Yves here. Both parties have been gunning to “reform” as in cut, Social Security for decades. Bill Clinton’s plan was sidetracked by the American heroine Monica Lewinsky. Obama’s Grand Bargain failed due what is left of the left combatting cuts to safety nets, most of all Social Security. Readers here like to diss Bernie Sanders, but even Wikipedia credits him with leading this campaign, and notably, opposing a Democratic party president when as an independent who caucuses with the Dems, he needs to play nicely with them in order to get their support for initiatives that are important to his Vermont base.
This post usefully goes through the mathematics of what it might take to improve Social Security’s finances as well as the noises being made by various Presidential contenders. Note that the concerns about Social Security which rest on the fiction of past contributions, when it is really a pay as you go program. Somehow no one (until very recently) worried about the sustainability of our Ukraine misadventure, and even that misguided enterprise is running into ground due Ukraine running short of men and the Collective West coming up short on arms, and not an inability to keep the money flows going.
All it would take is raising the Social Security contribution ceiling to get more funds from top earners after a protracted period of income and wealth shifting to top cohorts.
By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website
After the New Hampshire primary, Donald Trump and Nikki Haley emerge as the final two Republican contenders for the presidency. What impact would their victories have on Social Security, a crucial federal program widely supported by voters? Will those vying for the White House, including President Biden, address the economic inequality that is the real threat to the program?
GOP Promises: Depends on Who’s Listening
On the campaign trail, Trump pledges to safeguard Social Security without cuts, proposing to fund it through expanded fossil fuel drilling—an odd claim debunked by Eric Laursen, author of The People’s Pension. The former president vows to “always protect” the program, a position distinctly at odds with that of challenger Nikki Haley, criticized by Trump for committing to raise the retirement age for younger Americans if elected. (Haley’s wealthy donors have praised her attacks on Social Security).
Trump’s position is also at odds with his own past remarks. Just four years ago, in Davos, Switzerland, while hobnobbing with the world’s elite at the annual World Economic Forum gathering, Trump declared his intention to cut Social Security and Medicare if he got a second term.
“Will entitlements ever be on your plate?” asked the CNBC interviewer.
“At the right time, we will take a look at that,” Trump said. “You know, that’s the easiest of all things [to cut].” He suggested that economic growth would make cuts easier for people to swallow.
Perhaps Trump only says such things when talking to the wealthy because he knows that people who rely on Social Security don’t benefit nearly as much from economic growth as those at the top. This trend has been increasingly evident for several decades. According to economist Peter Temin, the U.S. has been dividing into a “dual economy,” with roughly 70% of the population facing precarious work conditions and limited benefits despite overall economic growth. In other words, trickle-down stopped trickling a long time ago.
Back in a more equal time, in 1975, Congress chose to index the Social Security cap (the maximum earnings subject to the payroll tax) to wage growth. Before that, the cap was raised ad hoc, as needed. Lawmakers who made the call didn’t foresee stagnant wages and growing inequality as defining issues of America’s future. They didn’t anticipate that globalization; the rise of shareholder value ideology (see economist William Lazonick); the decline of unions; the deliberate suppression of wages (see economist Lance Taylor); and other forces would hold back earnings for most of the population while the income of the wealthy ballooned. Since the eighties, these problems have led to a decline in the percentage of earnings covered by the Social Security cap. High earners’ income has simply outpaced the rest of the workforce, while the payroll tax is levied on only a tiny percentage of that high income.
Income inequality in the U.S. is now the highest of all the G7 nations. It’s clear that productivity and growth gains mostly enrich the wealthy: according to a Brookings Institute report, America’s national income from 1979 to 2016 rose by almost 60%, but those in the bottom half of the income distribution saw their income rise by just 22%. The top 10% raked in nearly five that much.
The Social Security payroll tax cap for 2024 is set at $168,600. Because so many rich Americans have been earning far more than the cap for decades, the Social Security Trust Fund has lost trillions of dollars. Income free of payroll taxes retained by the most affluent Americans has hurt the program meant to support all workers in their old age or disability. Ordinary workers bear a disproportionately heavy burden: research from the Center for Economic Research and Policy reveals that while most Americans pay 6.2 percent of their wages into Social Security, the wealthy often contribute as little as 0.08 percent. A whopping 94% of working Americans pay into Social Security on every dollar they earn. Not so for the wealthy – not by a long shot.
Economist Teresa Ghilarducci recently pointed out that while 160 million American workers like you and I will pay Social Security payroll taxes all year long in 2024, well over 200 people likely paid all their Social Security taxes in the first few hours — even minutes — after the Time Square ball dropped. “Elon Musk earned $168,600 in about 4 minutes,” reports Ghilarducci. “It took Tim Cook of Apple about 2 hours.” She further notes that if the top ten American CEOs paid Social Security tax on all their income, including stock options, the Social Security system would have received $3.4 billion. “A lot of income escapes the Social Security system, and the escaping income is from the wealthiest Americans,” writes Ghilarducci.
Drilling down even further, the research of Matt Hopkins and William Lazonick cautions that any discussion of taxes on income must use the correct “realized gains” measure of pay derived from the exercise of stock options and the vesting of stock awards (which, unfortunately, is not the measure of executive pay that is widely published, even by critics). In a conversation with the Institute for New Economic Thinking [INET], Lazonick pointed out that, as Tesla CEO, Elon Musk has often paid payroll taxes on income that is far below the annual limit, or what the Social Security Administration calls the “contribution and benefit base.”
That is because Musk obtained little if any of his compensation from salary, while he pulled in enormous realized gains from stock-based pay in only two years—2016 ($1.3 billion) and 2021 ($23.5 billion)—of his 14 years from 2009 to 2022 as Tesla CEO. He paid Social Security taxes in those two years on the full contribution and benefit base as well as in 2009 (when he made $240,000).
But in the other 11 years, Musk’s total annual pay averaged less than $33,000, which meant that his payroll taxes were on only 27 percent of the contribution and benefit base. In 2020 and 2022, Musk contributed no payroll taxes because his Tesla CEO income was zero, while in 2021 he had to pay just $8,854 on a total compensation of $23.5 billion.
Does that sound fair?
In Lazonick’s view, the reason we even have a Social Security payroll tax cap is unclear unless it is “limiting the amount rich people have to pay into a program many of them dislike.” He believes that the cap has to be totally rethought: “There’s no reason not to have a payroll tax on the entirety of the realized gains from exercising stock options and the vesting of stock awards.”
Lazonick stresses that wealthy executives often make very little of their income from salaries, sometimes taking just one dollar: “If you want to deal with the cap, you have to deal with this issue.” He also emphasized the need to address the increase of low-wage workers in the U.S. workforce: “When you have more and more people making $30,000 a year, that’s going to hurt Social Security. If you want to strengthen the program, deal with that.”
It should also be noted that Social Security was designed for wages that rise when prices go up, but most American workers say that their wages haven’t kept up with inflation.
Bottom line: Capping payroll taxes according to wage growth in the age of inequality makes little economic sense. The majority of American voters, Democrats and Republicans alike say they like the idea of raising the cap and using the revenue for targeted expansions, a position President Joe Biden has campaigned on.
Weak Support From Democrats
Donald Trump is not the only person with sights on the White House who changes his tune on Social Security. President Biden talks in favor of expanding and increasing Social Security benefits, yet his calls to cut Social Security go back 40 years, as journalist Ryan Grim has documented. In the 1980s and again in 2005, he favored raising the retirement age, a position for which he now blasts Republicans. 1983 marked the last time major legislation on the Social Security program was passed, and at the time, Senator Biden, along with 25 other Senate Democrats and 163 House Democrats, provided the majority of votes to pass the last cut to benefits—which included raising the retirement age for people not yet able to vote. Maybe you were one of those people, now unable to retire at 65 with full benefits.
Today, many Democrats give lip service to expanding the program, but such reforms have gained little real traction in the party. In 2022, Democratic House leadership killed a vote on whether to expand Social Security.
What Biden would actually do with Social Security if elected remains anyone’s guess: he has been susceptible to pressure from deficit hawks in the past when considering cuts to the program, despite the fact, as economists Thomas Ferguson and Robert Johnson have pointed out, the argument that Social Security contributes to the deficit is a specious one. Currently, deficit hawks appear to be circling again, and some see signs that the President is beginning to cater to them. To those watching the ever-expanding influence of money in politics, the alarming straight-line relationship between congressional race outcomes and political money, documented by Thomas Ferguson, Paul Jorgensen, and Jie Chen, explains a lot about why public preferences on how to address the program are routinely ignored.
The truth is that both Republican and Democrat voters want a robust Social Security system.
Since the majority of Americans want more revenue to strengthen it, why shouldn’t the small fraction of the highest-income Americans, especially the top 200 or so, pay more instead of raising the retirement age for young people? At this time, seven million borrowers under 25 currently owe over $97 billion in federal student loans), and they face perhaps a lifetime of unstable, insecure jobs. Meanwhile, retirees contend with the crushing challenges of rising housing costs, soaring healthcare expenses, and the termination of pandemic-era aid programs. Rising homelessness among younger Baby Boomers – at a rate not seen since the Great Depression – is a warning sign that an increase in benefits is long overdue. If the younger Baby Boomers are becoming homeless, what does that portend for Gen X and the generations to come?
Ultimately, if White House contenders truly aimed to safeguard Social Security, they’d prioritize building an economy with quality jobs and fair wages for American workers. They’d confront the inequality eroding our economic stability and burdening working people unnecessarily. But as long as politicians cater to wealthy donors, who’s going to hear us?
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Cutting social security lowers basic demand!
Oops.
Apologies if I’m missing something that makes Social Security “NON-MMT compatible”. But surely, with the required caveat of “real resource constraints so as not to stoke inflation” SS should be just funded ex nihilo with central govt money creation?
Yes I’m perfectly aware that we still can’t get enough citizens to stop thinking their nation has a “credit card” requiring repayment. So I totally “get” the political issue. But am I totally wrong in thinking that the economics could “make the funding issue of SS go away”? Are we fighting the wrong battle?
Mostly, yes. What matters isn’t the amount of dollars available — it’s the real resources, including labor, that will need to be available to provide the goods and services represented by the Social Security program. The money is really a distraction from the molecules and joules which really matter.
So either a drop in supplies or a increase in money and hey presto, inflation.
End result is that the major argument within economics is where the money should come from, government spending or private lending.
The group holding sway right now see government spending as bad and private lending as good.
In the end they are still just adding more epicycles on the same basic system that was set in motion when the Bank of England war formed.
Thanks. Yes what I thought – if we build enough clinics, train enough physicians and carers and staff able to help people retrain and “be productive in some way” etc then I fail to accept the “SS fund dollar value” even being an issue (beyond the politically manufactured football everyone kicks around)
Apparently, for most politicians, the only time that they support MMT, is when it comes to the “defense” budget.
When approving money for war and the military/industrial complex, it’s rare to hear “But where’s the money gonna come from?” uttered in the halls of congress.
…and the “job guarantee” promoted by MMT turns into military recruiting…
When SS was still on paper, some of FDRs advisors told him that a payroll tax was not needed to fund the system (back then more people in power actually understood the system), but FDR said he didn’t care about that, he wanted the payroll tax there to create security for the program. His logic was that if people paid into it, they would defend it from those who (mostly rich people) who didn’t like it. For the most part his logic has held as the program has mostly remained intact for goin on 90 years. Even now no smart politician talks about getting rid of SS… they all want to cut it to “save” it.
I think that like the postal service (which is actually in the US constitution) they would like to starve SS until privatization becomes “necessary”. The way the USPS is being treated is a scandal IMO. I recently mailed a large 11 lb package and I was surprised that it was a dollar cheaper to send FedEx ground than USPS ground… that would never have been the case at one time.
Continuing to focus on “making SS pay for itself” is a loser. No other major program (defense, Medicare, etc.) in the federal budget “pays for itself.” Just appropriate the extra money that SS needs to meet its obligations and be done with it. Ironically, SS is one of the few areas of the budget that can be fixed by just spending money, unlike defense, Medicare/Medicaid, education, infrastructure, etc. where more funds doesn’t seem to mean better results.
It will only take a trillion dollars to keep the SSTF solvent for the every working American’s lifetime. Just do it.
On a slightly skewed angle to the topic, is there any grass roots discussion in the US about cutting (i.e. diverting) some of the funds allocated to so called ‘Defense’? Or is this always going to be a sacred cow? It swallows gigantic amounts of money, to not much effect on actual ‘defense’, although I suppose there are a certain number of jobs supplied by it. And if things keep going downhill for the US Empire, as many quite plausibly forecast, how long can this sacred cow keep swallowing its present rich diet, before austerity creeps in? To an outside observer, this is the proverbial bull in the china shop of US welfare provision.
NB. There is a good overview of ‘Defense’ spending here:
https://orientalreview.su/2024/01/15/bipartisan-declaration-of-neoconservatism-by-the-u-s-congress/#
I keep wondering when the (still ongoing) covid deaths at the higher end of the age demographic will start affecting SS financial outlook. We’re on our way to a third year of declining life expectancy. Isn’t this materially improving the solvency of SS? Especially since it doesn’t look like the decline is reversing?
Yes of course I agree, the cap should be raised or preferably eliminated. Tax the games the wealthy play with deferred income too. Benefits need to go up and quickly – many of the newly homeless are retirees who can’t afford their property taxes and homeowner’s coverage.
I acknowledge that the actuarial assist from declining life expectancy is possibly offset by the potential explosion in disability claims. And SSDI has been woefully underfunded for decades. So that’s another reason to nick the well off who told the serfs to go back to work and get infected.
I was originally going to wait until I was 70 to collect SS. Now, with the possibility of getting Long Covid and it’s impact on organ systems (had Omicron in 2022), I’m filling out the SS application now. I hit the full retirement age last month. I see no reason to wait and will take my benefit while I’m still above ground.
I decided to take it early a few years ago when I was in my late 60s and I’m glad I did. Inflation has proved that to be a smart decision. Since I had been self-employed being paid mostly in cash it amounts to a pittance anyhow.
I agree that there’s a lot that can be done to bolster SS funds, and the least complicated (at least from a pure financial point) is to eliminate or significantly raise the cap on the amount of wages that are taxed. This of course will prinicipally affect the PMC, that part of the 6% of the population who see a little bump in their take home pay after they’ve maxxed out their annual contribution before the end of the year. Because the PMC seem to be a sacred cohort whose taxes must not be raised, good luck with that.
The idea of using capital gains taxes to bolster funds looks great on paper, but much of the capital gains at the top end that could be taxed are held in trusts, partnerships, and many other structures with income that doesn’t have to flow back directly to a taxable individual. Given that idea that most people see SS as a ‘replacement’ for their working ages when they retire, the simpler solution is to simply double, triple, or quadruple the annual maximum taxable wages (or not cap it at all).
On the other hand, since good income can be made on investments in the military industrial complex, perhaps taxing that income should be the way that the government pays for their overseas military adventures. The government has provided people with the ability to make easy money on certain investments, so the government gets to take back a little bit of it – call it a commission.
The article is pathetic in the sense that it proposes raising taxes on the slightly well-to-do population that is still an employee and gets money via *wages* that can be taxed directly. The main example, Elon Musk, whoe doesn’t get his money via wages, and all his billionaire friends, are off the hook.
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As someone pointed, money spent in stupid wars and whatnot are sacred right? Let’s raise taxes on the PMC, that’s the mantra of the crowds. I say not. Will vote for people who lower my taxes, i.e., Republicans. Especially Trump. Loved his last tax reduction.
Goodie for you. Trump’s tax reduction did nothing for people at the lower end of the wage scale.
Did you really read the same article? It explicitly says the correct figure to determine the amount to be paid into SS is “realized gains”, which includes all contributions to the wealth of the rich and argues for no cap at all. This definitely doesn’t let them off the hook.
{pulls up rope ladder}
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Part of the motivation in getting my gotten gains as soon as possible was to have control over inflationary issues which I watched increase about 40% while in Social Security’s waiting room during my 60th & 61st year on this good orb, and yeah I know there’s a cost of living stipend, but in no way or how does it come close to actual inflation ($1200 more for house insurance this year, a 20% raise from last year) and i’m a spend it when I get it type of fellow these days, and could I see almost a couple grand worth of SS $ be only enough to buy a week’s groceries coming down the pike? sure.
I also wanted to get grandfathered in against only being able to get your dough when you’re 64.
If I get the story right, all the money clipped out of worker’s wages gets used to buy US Treasury Bonds where it is reckoned to be safe which is probably fair enough. But Wall Street wants Social Security privatized and there is no shortage of politicians on either side of the aisle that wants to see this happen – for an appropriate contribution. Can you imagine what would happen if this happens? All that money currently invested in Treasury Bonds will suddenly go surging into the stock market chasing after any returns that they can find, especially for stuff hyped by Silicon Valley. The stock market indexes would go through the roof – until one day they don’t. And in the resulting crash, who will politicians bail out – those reckless Wall Street investors or Social Security pensioners. And of course they will claim that they can’t do both.
I taught in a public school for 35 years. I considered my income to be low middle class. My last year of teaching I made $49,000. In those 35 years I never made enough to stop paying the SS tax. I’m one of those that probably have collected more than I paid in to the program.In fact in one more year I will have collected more in SS and pension benefits than I made in my working years. I believe I am unusual. I know many people that retired and died in 5 or less years after retiring. The biggest fear I have is having a health issue that will be very costly. In my opinion when to start collecting is a gamble. My personal belief is start collecting as soon as you can and don’t worry about waiting to collect because your monthly benefit will be bigger. Enjoying a healthy life after retiring is more important than having a big bank account.
Your strategy to collect right away is axiomatically correct, since the “average” life span data is meaningless for each individual, none of whom can know for sure that they will outlive that average or not.
A higher sum later could also prove useless if your health has deteriorated such that enjoyment of the additional money became impossible — again something no individual can know in advance.
From 1983, Social Security ran a surplus every year until 2021 when its income exceeded expenses due to covid. The surplus was invested in US Treasuries and the SSA was able to meet its obligations, then and now, with interest earned from the surplus.
Noteworthy, are the terms ‘off-budget’ and ‘on-budget.’ SS was created as a stand alone, pay as you go system, off-budget. That is, the revenue from employee and employer contributions is distributed by the SSA to retirees. It is not included in the general revue collected by the government.
In 1968 it was moved to ’on-budget.’ The problem is, if the government runs a deficit and SS is collected as ordinary tax revenue, then the people who want to reduce the deficit will look to programs like SS to fix the problem, regardless that SS is running a surplus by itself.
In 1983, SS was returned to off-budget status. Nonetheless, as the RP and DP are both right wing parties, they continued to claim SS payments were an “entitlement.” Thus, as the deficit must be reduced, and as reducing the military or national security state budget is not on the table, SS was an easier target.
The SSA was created off-budget largely because it was known that in future years there would be a surplus and the surplus should be saved and invested rather than let it be grabbed to pay the bills of other agencies. Nonetheless, to create fear and confusion, politicians and their wealthy donors still treat the SSA as though it were part of the federal budget though it’s not. Moreover, it’s not hard to imagine the desire of the wealthy to figure out a way to divert some of the SS money to themselves.
https://www.cbpp.org/research/policy-basics-understanding-the-social-security-trust-funds
https://www.ssa.gov/history/BudgetTreatment.html
With eg’s comment, and Terry’s comment, and But what do I know?’s comment…I think some profound things have been touched on with relatively few words. Even if you add them all up together.
Eliminate the cap and make stock purchases, buybacks and the like subject to the tax, and index the tax to income. With extraordinary wealth comes extraordinary responsibility.