there waiting with the alternative: Imagine how much more money you would have if you just privatized Social Security and let them manage it! Such a strategy has been tried and completed successfully in other countries and with privatizing other social services (for example, private, for-profit charter schools as an alternative to defunded public schools).
The last word is pretty simple. Taxes. When Franklin D. Roosevelt created Social Security, he also created the bizarre, nonsensical system of accounting that the program uses for political reasons. When you and your employer pay FICA taxes, that money is nominally placed in the Social Security Trust Fund. When Social Security benefits are paid out that money again nominally is paid out from the trust fund. FDR did this for political reasons to try to prevent Social Security from ever being destroyed by politicians. He reasoned that if people believed that they were getting “their money” out of the program when they retired, then they would resist any cuts or adverse changes to the program since they viewed it as their own money rather than some entitlement program.
Because we live with this fiction that FICA taxes fund Social Security, we now have created the “problem” that in about 20 years the number written in the government’s spreadsheet for the trust fund of Social Security will be smaller than the amount of money that is being paid out in benefits. One of the ways to fix this non-problem is simply to raise payroll taxes. One widespread idea is to raise the cap on the amount of income subject to FICA taxes. Right now, only the first $113,700 of income is subject to FICA taxes. Everything after that is not subject to FICA. By removing the cap and subjecting all income to FICA taxes, the number on the government’s spreadsheet for the amount in the trust fund will be very big–big enough that the amount paid out in benefits can last another 80 years or so before the number on the spreadsheet starts getting smaller.
For many of the ultra-wealthy, however, Social Security is not part of their retirement plans. Even the worst corporate executives still receive gold-plated retirement plans. For many people making a few hundred thousand a year, Social Security payments might, and probably are, part of their retirement plans. But the ultra-wealthy don’t need or particularly want Social Security benefits, so they do not care much what happens to the program. But they do care deeply about their taxes. Therefore, it is in their best financial interest to push for cuts in the program rather than take the chance of a possible tax increase.
In the accounting fantasyland of the government, there “appears” to be a “problem” with the number on a spreadsheet not being big enough. Back in the real world, Social Security is not funded by FICA taxes nor from payments from the trust fund.
Social Security funding works like this. Right now, the US has about 314 million people, of whom 58.6% or 184 million are currently employed in some capacity. These people generate all of the goods and services that are for sale. These people also get all of the income available in the economy. Also, the goods and services need to be purchased right away; they cannot be saved or hoarded for later. A barber can’t save a haircut for later. You either get your hair cut now or you don’t. You can’t stockpile future haircuts for when you retire. Some things might be able to be saved. You could certainly buy a car now and put it in storage to use 30 years from now when you retire. But it will lose a lot of its utility. You would have taken something worth say $30,000 and turned it into something worth maybe $1,000.
If current workers were the only ones who could buy things, what would happen? All of the workers would consume almost all of the goods and services available, since they receive all of the income. Nothing would be leftover for anyone else. But every society has some members who do not work: babies, children, disabled, sick, and elderly. Do we want to live in a world where no one in any of these groups gets anything, except what they can beg, borrow, or steal?
There are about 62 million US retirees or disabled persons. What we do is enact some type of tax on the workers that reduces their income. Now all of the workers can consume only a fraction of the total goods and services available. We also have the government pay out some type of income to the 62 million retirees and disabled persons. They can then use this money to consume the leftover goods and services that are not consumed by the workers.
It’s important to remember that the point of the tax is to reduce the demand from the workers. The taxes do not serve to fund anything. The point of the payments from the government is to ensure that all available goods and services in the economy are being purchased. If there are leftover goods and services, then the payments should be increased or the taxes decreased.
Right now, the US has around 20 million unemployed and underemployed people, and record low industrial capacity utilization. We have plenty of idle capacity to take care of new retirees. The Social Security program is not in any kind of danger of being unable to meet the demands of existing and potential retirees.
What Should You Do?
Right now, Social Security payments are an integral part of the economy and cutting them will not only have a detrimental impact on the well-being of those who are retired and those who will retire, cuts will also take even more demand out of the economy and lead to less jobs and lower growth.
Instead of talking about reducing government spending or reducing benefits or increasing taxes, we need to be talking about increasing spending and reducing taxes. The conversation in Washington is focused on the wrong goal.
If the Chained CPI change goes through, then that will mean cuts of $230B over 10 years. Since that $230B is spent, it will translate to about $345B taken out of the economy (assuming a 1.5 fiscal multiplier). Considering we still have a $2T hole in the economy that is the last thing we need to do.
If you do not like Social Security and support the cuts to the program, that is fine. In a country of over 300 million people, many of us will have different opinions. But because the $345B will be removed from the economy over 10 years, something will need to be done to replace that spending–perhaps an equivalent increase of $230B in a different social program (assuming a 1.5 multiplier). If you favor tax cuts, then you’ll need to identify around $700B in tax cuts (assuming a generous .5 fiscal multiplier for tax cuts).
To figure out what spending or tax cuts you would want just follow the simple formula below.
Take the amount by which you want to stimulate the economy and divide it by the fiscal multiplier and that gives you how much you need to spend (or cut in taxes). To find the fiscal multiplier for the types of tax cuts or spending programs of your choice, just consult the handy list below.
Type of stimulus Fiscal multiplier
Corporate tax cuts/credits: 0 to .27[2] (e.g., R&D credit, lower corp. income tax rate, loopholes, etc.)
Flat tax cuts: .29[3] (e.g., Bush tax cuts)
Progressive tax cuts: 1.27[4] (e.g., payroll tax cut, expand Earned Income Tax Credit, etc.)
Military spending: .60[5] (e.g., guns, planes, tanks, bombs, etc.)
Expanded government: 1 to 1.7[6] (e.g., expand SEC to better oversee the stock markets)
Social programs: 1.5 to 2.0 [7](e.g., Social Security, Medicaid, food stamps, etc.)
Direct hiring of
