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Saturday, December 3, 2016

Ignore The Deficit Hawks: Social Security Is Easy To Fix

On the 77th anniversary of Social Security, we’re celebrating what has made the program so important and why it remains vital today. Jeff Madrick explains why Social Security’s so-called fiscal crisis has been overblown and looks at the many simple solutions on the table. Read the rest of our coverage here.

Little is as distressing in the public discourse as the linking of the financial problems of Social Security and Medicare. It is a favorite ploy of the deficit hawks to claim we must reform our entitlement programs without distinguishing between the two. I am at a loss to explain this. It is clearly ideological — small government no matter who gets hurt. But Social Security payouts will rise from roughly 5 percent of GDP to 6 percent at worst down the road, while Medicare will rise by much more.

Nevertheless, poorly educated pundits, willing to believe the self-proclaimed centrist view that we cannot tax our way to solvency, demand Social Security reforms from selfish baby boomers. Monique Morrisey of the Economic Policy Institute does good work on this. Moreover, there is even a detailed Senate report on the issues that requires only a little updating. Maybe journalists should read it before they write about the subject. Its title is rather self-explanatory: “Social Security Modernization: Options to Address Social Security Solvency and Benefit Adequacy from the Senate.”

First, remember that Social Security provides nearly 60 percent of the elderly more than half of their income. Seventeen percent receive all their income from Social Security, mostly households headed by elderly women. Most remarkably, and it would be nice for young people to register this, the poverty rate measured by the federal government for the elderly was 35 percent in 1959. As Social Security became more generous, it was reduced to 10 percent, about where it stands today. This is one of the great social achievements of our time.

Now for that future financing gap. It’s true that payroll taxes won’t cover all the benefits to be paid in 25 years or so, as the ratio of the elderly to workers rises and life expectancy grows. But a more important and lesser known cause of this future gap is inequality of income. Taxes revenues are reduced because incomes have stagnated for so many. Due to an earnings cap above which taxes are not collected, now about $110,000 a year, combined with the rapid rise of incomes for high-end earners, some 17 percent of aggregate earnings are not covered by the payroll tax. In 1980, only 10 percent were not covered.

But the solvency gap, as we might call it, is not very large, amounting to only 2.67 percent of GDP. How can that be closed? Pretty darned easily. For example, the cap can be eliminated. This would close almost the entire gap if high-end earners do not receive higher benefits. It will still close four-fifths of the gap if they do.

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