Social Security war looms

 

Gordon L. Weil

The war over Social Security is on the verge of breaking out.  It will run short of funds to pay for promised benefits in less than 10 years.

Many American leaders intentionally ignore the issue, which may be the most important economic and political challenge before them. They dodge the problem because there are only two solutions – raising taxes or cutting benefits, and both are politically dangerous.  Facing only downsides, politicians push the problem off, making it worse.

Either payroll taxes will have to be raised or retirement and disability payments will have to be cut – or both – to keep the program solvent.  The aging population does not include enough people paying payroll taxes to cover the costs of benefits for current beneficiaries.  Expenses rise, but income either does not rise as fast or might decline.

The Republican textbook answer is that revenues could be increased if Social Security reserves could be invested in the stock market instead of lower interest Treasury debt.  Over time, the financial markets have grown, though during recessions and other economic setbacks, they have faltered.  This proposal has not been endorsed by Congress, but it lives on.

Treasury Secretary Scott Bessent said a provision of the One Big Beautiful Bill, known as Trump accounts, “is a backdoor for privatizing Social Security.”  Trump accounts give newborns an account of $1,000 with gains used to supplement their education spending when they are 18. 

After he set off immediate alarms, Bessent retreated, claiming that privatization would supplement Social Security, not replace it. Two funds, the original and the add-on, would co-exist.

Trump accounts will come at a cost to taxpayers, and so would a parallel investment fund.  Does Bessent propose taking part of the payroll tax revenues for private investment, thus reducing the reserve for paying benefits that would otherwise flow from the original Social Security?  Would for-profit investment firms handle the add-on funds?

Though not an exact parallel, this proposal sounds like a variation on Medicare Advantage, run by insurers, instead of using original Medicare, operated by the government.  Recent reports suggest that the insurers put profits over health care, and retirees may suffer both physically and financially.

Two senators have proposed creating a separate fund from the Social Security Trust.  Revenues from that new fund would be used to close the gap between traditional benefits and the money available from the Trust.  The new fund could invest in the stock market rather than only in U.S. Treasury debt, as does Social Security.  After 75 years, it would repay its balance to the Trust.

This proposal would require an initial investment to get the new fund into operation so that it could produce enough income to cover the benefit shortfall and to maintain its assets, enabling it to survive for 75 years.  The senators estimate that it would take $1.5 trillion to create the fund, right from the start.  What would be the source of that seed money?

Social Security was originally intended as a retirement supplement to other income and, based on the life expectancy at the time, it was not planned for payments stretching over decades, as they now do.  For many people, it has become their main or entire source of retirement income. In effect, it may have come to be widely, if not openly, considered a national retirement plan.

In the U.S, there is a belief, virtually the Eleventh Commandment, stating: “Thou shall not raise taxes.”  If Social Security must abide by that rule, the only realistic option is to reduce benefits.  That’s what many pre-retirement people accept as inevitable, though they themselves may have failed to save for their later years.

Bessent and others seem to believe that investing in the market will increase returns enough to ensure Social Security will never have a shortfall.  Retirement payments would be hostage to the performance of those making the investments – amounting to an act of blind faith.

Congress has been approving changes that reduce the shortfall by boosting the age to receive full benefits, raising the cap on how much income is subject to the payroll tax and making most of the benefits for higher income people subject to income taxes.  These are all helpful, but not enough to close the gap.

A wide array of other options is available, and it is possible to estimate the effect of each of them on reducing the Social Security shortfall.  You can be the policy maker by using this questionnaire.  Go to the Revenues (or the other tabs) tab and make your choices, and you will see their relative effect. 

Note that diversifying Social Security investments, the Bessent idea, only solves 6% of the problem.  It’s not the solution.

Have fun with the questionnaire.   Members of Congress ought to give it a try.