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.
