I have discussed senior entitlements (social security and Medicare) in numerous posts and tweets but probably not a dedicated full-length post. Thia post is motivated by Biden's SOTU address where, once again, Biden weaponized the issue to bash his political opposition like numerous other Democrats over the years since their starts as Dem initiatives under FDR and LBJ respectively, probably most infamously as the attack on Paul Ryan during the Obama Administration through Paul Ryan allegedly throwing Granny over the cliff.
This won't be a comprehensive overview but I did want to flesh out a few points you really can't do justice to on Twitter. First is the talking point of senior citizens and their advocates that these aren't "entitlements" but earned benefits. Let's quote the Social Security Administration:
The Social Security benefit programs are “entitlement” programs. This means that workers, employers and the self-employed pay for the benefits with their Social Security taxes. The taxes that are collected are put into special trust funds. You qualify for these benefits based on your work history (or your spouse or parent). The amount of the benefit is based on these earnings.
The cited source contrasts it to the social welfare SSI program; alternately, one can discuss Medicaid.
There is no doubt that those of us have paid payroll taxes our whole job history; over the last several years that's been 15.3% on the up to one's first $160K in income (The ceiling has increased with inflation; for a brief period in the distant past, I modestly passed the ceiling.) Of the 15.3%, 12.4% is for social security, 2.9% for Medicare. Technically, only half of the taxes paid show up in your paystub; the company match comes from the benefit portion of your compensation. Make no mistake, that 15.3% is real. A lot of IT contractor work is on 1099 or C2C (corp to corp) vs. W-2. I've done 1099 on a few occasions, most recently 2020 for a few months. I had to mail in quarterly estimated tax payments, including the full 15.3%. I've been paying payroll taxes since work/study as a 16-year-old OLL college freshman washing dishes in the college cafeteria and mopping floors. There was one exception, being my one year as a visiting professor at Illinois State in the early 1990's. I think it had to do with Illinois state employees automatically enrolled in a state pension plan waiving federal payroll tax. I think policy has changed since I worked there although I'm not sure when; I do recall a public-school teacher some time back in panic over Illinois' all but insolvent public pension systems, noting he didn't have social security to fall back on. Similarly, I believe some federal civil servants prior to 1984 could opt out depending on their pension plan option.
But social security is NOT like your optional 401(K) or 403(B) retirement supplemental plans where you're immediately vested in your contribution and may vest in any employer match dependent on the length of your employment provision. (Note that investments are not guaranteed to make money, particularly in the short run.) But in the long run, equities in general provide superior returns to bonds.
But when you pay into social security, it doesn't get invested in some asset, like Treasury notes, on your behalf. It's a pay-go model that some critics call a Ponzi scheme. Basically, the two programs use their split of revenues and used to fund current beneficiaries. If there is a surplus in operations, the program is required to be invested in a (low-yielding) government debt. reserve. If the operation is in deficit, interest payments on the reserve and/or debt is sold to make up the difference.
So long as the reserves last, the social security and Medicare programs, although running at deficits, do not add to the federal deficit. But that's a problem, because both programs are exhausting reserves. According to the trustees, Medicare's reserves will be depleted in 2028 (at which point ongoing contributions will fund 80% of current program costs), and social security's reserves will expire in 2034, at which point 77% of costs will be covered by ongoing taxes.
I believe social security started running at a deficit around 2010, as highly-populated Baby Boomers were starting to retire at full retirement (65 to currently about 67). You reach your maximum monthly benefit at 70. You can start at 62 at a lower amount. You reach breakeven relative to 62 at 78 for full retirement and 80 if you start at 70. Because of the progressive tilt of distributions, I recall seeing a post that higher-earning beneficiaries are less likely to break even over lifetime contributions
There are nuanced conditions for eligibility to social security beyond age, including 40 qualifying quarters of work making a certain minimum amount, like $1640. (I met that threshold several years back.)
But this fantasy that your retirement is being funded by investment income from dollars paid by payroll taxes is not real. We are running at a 2.83% actuarial deficit on taxable payroll vs. 1.80% leading to the last fix in 1983. If we accept the notion that the program should be self-financed and not be a federal dole subject to the political pressures on expenditures from general revenues and taxes (somewhat similar to how the highway fund is financed through federal taxes on fuel), we need to shore up the system sooner than later. We can see how the aggregate tax (employee/employer) went from about 9.35% to 15.3% by 1990.
The topic of senior entitlements is very sensitive politically. Bush tried and failed to reform the third rail of American politics. Seniors are among the most potent voting groups. The Democrats have persistently attacked the GOP for decades for intending to gut the programs. (As a libertarian I have my own personal views which I'll discuss shortly, but for the most part, this post realizes the programs are a political fact of life and discusses more feasible options.) Bush 43 took on reform in his second term, and his own reform initiative, including partial privatization, went down in flames. [I'll simply point out here other countries have fully or partially privatized their programs successfully.] Public support tanked to about two-thirds against, and the Democrats were opposed, pointing out personal accounts would displace the ongoing pay-go scheme, requiring taking on massive public debt. Yeah, the same dudes who are pushing for raising the debt limit from $31.5T and look the other way as trillions more are added over the coming decade pretended to care about the national debt, then in the mid-single digit trillions. But the key point is that the pension outflows would lessen in the long run and would be lower respectively. And retirees would own real assets more than a political promise of IOU's.
But wading back into GOP politics briefly, I knew Bush's proposal, although in principle laudable and defendable, was a tough get. My own late maternal grandfather, a mom-and-pop grocer, was a rare Massachusetts Republican, and he bragged to me on multiple occasions about getting the biggest social security payments they issue. I worked in the 1990's for a marketing research company in the southwest suburbs of Chicago; the executive VP, a University of Chicago-trained statistician, MK, is someone I personally worked with in a company cost-cutting initiative, would later running for the retiring GOP incumbent Congressman's seat (but lost in the primary); his big issue was saving social security. Of course, Paul Ryan, before he became Speaker, fleshed out reform initiatives, and the Dems came up with the infamous "Ryan throwing Grandma off the cliff" ad (see below).
Trump, of course, didn't/doesn't want to touch the issue with a 10-foot pole. As far as he concerned, the reserves will be exhausted on someone else's watch, and he doesn't want to waste his political capital on the issue. So much for "leadership"
If you really want to see how explosive the issue can be, witness the protests going on in France over a legislative vote early next month over Macron's overdue reform proposals on France's unsustainable generous public pension system. The chief element is pushing back in a phased approach eligibility, by 2 years, for most workers from a current 62 to 64.
[As a personal aside, I will likely defer entering the social security system until 70. In part, this is in contrast to my parents and some of my siblings who have or plan to retire by 62 and file for earlier social security. I think most of them have or had supplemental pensions (e.g., civil service or corporations with pension plans); I don't think I've been enrolled in any pension system--I think IBM had one but new employees weren't eligible. For the most part I've maxed out my 403(B) and 401(K) contributions, although I don't think I've ever vested in any employer match. The University of Texas System stole $4000 I should have been vested in as a UTEP professor; in fact, I was limited in what I could contribute to my 403(b) based on the expectation I would vest. I tried to hire a lawyer, but no one wanted to burn bridges with the UT System hoping for scraps from their table. Then there was the Roth IRA conversion I did in Illinois in the late 1990's. Illinois didn't tax the 4 years spread of the conversion, which was where I lived at the time of the conversion. California did; where this became relevant was my "job offer by extortion" ("Either you accept our full-time offer now, or don't come to work Monday"; I've explained this in other posts.) During the 18 months I lived in California they stole 10% of mt allocated Roth base on the Alice in Wonderland principle if they didn't grab the money from people leaving California, they could target people coming into California--even though it wasn't income earned in California! In addition to the thousands California stole from me then, I had doubled the maximum disability insurance mandate because I had 4 W-2's in 2000 and maxed with my first employer. California "lost" my W-2's and refused to reimburse me the $500+, saying the burden of proof was on me. They claimed they couldn't trace it from the employer's side. The paper copies got lost on my move back to Illinois. I thought I had a scanned copy but the file copy was corrupted. To this day I've vowed California will never see another dime from me. When I moved to southwest Arizona in 2016, I was 2 miles east of the California border and never crossed it once over the coming year.
[As a libertarian and a constitutional conservative, I personally don't think there is any constitutional basis for government meddling in retirement planning. I think it's paternalistic, morally hazardous, and ineffective/inefficient compared to private sector alternatives.]
Let's recall there are 2 major trends here: longer longevity in retirement and the sheer size of the Baby Boomer generation. The latter pushes down on the Labor Force Participation Rate. Fewer workers mean fewer workers' payroll taxes to support each current beneficiary.
So, what's a possible practical solution?
Not the Democrats' preferred solution of lifting the income tax ceiling on higher earning workers. This is a socialist scheme that shifts the burden for a fix to a small number of workers. All workers should shoulder the burden. I think there are ways for higher-income workers to share the burden, e.g., double the current ceiling, freeze higher income distributions, expose more distribution to income taxes, means-testing, deferring eligibility, etc.
All workers should have deferments of up to 2 years, phased in for newly retired.
Work credits should be extended from the current 40.
An increase of 3 points (from 15.3 to 18.3%) to the payroll tax split between employers and employees.
In other words, try a mix of fixes analogous to the 1983 Reagan/Dem bargain. I would like to see more diversification of the program reserves, also.
