be the Robin Hood Tax – a small sales tax (.5 percent or less) on traders of stocks, bonds, currency and financial derivatives. Officially known as the Financial Transaction Tax, this could raise hundreds of billions of dollars a year by taxing the kind of risky, unproductive Wall Street behavior that caused the economy to crash in 2008. On April 17, the Robin Hood Tax was introduced as a congressional bill – H.R. 1579 – by Representative Keith Ellison (D-MN), co-chair of the Congressional Progressive Caucus.
ADDITIONAL COVERAGE
Click the article titles below for additional coverage from the UE News about Social Security, the attacks on it and the fight to defend it.
Don't Cut Social Security, Increase It
For Medicare, Means Testing Means Trouble
The People's Pension: The Struggle to Defend Social Security Since Reagan (Book Review)
A Young Person's Guide to Social Security