Unfixing Social Security
Every problem has a solution
63% of Americans live paycheck to paycheck. Just one percent short of the highest level ever. That is at least 20% higher than Canadians and Germans who suffer the same lifestyle.
It is easy to accuse the US government as a reckless spender. However, spending as a percentage of GDP has grown just 3% since 1960. Despite the U.S. government spending more, the impact is not being felt by citizens. Germans and Canadians are slightly better off financially than Americans.
Basically, the contradiction lies in the tug of war between the two political parties over spending. Democrats want to raise taxes and spend more. Republicans want to decrease taxes and cut spending. The United States would have already become an exceptional society if this imbalance could be rectified.
As a result, America swung back and forth between two ideologies: helping the business world or lifting the left behind. The two parties that differ on the ideological spectrum are still united on one thing: neither can balance spending with revenue. Their answer is more borrowing.
The Top five items that dominate Federal spending are:
There is one thing that unites both parties: they are more than happy to take on debt to achieve their priorities. Democrats want to raise taxes and strengthen social programs. Republicans want to reduce taxes and tighten social programs.
Federal Revenue weighed against spending:
Politicians come and go. Trump and Biden won’t be here forever. Mitch McConnell and Chuck Schumer will be part of history books when grandkids are in college. But the debt piled up by the politicians will be there. Democrats will not agree to cut the social programs and Republicans will not agree to increase taxes. Caught in the middle, the current generation takes a loan that the next generation has to pay.
Questions lead to more questions. Should we increase debt because the economy keeps growing, or should we increase taxes to reduce the deficit or should we turn social programs into stamps?
The only difference between the two political parties is their approach towards fixing social benefits. Democrats stand united. They want to increase tax paid by the wealthy and they want to expand the benefits offered. In comparison, Republicans are in a bit of a disarray. There is a long list of establishment Republicans who want to end all social programs.
Social Security
Social Security, is a social insurance program, administered by the U.S. federal government. Workers and employers pay social security taxes into a trust fund that pays benefits to:
- Retired individuals
- Disabled individuals
- Surviving spouses and children of deceased workers
The Problem Statement
The entire world is slowly gravitating towards a population crisis. It is still not evident as the numbers have not fallen off the cliff yet. In the United States, the share of population that’s working age has declined from 67% in 2010 to 61.9% in 2022.
- Because of the lower birthrate, fewer workers are paying into the system today than are retiring and collecting benefits.
- The maximum earnings subject to the Social Security payroll tax is $160,200 this year. This leaves a huge share of wages outside the taxable base.
- Rate of wage growth
“Unless Congress acts by 2035, Social Security funds will be sufficient to pay only about 80 percent of the program’s obligations to retirees and disabled workers. The resulting benefit cut — estimated at 20 to 25 percent over time — would affect current and future beneficiaries alike, pushing up poverty rates among retirees by 60 percent, according to projections by the Urban Institute”.
“People of color depend disproportionately on Social Security, so if benefits are cut it’s going to be especially devastating for them,” said Richard Johnson, senior fellow and director of the Urban Institute’s Program on Retirement Policy.
The Fix
Among the Democratic proposals are three notable fixes, each requiring an increase in taxes to strengthen the program.
The Biden Proposal: Adds a new tier of payroll tax contributions for people with incomes over $400,000. That would extend solvency by roughly five years.
The Social Security 2100 Act: Provides a 2% across the board benefits to all beneficiaries. Applies payroll taxes to wages above $400,000. Extends the date at which 20% benefits would be cut from 2035 to 2044.
Progressive Version: Across the board increase of $200 per month for all beneficiaries. Extends solvency by 75 years. Additional funds generated by applying current FICA tax rate to wages above $250,000 and additional taxes on investment income.
The Republican plan: A little all over the place. Senator Rick Scott wants the congress to review social programs every five years. In other words, congress will have to keep talking about the solvency of the program and one fine day with enough members it would be able to kill the program forever. Senator Ron Johnson of Wisconsin wants all social programs reviewed annually. Senator Mike Lee wanted to pull Social Security and Medicare root and branch.
The most substantive Republican Social Security plan comes from a group of conservative lawmakers in the House of Representatives as part of a broader federal budget plan. The group, the Republican Study Committee, calls for significant benefit cuts for all but the lowest-income workers by gradually raising the F.R.A. to 70, and through changes to the benefit formula that would sharply cut benefits for middle-income and affluent workers. After that adjustment, the group proposed linking the F.R.A. to any further gains in life expectancy.
Is there a solution?
Clearly, there will never be a bipartisan solution to fix social security. A program that has lifted so many people out of poverty is slowly sinking between the ideological divide. There are more than 180 countries around the world that offer social security benefits, so United States isn’t the only country that takes advantage of collective power to help the individual.
“Social Security benefits are much more modest than many people realize; the average Social Security retirement benefit in January 2022 was about $1,614 per month, or about $19,370 per year. (The average disabled worker and aged widow received slightly less.) For someone who worked all of their adult life at average earnings and retires at age 65 in 2022, Social Security benefits replace about 37 percent of past earnings.
Social Security benefits are also modest by international standards. The U.S. ranks just outside the bottom third of developed countries in the percentage of an average worker’s earnings replaced by the public pension system”.
Social security is topped up with universal healthcare in most developed countries, so retirement and healthcare concerns are eliminated. Healthcare expenses in the US rank at the top, putting retirees and economically struggling people at risk. In the wake of such high costs, many Americans either avoid preventive care or travel overseas to get cheaper medical care.
However, one party wants to yank the benefits away from Americans and let them live and dance to the whims and fantasies of the corporate world, rather than strengthening the programs.
The largess Republicans bestowed upon the corporate world by reducing the tax rate from 36% to 21% did not turn United States into an economic paradise. The United States is going through an exceptionally strong economic upswing because of the government directing benefits to all layers of the society during the COVID Crisis.
To know more about how that happened you can read my earlier article where I explained the impact of Biden’s middle out economics.
Unlike the rich, who pocket the entitlement they get from the government by depositing it in the stock market, social security beneficiaries will return the money to the economy. Expanding the benefits offered to workers who came before us would be a great thing for the United States.
Even if that is not possible, we should at least find a way to keep the programs vibrant and strong.
Not weak and collapsible.
