Social Security Reforms Progressives Will Resist

On January 28, the Congressional Budget Office released “The Budget and Economic Outlook: 2020 to 2030,” and it projected annual trillion-dollar budget deficits for the entire decade. The largest expenditure of the federal government is for social programs, the biggest of which is Social Security. Some progressives in Congress, however, contend that Social Security should not be a part of any effort to balance the budget. But if Congress is ever again to get control over the budget, reform of the social programs must be a part of the solution.

In the Social Security Administration’s Annual Statistical Supplement, 2019, the first block of data, “Table 4.A1 Old-Age and Survivors Insurance, 1937–2018 (in millions of dollars),” is divided into Receipts, Expenditures, and Assets. Let’s focus for the nonce on two columns: “Net payroll tax contributions” on the Receipts side, and “Benefit payments” on the Expenditures side.

The drill here is to sum the two columns, payroll tax receipts and benefits, and then subtract the latter from the former -- for three significant time frames. Our three time frames are delimited by 1937, 1984, 2010, and 2018. Those years are for Social Security’s startup, the year the big payroll tax hikes kicked in, the year that the program went “cash-flow negative” (whereby receipts from the payroll tax hikes weren’t enough to pay benefits), and the last year of the table.

Our time frames are 1937-1983, 1984-2009, and 2010-2018. To simplify, let’s drop off the rightmost digits and express our sums in billions. So, for time frames of 47, 26, and nine years, Social Security produced differences between payroll tax receipts and benefits of, respectively, -$15B, +$1,043B, and -$766B.

If one adds up those three sums one gets +$262B, which figure you’ll also get if you do the routine for 1937-2018. That might seem like a bit of cushion, but the difference between payroll tax receipts and benefits in 2018 was -$129B. If that size shortfall between income and outgo were to continue, then Social Security will have become cash-flow negative over its entire history in early 2021. For those of you who voted for Rep. Alexandria Ocasio-Cortez, that’s next year.

The “burn rate” indicated by the 2010-2018 shortfalls (-$766B) was more than twice as fast as the rate that SS produced surpluses for 1984-2009. It appears that SS will have burned through, i.e. spent to offset the payroll tax shortfalls, an amount equal to the entire $1T surplus generated over 26 years in a bit over 11 years.

However, there are two other sources of tax receipts besides the payroll tax. The larger of these two is “Income from taxation of benefits.” Since 1984, benefits have been subject to the personal income tax. Call it “claw-back,” for this is a type of means testing. (What the SSA giveth, the IRS taketh away.) For 1984-2018, the total revenue from the taxation of benefits was $482B.

The older of the two other sources of tax receipts is “Reimbursements from the general fund of the Treasury,” as the first entry in this column was in 1947. The total for reimbursements for 1984-2018 was $208B.

For 2010-2018, the three sources of tax receipts together are $391B short of being enough to cover total expenditures. So, for the period, SS has been cash-flow negative not just for payroll tax receipts, but for all tax revenue. The $391B shortfall was made up for with interest. When we subtract the $391B shortfall from “Net interest” accrued over the period, we get $461B, which happens to be the total we get if we sum “Net increase during year” over in the Assets section on the right. (Actually, when I summed that column, I got a $2M discrepancy, but hey, close enough for government work.)

In 2018, total expenditures were $853B while total payroll tax receipts were $715B, a difference of $138B. To pay total expenditures with the payroll tax alone, its receipts would need to rise by about 19.3 percent. That would entail a rate hike for the payroll tax of 2.39 points. So instead of being 12.4 percent, the SS portion of the payroll tax rate would be 14.8 percent. And rather than 6.2 percent, workers would have 7.4 percent skimmed right off the top of their wages.

But do we really want to burden wage earners and their employers with a payroll tax rate hike? Perhaps there are better ways to raise revenue. The three sources of tax receipts for 2018 totaled $750B, which makes for a shortfall of $103B. One reform to help close that shortfall gap is the expansion of “means testing” in the taxation of benefits that we’ve had since 1984. We could claw back more of the SS benefits paid to high-income earners. High-income folks who would object to further claw-back of their SS benefits should consider that they are the ones who are already paying to make up for the shortfalls.

Another reform might be the creation of a new surtax levied on all income currently subject to the federal personal income tax. Instituting a new tax is rather progressive, and contains a whiff of Bernie Sanders and other leftists who for years have been advocated taking the cap off the payroll tax. But the rate on the new surtax could be quite low. Look at this chart from the St. Louis Fed and you’ll see that personal income, the target of the surtax, was $18.9T in December. If PI, personal income, were an even $20T, we could cover a $100B shortfall with a tax rate of 0.5 percent.

Democrats, however, would say there is no need for any of this, as interest receipts have been enough to pay the shortfalls that began in 2010. And if interest in a year is not enough to cover any shortfall from the three sources of tax receipts, then SS can tap its so-called Assets, i.e. its $2,797B “trust fund.” And tapping the so-called trust fund is just what happened in 2018. Notice in “Net increase during year” that there was no increase in 2018 and that the value of Assets decreased by $22B, the first such decrease since 1983.

Just where do Democrats think the money to cover shortfalls comes from? Back when SS was in surplus, interest didn’t need to come from anywhere; it was merely a number added onto the trust fund. But now that SS is cash-flow-negative, interest and trust fund transfers can come only from two sources: other taxes, such as the income tax, or loans, i.e. the sale of U.S. Treasury securities. Since Congress has resumed running trillion-dollar deficits, it seems fair to say that SS shortfalls are being made up for with new debt.

This writer urges that SS be put on a strict pay-as-you-go basis. That is, the system should operate on a cash-flow basis, whereby benefits are paid for with tax revenue only. Social Security needs to be put under its own budget, where each year Congress balances income and outgo, i.e. taxes and benefits. If in any year SS spends more than it takes in, then Congress would be required to make up for that shortfall in the next year, either by raising taxes or cutting benefits or both.

Raising the payroll tax rate, clawing back more of the benefits sent to high-income earners, instituting a surtax, or a combination of the three could close the shortfall gaps and thereby make Social Security a self-sustaining system.

NOTE: To verify the numbers above, click on the Excel link in the upper right corner of the first link above and download the spreadsheet, it’s named “4a” and on my system it went in the Downloads folder. If you use Zoho to work with the spreadsheet, click on Browse, then select and open 4a, and then click on View. To sum a column, click inside a cell for your year and drag the plus sign downwards; the sum will appear in the lower right-hand corner. Have fun.

Jon N. Hall of ULTRACON OPINION is a programmer from Kansas City.

On January 28, the Congressional Budget Office released “The Budget and Economic Outlook: 2020 to 2030,” and it projected annual trillion-dollar budget deficits for the entire decade. The largest expenditure of the federal government is for social programs, the biggest of which is Social Security. Some progressives in Congress, however, contend that Social Security should not be a part of any effort to balance the budget. But if Congress is ever again to get control over the budget, reform of the social programs must be a part of the solution.

In the Social Security Administration’s Annual Statistical Supplement, 2019, the first block of data, “Table 4.A1 Old-Age and Survivors Insurance, 1937–2018 (in millions of dollars),” is divided into Receipts, Expenditures, and Assets. Let’s focus for the nonce on two columns: “Net payroll tax contributions” on the Receipts side, and “Benefit payments” on the Expenditures side.

The drill here is to sum the two columns, payroll tax receipts and benefits, and then subtract the latter from the former -- for three significant time frames. Our three time frames are delimited by 1937, 1984, 2010, and 2018. Those years are for Social Security’s startup, the year the big payroll tax hikes kicked in, the year that the program went “cash-flow negative” (whereby receipts from the payroll tax hikes weren’t enough to pay benefits), and the last year of the table.

Our time frames are 1937-1983, 1984-2009, and 2010-2018. To simplify, let’s drop off the rightmost digits and express our sums in billions. So, for time frames of 47, 26, and nine years, Social Security produced differences between payroll tax receipts and benefits of, respectively, -$15B, +$1,043B, and -$766B.

If one adds up those three sums one gets +$262B, which figure you’ll also get if you do the routine for 1937-2018. That might seem like a bit of cushion, but the difference between payroll tax receipts and benefits in 2018 was -$129B. If that size shortfall between income and outgo were to continue, then Social Security will have become cash-flow negative over its entire history in early 2021. For those of you who voted for Rep. Alexandria Ocasio-Cortez, that’s next year.

The “burn rate” indicated by the 2010-2018 shortfalls (-$766B) was more than twice as fast as the rate that SS produced surpluses for 1984-2009. It appears that SS will have burned through, i.e. spent to offset the payroll tax shortfalls, an amount equal to the entire $1T surplus generated over 26 years in a bit over 11 years.

However, there are two other sources of tax receipts besides the payroll tax. The larger of these two is “Income from taxation of benefits.” Since 1984, benefits have been subject to the personal income tax. Call it “claw-back,” for this is a type of means testing. (What the SSA giveth, the IRS taketh away.) For 1984-2018, the total revenue from the taxation of benefits was $482B.

The older of the two other sources of tax receipts is “Reimbursements from the general fund of the Treasury,” as the first entry in this column was in 1947. The total for reimbursements for 1984-2018 was $208B.

For 2010-2018, the three sources of tax receipts together are $391B short of being enough to cover total expenditures. So, for the period, SS has been cash-flow negative not just for payroll tax receipts, but for all tax revenue. The $391B shortfall was made up for with interest. When we subtract the $391B shortfall from “Net interest” accrued over the period, we get $461B, which happens to be the total we get if we sum “Net increase during year” over in the Assets section on the right. (Actually, when I summed that column, I got a $2M discrepancy, but hey, close enough for government work.)

In 2018, total expenditures were $853B while total payroll tax receipts were $715B, a difference of $138B. To pay total expenditures with the payroll tax alone, its receipts would need to rise by about 19.3 percent. That would entail a rate hike for the payroll tax of 2.39 points. So instead of being 12.4 percent, the SS portion of the payroll tax rate would be 14.8 percent. And rather than 6.2 percent, workers would have 7.4 percent skimmed right off the top of their wages.

But do we really want to burden wage earners and their employers with a payroll tax rate hike? Perhaps there are better ways to raise revenue. The three sources of tax receipts for 2018 totaled $750B, which makes for a shortfall of $103B. One reform to help close that shortfall gap is the expansion of “means testing” in the taxation of benefits that we’ve had since 1984. We could claw back more of the SS benefits paid to high-income earners. High-income folks who would object to further claw-back of their SS benefits should consider that they are the ones who are already paying to make up for the shortfalls.

Another reform might be the creation of a new surtax levied on all income currently subject to the federal personal income tax. Instituting a new tax is rather progressive, and contains a whiff of Bernie Sanders and other leftists who for years have been advocated taking the cap off the payroll tax. But the rate on the new surtax could be quite low. Look at this chart from the St. Louis Fed and you’ll see that personal income, the target of the surtax, was $18.9T in December. If PI, personal income, were an even $20T, we could cover a $100B shortfall with a tax rate of 0.5 percent.

Democrats, however, would say there is no need for any of this, as interest receipts have been enough to pay the shortfalls that began in 2010. And if interest in a year is not enough to cover any shortfall from the three sources of tax receipts, then SS can tap its so-called Assets, i.e. its $2,797B “trust fund.” And tapping the so-called trust fund is just what happened in 2018. Notice in “Net increase during year” that there was no increase in 2018 and that the value of Assets decreased by $22B, the first such decrease since 1983.

Just where do Democrats think the money to cover shortfalls comes from? Back when SS was in surplus, interest didn’t need to come from anywhere; it was merely a number added onto the trust fund. But now that SS is cash-flow-negative, interest and trust fund transfers can come only from two sources: other taxes, such as the income tax, or loans, i.e. the sale of U.S. Treasury securities. Since Congress has resumed running trillion-dollar deficits, it seems fair to say that SS shortfalls are being made up for with new debt.

This writer urges that SS be put on a strict pay-as-you-go basis. That is, the system should operate on a cash-flow basis, whereby benefits are paid for with tax revenue only. Social Security needs to be put under its own budget, where each year Congress balances income and outgo, i.e. taxes and benefits. If in any year SS spends more than it takes in, then Congress would be required to make up for that shortfall in the next year, either by raising taxes or cutting benefits or both.

Raising the payroll tax rate, clawing back more of the benefits sent to high-income earners, instituting a surtax, or a combination of the three could close the shortfall gaps and thereby make Social Security a self-sustaining system.

NOTE: To verify the numbers above, click on the Excel link in the upper right corner of the first link above and download the spreadsheet, it’s named “4a” and on my system it went in the Downloads folder. If you use Zoho to work with the spreadsheet, click on Browse, then select and open 4a, and then click on View. To sum a column, click inside a cell for your year and drag the plus sign downwards; the sum will appear in the lower right-hand corner. Have fun.

Jon N. Hall of ULTRACON OPINION is a programmer from Kansas City.