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How to fix Social Security
Robert Reich
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Kai Ryssdal: The odds of avoiding a government shutdown look a little better today than they did yesterday. Speaker John Boehner says the House will pass a two-week funding bill, provided it contains some spending cuts.
Therein lies the rub. What will get cut to help control the deficit and what won't.
Commentator Robert Reich says one program gets an undeserved share of the blame for the deficit. And anyway, there's an easy fix.
Robert Reich: Social Security is not at all responsible for the federal deficit. Just the opposite. Until last year, Social Security took in more payroll taxes than it paid out in benefits. It invested the surpluses in Treasury bills -- in effect, lending them to the rest of the government.
But now Social Security has started to pay out more than it takes in. So to keep it going, it collects only what the rest of the government is obligated to pay it. This will keep it fully solvent for the next 26 years.
But why should there even be a problem 26 years from now? Back in 1983, Alan Greenspan's Social Security commission was supposed to have fixed the system far beyond then by gradually increasing payroll taxes and raising the retirement age.
The answer is Greenspan's commission failed to predict how much income would become concentrated at the top. Remember, the Social Security payroll tax applies only to earnings up to a certain ceiling that rises with inflation. That ceiling is now $106,800.
Back in 1983, the ceiling was set so the Social Security payroll tax would hit 90 percent of total income covered by Social Security. Today, though, the Social Security payroll tax hits only about 84 percent of total income.
It went from 90 percent to 84 percent because income inequality has widened. Now a much larger portion of total income goes to the top -- almost twice the share they got back then.
If we want to return to 90 percent, the ceiling on income subject to the Social Security tax would need to be raised to $180,000. Do that and Social Security's long-term problem is solved.
So there's no reason even to consider reducing Social Security benefits or raising the age of eligibility. The logical response is simply to raise the ceiling.
Not incidentally, several months ago the White House considered proposing that the ceiling be lifted to $180,000. Somehow, though, that proposal didn't make it into the president's budget.
Ryssdal: Robert Reich was Secretary of Labor for President Clinton. His most recent book is called "Aftershock: The Next Economy and America's Future." David Frum is in our commenting future; he's back next week. Send us your comments.
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Social Security is a true con job by the government. Do the math... 15% of one's annual wages modestly invested - even starting young at minimum wage and progressing to, say, just $45,000/year at retirement - will generate several hundred thousand dollars in savings. In retirement, that will easily generate what Social Security would pay monthly, PLUS upon death one would have a huge financial legacy to pass on to their heirs, church or charity. And that is the real social tragedy of Social Security: relative poverty from the SSA income, and ZERO legacy to pass on. My life would be so much better if I were not mandated to contribute!
Alan Greenspan played a far bigger role in "fixing" Social Security than you suggest. The 1983 payroll tax hike was used as a source of revenue to replace the lost revenue resulting from the unaffordable Reagan tax cuts. The payroll tax hike turned out to be a gold mine for Reagan. Every dollar of the surplus revenue was funnelled into the general fund and used to help finance the tax cuts and pay for two wars.
Allen W. Smith, Ph.D.
Professor of Economics, Emeritus
Eastern Illinois University
Website: www.thebiglie.net
Email: ironwoodas@aol.com
Phone:1-800-840-6812
Thank you "Sergei T" for your cogent statement above. It is becoming scarier with every passing day as I hear more and more government spokespeople convincingly spouting the purest nonsense, with a cheerful demeanor no less. I actually think that Reich believes that saddling all future taxpayers with an ever-increasing future debt obligations (i.e. Treasury bills) constitutes a form of constructive investment, and that spending every last cent you have and more constitutes fiscal responsibility. I truly stopped dead in my tracks when I heard him say this.
One of the signs of a collapsing empire, I think, is when a government increasingly glorifies and provides incentives for destructive behavior and discourages productive behavior, with its propaganda ministers busily convincing the population that up is down and good is bad. Perhaps we're on our last legs here.
I am not sure what raising the limit would do?
My understanding of the Social Security net is that it is a forced savings account and safety not for those that would not have any other retirement.
Raising the limit only forces those that already are rich enough (and generally smart enough) to invest and then get back more down the road.
"It invested the surpluses in Treasury bills -- in effect, lending them to the rest of the government"
Isn't the SS Trust Fund operated by government? In plain English: government collected money through taxation and spent it on some other programs. Now, Mr. Reich says that government debt (US Treasuries) is an asset. Mr. Reich, you are delusional, it's liability. There is no money in SS, even if it's "invested" in US Treasuries. It's a pyramid scheme. It's no way different from Berni Madoff ponzi scheme. Oh, there is one crucial difference: people who went with Madoff did it voluntarily. SS participation is mandatory and enforced by US government.
I would ask, why is there a limit in the first place?
For those under the limit, contibuting to FICA is year long event, so why should those (like me) above the limit get a tax holiday?
This is just another example of the baked in complexity in our tax laws that need to be scrubbed out.
I would add one caveat, if you make this change to properly fund the system, then lock that money away from Congress's grubby hands to pay for their next debacle.
Bravo Mr. Reich. I have been following your career since the days of Bill Clinton administration and love to hear your opinions and voice on marketplace. I could never understand why I paid SS tax on the first $75,000 or $86,000 or... It seems so simple to tax instead the first $150,000 or even $250,000 instead. Please mind I am an immigrant, albeit an old one, and wanted to contact my senators on this issue. The solution seems so simple indeed.
I usually agree with Mr. Reich not on this one. In my case I earn more than the max limit of social security earnings. I usually am FICA tax free in July. Guess what? Then I put away the FICA tax to my 401K. By doing so if all works out I will be less of a burden on government in the future. If Mr. Reich's plan takes hold I would not be able to contribute to my 401K at all. Why? With kids in college we just don't have the money to contribute to 401K except for the free FICA months from August to December.
Never forget that these ideas sound great but to take from one and give to another is merely a shell game and not a sound program. Get Social security in a lock box as Gore recommended. Thanks for a great show. Ed
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