I have written on social security in the past, so a number of points I'm making here are basically restated. Why discuss it now? I think Biden is resorting to a traditional Dem playbook tactic of fear-mongering on one of the most popular senior entitlement programs (in addition to LBJ's Medicare). Social security has been traditionally called the third rail of American politics, i.e., touch it and you'll get electrocuted. Bush tried to pass reform early in his second term, failed, and I don't think he ever really got back on track. That and the growing unpopularity of the Iraq war sank his approval ratings, and the GOP lost control of Congress in the mid-terms, paving the way to Obama's gaining the White House with a super-majority in control of Congress in the following election.
The current context is that Trump is trying to unilaterally cut payroll taxes (which basically is 15.3% "split" between employee and employer on income, which is currently capped at about $137.7K, except for the 2.9% Medicare portion, which is uncapped). Now, cutting payroll taxes is a populist notion that Democrats would normally embrace, because payroll taxes are considered "regressive", i.e., have a disparate impact on lower-income workers. And that's why Trump is resorting to the gimmick, trying to gain favor with lower-income voters in an election year.
Biden, of course, doesn't want to give Trump credit for obvious reasons, so he's going to spin this as undermining social security funding. Now there's a bit of truth to that, but it's more of a long-term vs. short-term issue, and Biden is deliberately misleading people, especially senior citizens, to the latter perspective. And even the long-term issue could be mitigated if, e.g., Congress would make up the difference in the payroll tax revenue with a transfer from general revenues. (That's what they did back in Obama's first term.)Of course, FDR deliberately designed the system to avoid the appearance of pensioners being on the dole, which could become a target in federal budget cuts, so that probably wouldn't be a viable patch.
Now why is Biden's attack disingenuous and hypocritical? Because there was a 2-point taxpayer payroll tax holiday during Obama's first term. There is no short-term funding issue. We basically have a PAYGO system. This means incoming taxes are used to cover outgoing distributions. We've been running a cash flow deficit since 2010. We have roughly $3T in social security reserves. So how have we been making up the difference? Out of general revenues? No. Basically the $2.9T in reserves is required to be invested in interest-bearing Treasury debt (and let's face it: that interest income isn't very much under today's Federal Reserve policy). So basically we're covering the funding gap with interest income on reserve assets. The amount has residual interest income feeding back into the reserve has been dwindling and projected to go into deficit this year. (Never mind the collapse of payrolls during the COVID-19 crisis, which have hurt payroll revenues to the Treasury.) What does negative income to the trust fund mean? It has to start drawing down on reserves, i.e., sell Treasury debt.
The long-term story is bad, with reserves being depleted by a projected 2034. Does this mean distributions will run out? Highly unlikely. For one thing, incoming revenues will still cover about 75% of distributions, and with a politically powerful senior lobby, cutting checks by 25% is politically unthinkable. But how do you fix the system? Well, if you go back to the 1983 compromise with Reagan, you see a number of tactics: raise the eligibility date, moderate distribution increases, increase the number of workers paying into the system (e.g., then federal workers hadn't been required; they had a separate pension system), increase payroll tax rates, and/or lift the income ceiling, etc. None of these is popular, except fewer would be outraged of people making over $137K having to pay more on income above that level (except, of course, affected higher-income workers), which is why the Dems want to raise the cap on social security taxes like it currently is for Medicare taxes.
To review briefly, FDR thought his plan for social security lockbox was a stroke of political genius. He didn't want it to be a welfare system, subject to budget cuts in a financial crisis. By mandating participation, including higher-income folks, FDR thought everyone was vested in the survival of the program. Even upper-income people would feel they had a personal stake because of their own payments into the system. (Now we libertarians don't like forced participation, never mind there are no real assets to the trust fund; it consists of noncompetitive IOU's covering past government overspending with suboptimal income generation.)
Now the big problem here is the fact that the system has never been sound from an actuarial perspective. People are living longer in retirement, but the ages for retirement have barely budged. (Well, to a limited extent, that's changed. Full retirement starts at 66 to 67 (vs 65) for Baby Boomers, increasing by year of birth. One can still file for early retirement at age 62 with an increasing discount to full distribution. I know multiple relatives who have retired early, but many of these had supplemental, e.g., government/military pensions.) With an aging, shrinking workforce and a growing, longer-living beneficiary we've seen the proportion of active workers paying into social security to beneficiary decline from something like 41 to an estimated 2 by 2030.
Bush attempted to reform social security by suggesting a partial privatization (I favor full privatization). The basic idea was to vest employees into their own retirement and to allow them to diversify in other assets with historically higher rates of return. The Dem response was basically two-fold: (1) allow current workers to control part of their assets now basically meant that money wasn't available to finance current beneficiaries; where is the replacement for those funds? (2) Allowing workers to invest on their own was like letting them gamble in a casino; who's going to bail them out of bad decisions?
I can predict fellow libertarians will disagree on Trump's unconstitutional executive order, with me on the side of the rule of law and social security policy has to be set into law by the Congress. Others will argue, "Payroll taxes are theft. We are in favor of anything that returns some of our stolen money back to us."
I don't know the specifics of Trump's payroll tax holiday, whether he will make up the difference to the program/trust fund out of general revenues. I do know that he has not been promoting entitlement reform; to loosely paraphrase what I've read he's said: "The shit will hit the fan after I'm out of office in 2025 (assuming his reelection). What's in it for me?"
Biden's current attack is hypocritical; he does have 3 basic available credible criticisms:
- Trump doesn't have constitutional authority to do a payroll tax cut on his own. (Even Obama's cut came through Congress, not executive orders.
- We are already in a PAYGO deficit, and have been for a decade. Payroll tax cuts exacerbate the already shaky finances, with likely exhaustion of reserves by 2034, if not earlier.
- Payroll tax cuts basically help the employed, not the unemployed during the COVID-19 crisis. Not to mention traditional Keynesian policies don't work in a highly constrained economy marked by partial shutdowns.
