Is Social Security going broke? Not really. I’ve been hearing this since I was in high school. Social Security was going to go busy in 1970, 1990, 2010, and so on. Hasn’t happened yet, and it isn’t going to happen.
Social Security is a pension plan funded by a payroll tax. Part of the tax is paid by the employer and part by the employee. When someone is disabled or retires, they receive a monthly Social Security payment based on the amount they earned during their working years.
This money is not set aside in individual accounts. Instead, the money that I pay into the system right now funds Social Security payments for my parents and others who are retired and drawing money out of the system. When I reach retirement age, I’ll be taking money out of the system, and my kids will be paying money into it.
For a good explanation of the criticism of the current system, predictions of running out of money, and how the system can stay solvent, read the Baseline Scenario blog from September 12, 2011. (Baseline Scenario is a great economics blog by James Kwak and Simon Johnson — well worth following.)
The current prediction is that Social Security will run out by 2033, but that doesn’t have to happen. Here’s the key explanation from the Baseline Scenario blog:
“As all informed observers realize, you could close the seventy-five-year Social Security budget gap simply by raising the payroll tax rate by two percentage points (or by other means that have a similar financial impact, such as eliminating the cap on taxable income).”
Nobody advocates raising the payroll tax rate. That would increase taxes on everyone earning less than $110,100 per year. But what about raising the limit, so that people earning more than $110,100 per year would pay the payroll tax on all of their income — eliminating the cap on taxable income?
The Romney/Ryan ticket has suggested changing the Social Security system in various other ways: raising the retirement age, reducing benefits for higher-income recipients, and using part of the payroll tax contributions to create private individual retirement accounts. There’s been some back-and-forth about whether they really want to switch part of Social Security into private retirement accounts, and whether that really should be called privatization.
Bottom line, as summed up in a recent Atlantic analysis:
“The Democratic ticket will probably try to raise taxes on wealthier households while playing a bit with the benefits formula. The Republican ticket will look for cuts that will probably impact retirees at all ends of the economic spectrum. Take your pick.”
[I’m taking time off this weekend for a writing retreat. I’m going to spend time writing about several election issues. In some ways, this feels like a futile exercise — who’s listening to me, anyway? And hasn’t it all been said already? Even so, I’m going to do it, writing what I think and linking to sources I trust, where you can get a lot more information. This post is one of my 2012 issues series.]
One response to “2012 issues: Social Security”
Jeff Nygaard, who has studied Social Security extensively for many years, published a number of excellent articles about the issue in the past few years in Nygaard Notes ( http://www.nygaardnotes.org/ ):
# 294, 295, and 296: Opening series
# 298: Chile, Galveston TX, and Britain
# 319: Chile … a failure
# 365: The GWB Trojan Horse
# 386: The crisis is false
# 453: Some recent hysteria (April 2010)
# 463: The Simple Solution (September 2010)
# 514: The Most Fundamental Misunderstanding About Social Security (9/21/12)
I recommend them to everyone interested in the Social Security discussion (or hysteria).