Social Security and Medicare Report

A new report on Social Security and Medicare says they will begin paying out more than they take in in taxes sooner than expected. Social Security could be depleted by 2037.

2037 is ages from now. I think we should leave social security alone. I certainly don't want to pay more in social security taxes for reduced benefits, which is one suggestion made by the report:

Social Security could be brought into actuarial balance over the next 75 years with changes equivalent to an immediate 1.6 percent increase in the payroll tax (from a rate of 12.4 percent to 14.4 percent) or an immediate reduction in benefits of 13 percent or some combination of the two. Ensuring that the system remains solvent on a sustainable basis beyond the next 75 years would require larger changes because increasing longevity will result in people receiving benefits for ever longer periods of retirement.


The social security problem is being caused by the recession, not benefits being paid out. So maybe that will turn around.

Here's what Ezra has to say. By the way, today is Ezra's last day at American Prospect, bookmark his new home at the Washington Post where he'll start blogging Monday.

If you have any thoughts on medicare and social security, here's a place to discuss them. I have no idea about the economics. I only know I've paid in for 40 years and I want my money out when the time comes, and not at a cut rate.

As for the Senators who are proposing "sin taxes" on sugary colas to pay for health care, they need to get their heads out of the sand. All that will do, like increased cigarette taxes, is further tax the poor who can least afford it while not reducing consumption.

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    So far, the best article I've read (5.00 / 8) (#1)
    by Anne on Tue May 12, 2009 at 09:31:20 PM EST
    on this is over at Salon, by Michael Lind; it's worth a read:

    On Tuesday, May 12, the trustees who oversee Social Security and Medicare will issue their annual report. I don't know what will be in the report. But I do know what the response will be. Conservatives, libertarians and center-right Democrats will take whatever the report says as evidence that there is an "entitlement crisis," which should require us not only to address spiraling healthcare costs (a genuine issue, affecting the private sector as well as Medicare and Medicaid) but also the alleged "crisis" of Social Security (an imaginary problem).

    The coalition of libertarian zealots, Jeffersonian conservatives, center-right Democrats and bankers and brokers who would like to earn fees or commissions from the diversion of Social Security payroll taxes into IRAs recycles the same arguments against Social Security, rain or shine, boom or bust. They've been doing it for more than a quarter-century, ever since a couple of libertarians wrote up a guide for small-government conservatives on how to spread doubts about a popular, solvent and effective entitlement. These tried-and-true arguments will be dusted off and dragged through the media once again, after the latest Social Security Trustees' report is published. Among the bogus arguments you can expect:

    He then goes on to counter the arguments very effectively.

    I do not want Obama, or anyone else, to "save" Social Security.

    Absolutely. I am so sick (5.00 / 3) (#3)
    by sallywally on Tue May 12, 2009 at 09:55:11 PM EST
    of people spitting out this mantra about how there's a problem. I hope (but don't expect) that Obama will not buy this line of crap.

    Demographically (none / 0) (#5)
    by Socraticsilence on Tue May 12, 2009 at 11:22:08 PM EST
    The retirement of the baby boom generation will cause a problem- the workforce may well be smaller than the retirees, and longevity has also increased the burden on the SS system, I have yet to see an argument that layed out the problem with lifting the payroll tax ceiling.

    Demographically nonsense (5.00 / 1) (#15)
    by Bruce Webb on Wed May 13, 2009 at 11:26:23 AM EST
    The ratio of worker to retiree is never projected to get below 2 to 1 and even that is based on ridiculous assumptions on immigration. Under current assumptions our national response to a decreasing covered worker ratio is going to be slamming shut the window on both legal and illegal immigration,


    This may make sense to the ZPG crowd but economically it doesn't make sense at all.

    As to the problem with lifting the payroll ceiling.

    Social Security has to date been a program of the workers, by the workers and for the workers. It fundamentally draws nothing from capital and so in the final analysis owes nothing to capital and the cap helps maintain that separation. Social Security currently is running a surplus and has no need for extra revenue right now and perhaps not ever. If it does need help in the future that can be accomplished by raising FICA initially by 0.02% in 2028 and then slowly thereafter. You can see the spreadsheet here in a plan we call 'Trigger' (because it doesn't come into play unless needed).

    All a cap increase really does is place an obstacle in the way of reimposing more progressive tax rates to address areas of real immediate need including health care and education. Moreover by being limited to wage income a payroll tax increase leaves the Masters of the Universe off scot-free. Why tax lawyers and give hedge fund managers a free pass? That is what a cap increase does.

    Leave the cap alone. The cap is our friend and wall against those who want to kill Social Security. (Like Pete G. Peterson)


    Three that come to mind immediately (none / 0) (#8)
    by Abdul Abulbul Amir on Wed May 13, 2009 at 08:24:53 AM EST
    1. Fairness.  The max payout is capped, so its only fair to cap the tax as well.  A self employed person making $208K will see a tax increase of $14,400 a year.  Thats pretty steep.

    2. It will promote outsourcing high paying jobs to other countries.  

    3. It will encourage high earners to retire early to draw out rather than pay in.  When fed income tax, SS tax, Medicare tax, state income tax, and local income tax combined take more than 60% of the next dollar earned, it makes a decision to retire relatively more attractive than at a lower rate.

    Actually.... (none / 0) (#14)
    by gtesta on Wed May 13, 2009 at 10:40:02 AM EST
    one of the main problems is the fact that SS taxes are currently higher than they need to be compared to current obligations.  This occured in the 1980's under Reagan as the idea was to build up a "trust fund" that could be used to offset future obligations.  Of course, the "trust fund" was used to mask the real size of federal deficit spending rather than its original purpose.
    So we should get back to the idea of "pay as you go" for funding Social Security.  The tax rate can be adjusted annually and caps should be removed.  I would favor a progressive tax rate to fund this rather than the current flat tax.  So that "relatively low earners" like the one in your example would not be hit so much.

    Regarding points 2 and 3, I don't think we will see outsourcing of any high paying jobs, since that defeats the purpose of outsourcing. And your point on marginal tax rates is a valid one, but I don't really see a high income person making their retirement decisions based on that.  This is just "Joe the Plumber" rehashed.


    Huh? (none / 0) (#20)
    by Abdul Abulbul Amir on Wed May 13, 2009 at 12:45:02 PM EST

    I don't think we will see outsourcing of any high paying jobs, since that defeats the purpose of outsourcing.

    Why not?  If it costs more to hire the same high priced talent in the US rather than in say Ireland those jobs will tend to move that way over time.  This may happen with a direct outsourcing decision by some company, or it may happen indirectly as firms that higher the same quality talent at a lower cost replace US based firms.  


    Maybe... (none / 0) (#21)
    by gtesta on Wed May 13, 2009 at 01:46:48 PM EST
    that was the weakest link in my comment.
    But if we did have a progressive tax (and no cap), then the $100k - $200k people might actually pay less tax under this than under a flat tax (with cap).
    My comment was really about the $1,000,000+ boys.  The justification from the "economic royalists" for their compensation always seems to be that "only they are uniquely qualified" to do these jobs...and they tend to protect their own.
    I don't think we'll see a wave of outsourcing for these jobs to their Asian and Indian counterparts who seem to get by at 1/10th their compensation.

    If the work force becomes smaller (none / 0) (#9)
    by Militarytracy on Wed May 13, 2009 at 08:33:41 AM EST
    than our "retirees" (and I use that term loosely because many people retire very close to when they hit the dirt right now), I don't see that as necessarily a problem as wages for workers will increase then and unemployment will decrease.  The boomers will begin spending more of their assets to provide care for themselves in their twilight years.  We'll all be employed caring for them in their old age, but jobs are jobs and work needing to be done is the work.

    The stats (none / 0) (#11)
    by jbindc on Wed May 13, 2009 at 09:32:09 AM EST
    (and my data may be a little old)...

    When Social Security started, there were 7 workers paying in for every retiree.  The average number of years people lived after retiring was something like 1-3.

    Now, there is 1 worker paying in for 7 retirees.  The average life span after retirement is in the double digits. (This could have changed recently as the economy has worsened or as people are healthier and want part time jobs to keep them busy).

    So, the workforce is already way smaller then the retirees, and we don't have a population boom to replace it. Don't forget, the number of available jobs has also decreased as  things get automated or jobs get shipped overseas, so unemployment may not decrease like you think.


    Your data is old and was wrong to start (5.00 / 1) (#19)
    by Bruce Webb on Wed May 13, 2009 at 12:17:06 PM EST
    The ratio of workers to retirees is skewed in the early years because most retirees were collecting under Social Security Title 1, which was a welfare based plan paid out of the General Fund, in fact nobody collected under Title 2, what we know as Social Security today prior to 1942, between 1936 and 1941 the ratio of contributers to retirees was in fact infinite. Title 1 remained larger than Title 2 until around 1950.

    The people pushing that 16 to 1 number just want you to ignore the very existence of Title 1.

    This post draws heavily on this, if you want it directly from SSA http://www.ssa.gov/history/briefhistory3.html

    That ratio of retiree to worker has since the war never gotten above 31 to 100. Plus you have fatally confused mortality at birth from mortality at age 65. A person born in 1940 lived on average 12.4 years after age 65
    Covered Worker Ratio http://www.ssa.gov/OACT/TR/2009/IV_LRest.html#345423
    Cohort Life Expectancy

    To summarize all my posts here. Do NOT believe any number you see that is not backed up by a link to the data source. The Right has compiled a conscious narrative designed to spread these bogus numbers around. See Michael Lind in Salon yesterday


    I don't think that weighing (none / 0) (#12)
    by Militarytracy on Wed May 13, 2009 at 09:48:46 AM EST
    how many workers to how many retirees is a statistic that speaks all there is to how we can afford social security .  If it were that flat out indicative of social security solvency then how can social security be insolvent right now and pay full benefits until 2037.  After that it can pay 75% of the current benefit forever...........  With changes in our economy all these numbers are affected as well.  If we had a very healthy economy and a healthy earning middle class, social security would be fine, so why don't we focus on creating that instead?

    This line spells out the problem with healthcare: (none / 0) (#2)
    by vicndabx on Tue May 12, 2009 at 09:37:16 PM EST
    Underlying health care costs per enrollee are projected to rise faster than the earnings per worker on which payroll taxes and Social Security benefits are based.

    Quality of care, level of care and charges are all over the place yet too many insist on blaming the big bad insurance companies.  How does one make that argument when the "insurance" is the gov't?

    Not all big business is out to make a profit at the expense of the consumer.  Some companies have employees who actually, um, take pride in their work.

    Do nothing isn't an option (none / 0) (#4)
    by Socraticsilence on Tue May 12, 2009 at 11:19:09 PM EST
    We kind of have to do something, and frankly while the "sin tax" approach does fall more heavily on the poor, it also falls heaviest on those who end up utilizing the system. As for Social Security, while I wouldn't support a benefit cut I have to think that both a rate increase and a removal and and increase in the payroll tax cap need to be on the table- doing nothing isn't an option, and with a system this large putting off any action because of the long time horizon is just as irresponsible as doing nothing about Global Warming because it wont have a major impact for decades- I mean Reagan increased the Social Security tax, surely Obama can get away with doing the same.

    Not necessarily true... (5.00 / 1) (#13)
    by kdog on Wed May 13, 2009 at 09:50:22 AM EST
    while the "sin tax" approach does fall more heavily on the poor, it also falls heaviest on those who end up utilizing the system

    My old man paid sin taxes all his life on cigs and booze, never saw a doctor...and I mean never.  

    And I pay sin taxes when I can't dodge 'em...and I need to be in seriously bad shape to face the health care hassle of seeing a doctor or hospital.

    I'd love to see a study that says sinners use more health care...if you ask me its the health nuts who live to 95 and run to the doc every time they have the sniffles that are the drain...sin tax rice cakes and tofu:)


    Doing 'Nothing' is actually a fine option (5.00 / 2) (#16)
    by Bruce Webb on Wed May 13, 2009 at 11:33:30 AM EST
    I actually put up a blog post to that effect a few years ago.
    Cost of Inactivity: 'Nothing' as a Plan for Social Security

    In 1997 Social Security was projected to go to Trust Fund Depletion by 2029 and faced a payroll gap of 2.23%. We did nothing. By 2008 Social Security was projected to go to TF Depletion by 2041 and faced a payroll gap of 1.7%. It turns out that reality gave us a hard smack in 2008 leaving us with a 2009 Report showing a TF projected for depletion by 2037 and a payroll gap of 2.00%. But even so the date of depletion still remains a net 8 years out and the cost of a fix 0.23% less than it was in 1997, a time when just about everyone was claiming "Do nothing is not an option". They were wrong then and are probably still wrong today. But you do have to examine the numbers to see why that is.


    Denying the existence of a "problem" (none / 0) (#6)
    by Bemused on Wed May 13, 2009 at 07:36:56 AM EST
      is completely foolish and removes one from the arena of the credible. The degree of the problem and the nature of the preferable solution are debatable.

       Arguments for "doing nothing" seem to me only defensible if one starts and ends with the conclusion that it is a certainty the politicians will select the "wrong" solutions and exacerbate problems. I can understand why people fear that but find it a poor argument for not advancing proposals to address the situation now when it is a manageable problem rather than allowing it to become a true crisis in the future which will then, obviously, require more drastic action to balance the books in a shorter timeframe.

      We could "solve" the problem quite easily simply by eliminating or at least raising  drastically  the income  ceiling on FICA and Medicare contributions. Doing that would allow for a REDUCTION in the percentage of income payable,  an INCREASE in benefits with no means testing and placing the funds on a sound actuarial footing. The only people disadvantaged by such a solution would be people making considerably in excess of the ceiling ($106,800 this tax year).


    Math challenged (none / 0) (#7)
    by Abdul Abulbul Amir on Wed May 13, 2009 at 08:02:29 AM EST
    ... an immediate 1.6 percent increase in the payroll tax (from a rate of 12.4 percent to 14.4 percent)

    The difference between 12.4 and 14.4 is 2.0 not 1.6.  I would feel much better if the people dealing with this problem were not so innumerate.

    BTW, an increase from 12.4 to 14.4 is a 16% increase in the tax rate. For each $100 dollars paid at the old rate you will pay $116 plus a few cents at the new rate.

    I suspect a typo (none / 0) (#18)
    by Bruce Webb on Wed May 13, 2009 at 11:51:27 AM EST
    The full Report consistently uses the 2.00% number. I haven't checked the Summary yet but that is just a simple error.

    And talking rate increases doesn't make a lot of real senses. Plus you have ignored the employer/employee split. We have also produced a second plan called Tenth Now. You can bring Social Security back to actuarial balance by increasing FICA by 0.1% per year for every year from 2010 to 2029. Spreadsheet here:

    For a laborer making $12.50 per hour this would mean an initial tax increase of a quarter per week. ($12.50 x 40 = $500 x 0.005). Oh and his boss would have to throw in a quarter as well. And each would have to bump that up another quarter each year. But all in all this requires capturing less than 10% of projected annual real wage increases. These are not crippling amounts.

    This is why Social Security 'reformers' insist on casting everything in terms of the God-help-us 'Infinite Future Horizon', once you start dividing those trillions first by year and then by week they shrink right to size.

    Want three more years in retirement rather than moving concrete 40 hours a week? How does kicking in a quarter a week sound?


    It's really quite simple (none / 0) (#10)
    by Slado on Wed May 13, 2009 at 08:36:47 AM EST
    Either raise the taxes or cut the benifits.

    Doing nothing will not work.  By the way 2037 is an estimate based on a estimated workforce, estimated enrolees and an estimated GDP.  What if we suffer through a 10 year stagnation and hyper inflation?  What do you think will happen then?

    Then our choices will be even more severly limited.  

    Also you can't just remove Social Security from the equation.  You have to look at the whole bloated federal budget and it doesn't take a Nobel Prize winning economist to see that a 1.85 trillion dollar deficit is a problem.

    10 years of stagnation (none / 0) (#17)
    by Bruce Webb on Wed May 13, 2009 at 11:38:42 AM EST
    Moves the date of TF depletion forward but does not markedly increase the cost of the fix. Both Dean Baker and my colleague Coberly have done the numbers. Dean of course posts at Beat the Press, Coberly's most recent Social Security post is from today at Angry Bear.

    If you want a more precise answer you can ask him. In any event if we have a serious L-Shaped Roubini style recession-depression Social Security will be the least of our problems.


    2037 is not ages away for this generation (none / 0) (#22)
    by roy on Wed May 13, 2009 at 02:33:19 PM EST
    Speaking as a member of the generation scheduled to hit retirement age in the 2040's, 2037 is not ages away.  I'm budgeting my retirement savings on the assumption that I will not get significant Social Security payments.  I'm fortunate to have enough income to do so, but other people my age aren't as lucky or pessimistic.

    I only know I've paid in for 40 years and I want my money out when the time comes, and not at a cut rate.

    If all you want is your money out, that's one thing.  But you aren't scheduled or asking to only get your money.  You're going to get your money plus some of the next generation's money.  Social Security cynics don't just call it a "pyramid scheme" out of malice; that's the essence of the program and why it's worked as long as it has.

    It's also frustrating that you continue to think of it as "your" money, while not letting the next generation treat our payments as "our" money which would mean the option of spending it on something other than the Social Security program.

    I got this, Jeralyn... (5.00 / 1) (#23)
    by gtesta on Wed May 13, 2009 at 03:43:44 PM EST
    "I'm fortunate to have enough income to do so"

    If you happen to be fortunate because you got a good public education or government guaranteed student loans, then you can thank all of us who paid "our taxes" to make sure you got there.

    I'm more than happy to pay my SS taxes as a thank you to the generation who helped me get to where I am today.


    Fair enough (none / 0) (#24)
    by roy on Wed May 13, 2009 at 05:25:59 PM EST
    I'll cop to not just going to public schools; I went to college on a full state scholarship.

    But you can't have it both ways.  If people getting money from SS are due it because the money they paid in is "theirs", then the money everyone else pays in is "theirs" too.  But those people don't get to spend that money so it isn't actually theirs, and so the the money paid in by SS recipients wasn't theirs either.

    If paying in is about gratitude or paying back the previous generation for benefit provided by public programs, then people who didn't get much help (like expatriates) shouldn't pay in.  Neither should people who've paid back by other means like other taxes or private charity, nor people who are merely ungrateful.  I'm not claiming people shouldn't be grateful, but if that's the premise of your argument you have to accept the logical fallout or change your premise.

    Either there's some other basis for why people should pay in and why those who paid in should get paid, or there's no basis.  I think the real basis is simply that people are compelled to pay in so they'll get paid when they retire.  If that's true, we need to make sure people do get paid, and that includes people who pay in now to collect in 30 years.  If we can't or won't do that, we need to acknowledge that the program is being run contrary to the reason people participate in it, and make some other reform.


    You miss the point (none / 0) (#25)
    by diogenes on Wed May 13, 2009 at 07:56:58 PM EST
    When the SS system starts drawing from the trust fund in 2016, it will be cashing in federal "bonds" to do so, so the US Government will have to either raise taxes or find someone willing to lend us billions on top of the already planned Obama deficit of that year.  Otherwise the US Government will default on the SS system trust fund.  
    Of course, given the track record of this administration, maybe they plan to declare that the US government will pay the SS system only twenty-nine cents on the dollar..