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Sep 16 2012

Social Security: Should We Double It?

Golden eggs in a basket sitting on one-dollar bills.

“Savings” by 401(K) 2012. Some rights reserved.

I was on a call recently, listening to somebody talk about a federal revenue committee that has been discussing ways to rearrange tax burdens and increase revenues. This person mentioned that one proposal under consideration was doubling Social Security. Two people in the room laughed.

I don’t have the details. This isn’t the sort of proposal that gets reported in the news. I assume the idea would be to raise withholding and employer-paid rates immediately, with increases in benefits to be phased in over time. People who are currently retired and not paying into Social Security would receive no increase. People who have been paying in at the new rates for a certain number of years would receive fully twice the benefit when they retire that they would now. Everyone in between would be affected based on years at the new rates.

I can see that this would be an appealing place to look for revenue. Because Social Security benefits paid now are funded by Social Security taxes paid now, the lag in increased benefits would substantially increase the current Social Security surplus. That would make those funds available for other uses. Instant additional funding.

This isn’t accounting funny business exactly. Social Security funding has always worked that way. We run funding surpluses. Eventually, the benefits paid out would catch up somewhat, making the situation then closer to today’s situation. In the meantime, there would be no worry about the boomers being a drain on general funds.

Sounds good, right? Well, then why did people laugh? Why is this idea outside the Overton Window?

A lot of the reflexive ridicule comes out of the last few decades of messaging from politicians and conservative think tank “scholars” who were tasked with taking Social Security private. Two market busts and a long stretch of recession have effectively killed that idea for now, but the messages are still out there. Nor have the counter-messages made much headway in these days of big corporate media.

This week, I want to do something about that. I’ve identified several things that people don’t know or don’t fully understand about Social Security after decades of miseducation. Each day this week, I’ll be taking a closer look at one aspect of Social Security or retirement funding. Here is a list of posts I have scheduled.

Have questions about Social Security? Have technical reasons why you don’t think doubling Social Security would be beneficial? Feel free to add them in the comments here, and I’ll try to make sure they’re addressed.

If, instead, you object to Social Security being increased based on philosophical grounds only, that’s nice. You can do that. Anyone trying to turn my comments section into yet another paean to economic libertarianism will like find themselves booted, however.

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Disclosure: I work for a company that has official positions on these issues. The positions I present here should not be taken to reflect the views of my employer. Additionally, I have no influence on the positions of the company that employs me. These views are mine as a private individual.

13 comments

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  1. 1
    JMR

    Doubling social security may or may not be a good idea, from the point of view of enhancing the retirement security of those who are now in their 40s and younger.

    It doesn’t really yield any additional revenue because the increased surplus in the social security fund is (exactly) offset by the need to pay the enhanced social security benefits.

    From a budgetary point of view, it is equivalent to the US borrowing money with an obligation to repay it later. As compared to borrowing money in the markets, the differences are (i) the borrowing has a longer term; (ii) the obligation to repay is weaker; (iii) we are forcing the lender to lend; (iv) we are borrowing almost entirely from our own citizens; (v) the interest rate is less transparent; (vi) the system operates on autopilot. It is unclear why we should prefer this form of borrowing.

    To the extent there are funding problems with social security, which there may be (though they are manageable) this kicks the can down the road and magnifies the problems.

    To the extent you are doing this as a way to deal with the general fund deficit, it also kicks the can down the road and magnifies the problems – unless you don’t take the obligation to pay enhanced benefits seriously.

  2. 2
    grendelsfather

    I am not an economist, but my layman’s position is that we must increase the threshold for OASI withholding and institute serious means testing for collecting benefits. Would that not fix all problems? I say this a someone who reaches the withholding threshold sometime around this time of year and who is scheduled to collect more SSI than I probably will need.

  3. 3
    brucemartin

    It is said that Social Security is one leg of a 3-leg stool. But most Americans now have very low savings and average low pensions.

    Thus, the real question should be this:
    Should we double Soc Sec, or triple it?

  4. 4
    Al Stefanelli

    As one who receives Social Security / Disability, it would be great if our future disabled / retirees who were unable to build a nest egg, or whose life savings were depleted due to medical expenses, not have to try and exist off of $12,000.00 per year.

  5. 5
    Improbable Joe, bearer of the Official SpokesGuitar

    Hell, quadruple it. Somehow there’s always money for bank bailouts, tax cuts, and interest rate manipulation that only benefit billionaires. We might as well just give everybody a $20,000 check and be done with it. The money eventually winds up in the hands of the billionaires anyways, but in the meanwhile it gets spent a dozen times over as it works its way up the food chain, and gets the whole economy moving.

  6. 6
    mildlymagnificent

    One thing that strikes me from outside the US. Given that you have most states and some local governments imposing sales taxes, and poor people tend to spend pretty well all of any extra money they get, increasing nationally paid pensions is one way to help out the states and regions by increasing their revenues.

    Such a strategy wouldn’t be much local benefit in UK or Oz because we have national VAT and GST. The benefits to regions in such countries from increased national pensions and the like comes only from enhanced economic activity, because the sales taxes go directly back to the national source of the pensions.

    When you look at the stats for the US, the lowest income group pays an average of 2.1% in sales taxes while all others pay progressively less as a proportion of their income. (Those with more money/income/options have more choices about what they do with additional income – reduce debt, increase savings, non-local spending.) And remember, that extra money often attracts tax from more than one transaction depending on the first purchase from the income. The benefits to state/local coffers might well be a good bit more than 2% of the total additional pensions paid to their residents depending on their own particular set up with reductions and exemptions.

    But I’m not an economist. Certainly not an American one.

  7. 7
    StevoR : Free West Papua, free Tibet, let the Chagossians return!

    Social Security: Should We Double It?

    I would say so, yes – at least!

    And pay for that and more by an extra tripling of the taxes on the 1% and enforcing those taxes and closing off their loopholes.

    Plus let’s have a Tobin tax :

    http://en.wikipedia.org/wiki/Tobin_tax

    On speculators & currency traders too – and regulate the banks some more and make fines for illegal corporate behaviours (eg. pollution, use of child workers, conspiracies over pricing and competition, tax evasions, etc .. ) be in percentages of profit rather than merely monetary pittance amounts as well.

  8. 8
    Maureen Brian

    Believe me, grendelsfather, means testing solves nothing. Why?

    Because the damage done by inadvertently paying someone $3 too much pales into insignificance when set against the harm, the extra state-borne health and care costs, the loss to the local economy, etc, of failing to pay 100 people what they are legally due. All experience to date shows that the ones who lose out are the most vulnerable, over and over again. People who do not communicate well or are not well enough to turn up to a meeting lose their benefit far more often than uppity ones who charge in, if necessary, waving the text of the legislation.

    Because a universal benefit is far cheaper to administer, so much cheaper that it is a wonder the cutters and slashers never take that into account when they are pontificating. Who knows, they might have an agenda.

    Because the only way you can administer a means-tested system justly is to have well-trained staff who actually understand the system and who are able to understand, once told, how medical conditions are sometimes progressive and sometimes fluctuating and that the process of ageing has these features too. In other words, it would take staff costing far more each than Al’s $12,000 to operate the system half-competently and the powers that be are inclined to attempt it with untrained staff and very dodgy computer software.

    And now on management think, because once complexity is introduced into a system it will – almost by itself – tend to accrue more complexity until it is beyond the comprehension of any one person, however bright (and certainly brighter than the average political hack out to score cheap points) they may be.

    I write this from the UK where a system which was incomprehensible 40 years ago is about to implode. When it does, just remember that each change arose out of that fear of someone getting that $3 too much.

  9. 9
    Lou Doench

    @maureenbrian, that’s the comment of the week! And its only Monday.

  10. 10
    mildlymagnificent

    Brilliant Maureen.

  11. 11
    jesse

    I’d say the simplest thing to do is
    a) get that payroll tax up. Under even the current system making it max out at say, $300K would basically guarantee Social Security’s solvency for what, a century? More? (I think the rule of thumb was an extra 20 years for every $10K increase).

    b) Yes, increase benefits. Because the money ends up going right back into the economy. A lot of conservative economists assume taxes just disappear into the ether. That money gets spent one way or the other.

    c) Keep the universality of the system, it’s simpler.

    d) Recognize that the people who say “it will run out of money in X years” almost always assume no economic growth.

    Another thing: the people who came up with SS were very, very good at projecting future lifespans. I think they were only off by a few months over decades. This should come as no surprise since the average increase in lifespans has been known since 1900 or so; most of the increase is because people survive childhood more often.

    There’s a few other interesting wrinkles to this. For one, if you wanted to increase employment (or decrease underemployment) and get money into the system, you could always offer people reduced benefit to retire early, getting them out of the workforce and leaving room for younger people who will pay more in over time. That is what they tried in France, since wealthier people are more likely to take early retirement.

    Or you could go the German route — keep people in school as long as possible so that the high earners (people in their 40s and 50s) keep working a bit longer and pay more into the system on the assumption that say, one older earner is paying in more than X number of younger ones.

    And yes, one thing no conservative ever seems to understand is that getting your benefits — be it unemployment or anything else — is HARD. It is a pain in the ass. If you need it odds are you aren’t hiring a dozen lawyers and walking around trying to scam the system. Does fraud happen? Yes, but it happens for far more money in the banking sector. Last time I checked the average investment banker doesn’t have to deal with any silliness when he collects his paycheck.

  12. 12
    Stephanie Zvan

    jesse, the greatest increases in life expectancy have come through people surviving childhood illness, yes. However, there are also improvements in treatment of heart disease, diabetes, and a number of other conditions that increase life expectancy for people in middle age. Life expectancy in later years hasn’t increased hugely, but there are more people who live long enough to collect at least some benefits. The resulting updates of actuarial tables have made some difference. That said, the GDP assumptions drive an awful lot of the variability in the projections.

  13. 13
    jesse

    Stephanie — yeah, I realize that a big chunk is surviving once yo do get old. My point was that when people say “OMG lifespans averaged 60 in 1940″ they miss that it wasn’t like people were dropping dead then most of the time.

    The increased numbers of people living to collect benefits was already baked into the estimates as far back as the 1940s. You don’t need to make all kinds of Kurzweil-esque assumptions about technology, just tack on a wee bit to the average life span every year. Also when they did it the architects of the program were projecting the lifespans of people born then, people who are all in their 80s now. It’s actually quite amazing that the way the system was set up it was perfectly solvent with even the most conservative growth estimates.

    Anyhow I don’t think we disagree on the major points. (I say this as someone who spent several years writing about retirement and the finances thereof).

    One other thing: if you are a debt hawk, you could always call for repealing the laws that allow borrowing against Social Security, which weren’t enacted until the 1970s. But that doesn’t affect SS directly — it’s more a problem for national debt/ deficit levels which affect it indirectly.

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