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Column: Social Security is perfectly healthy, but there’s one easy way to improve it

FILE - In this Feb. 11, 2005 file photo, trays of printed social security checks wait to be mailed from the U.S. Treasury's Financial Management services facility in Philadelphia. (AP Photo/Bradley C. Bower, File)

Social Security, the key to a secure retirement, is still under attack. (Associated Press)

’Tis the season for hand-wringing over the fiscal condition of Social Security.

This annual event is invariably triggered by the release of the program’s trustees report, which occurred Friday. As is typical, the release inspired reams of journalistic and political alarmism about what will happen when the program’s reserves (that is, its two trust funds) are exhausted.

The trustees currently project that will happen in 2033. At that point, they say, current revenues from the payroll tax would be sufficient to cover 80% of currently scheduled benefits. That’s a year earlier than the projections in last year’s trustees report.

A year’s worth of fluctuation in the reserve depletion date is not a cause for alarm — or celebration, if it goes the other way!

Kathleen Romig, Social Security expert at the Center on Budget and Policy Priorities

This sounded dire, superficially, and major news sources piled on. “Social Security funding crisis will arrive in 2033, U.S. projects,” the Washington Post reported. The Committee for a Responsible Federal Budget, which is an offspring of the late private equity billionaire and Social Security foe Peter G. Peterson, declared in the wake of the trustees’ report that “Social Security is 11 years from insolvency.

The annual report lent urgency to a raft of proposals to “fix” Social Security. Most such proposals amount to benefit cuts; that would be the result of steps such as raising the retirement age, reducing payments to wealthier recipients, gutting cost-of-living increases and recalculating lifetime earnings.

Some even advocate starting to cut benefits now, supposedly because the resulting strain would be easier on retirees’ household budgets if it’s spread over a decade rather than coming all at once. This theme was hammered home by the CRFB , which asserted that “time is running out to save Social Security.” Acting sooner rather than later, the committee said, “gives workers time to plan and adjust.”

So it behooves us to take a closer look at what the trustees actually said, at least so we have a better sense of the implications of any “reform” proposals. That’s especially true because the would-be reformers generally skate over the one sure-fire method of providing all the revenues the system needs to fully cover its obligations: Raise the Social Security tax not on ordinary workers, but wealthier Americans who have been getting a free pass on their full obligations to the system.

First, let’s examine the implications of the one-year change in the year of projected trust fund exhaustion. As Kathleen Romig, the Social Security expert at the Center on Budget and Policy Priorities, pointed out on Twitter: “A year’s worth of fluctuation in the reserve depletion date is not a cause for alarm — or celebration, if it goes the other way!”

For more than a decade, Romig observes, “every Trustees’ Report has estimated a reserve depletion date between 2033 and 2035.” Most of the change this year happened not because the program’s “finances continue to deterioriate,” as the CRFB claims, but because of technical factors, Romig states.

These include a change in the program’s projection methodology and an update to its valuation period. The latter is the 75-year span over which the system’s actuaries calculate its finances. Every year, that period advances by a year, so, a low-deficit year drops away and a high-deficit year is added. That increases the 75-year gap,” Romig writes, “even if the shortfall in each individual year of the projection stays the same.”

Big changes come from the system’s estimates of inflation, productivity, birth rates and other demographic factors. The trustees are projecting higher inflation, lower production output and lower birth rates over the next decade and the 65 years beyond. But those estimates are based partially on snapshots of current conditions, so they’re obviously conjectural.

The overwrought concerns about Social Security’s fiscal condition never ceases to produce rococo proposals for reform. A persistent idea is to raise the retirement age. I deconstructed this plan in February, when the CRFB advanced it in the guise of promoting “productive aging” by removing “work and savings disincentives in the current program.” (Translation from the CRFB’s gibberish: “Make working people work longer.”)

As I wrote then, proposals to raise the retirement age are based on the assumption that older workers would continue to work, perhaps until they drop dead, if not for what the CRFB called the “mixed retirement signals that often draw them into early retirement and treat retirement itself as a binary choice.”

That implies that workers are almost duped into filing for Social Security, when they would be so much happier staying on the job.

These proposals, however, never take into account the differences in life expectancies arising from ethnic, income and educational factors. Put simply, they would disproportionately penalize Black, lower-income and less-educated workers, as well as those whose working lives were spent in physically demanding jobs. These proposals boil down to rich desk-jockeys telling others to just suck it up.

Another perennial is to divert Social Security revenues into ostensibly more rewarding investments than the Treasury securities in which the program is legally bound to park its reserves. The trust funds, which hold those reserves, currently amount to more than $2.8 trillion.

The latest iteration of this idea is being formulated by a group of senators led by Bill Cassidy (R-La.) and Angus King (I-Maine).

Details of the Cassidy-King proposal are scanty, but what’s known is that it would involve creating a “sovereign wealth fund” of some $1.5 trillion in borrowed funds to invest in the stock market, real estate and other investments currently closed to the system.

The theory is that, over time, these investments would produce enough income to pay back the borrowings with interest and contribute what’s left over to the Social Security reserve.

Fans of Social Security’s investing in the stock market rely on the rule of thumb that over the long term the market yields an annual average of more than 8% over inflation. Over the last century, the return of the benchmark Standard & Poor’s 500 index was an annualized 7.51%, while the system’s most recent purchases (in June 2022) were of Treasuries yielding an average 3%.

That makes the proposal seem simple. In the real world, it’s anything but. It’s too easy to be fooled into “believing in the fantasy of a stock market ‘free lunch,'” observes the National Committee to Preserve Social Security and Medicare.

To begin with, as I’ve noted in the past, the actual yield of the stock market over periods of less than a century is highly variable. The inflation-adjusted compound annual growth rate of the S&P 500 for successive 45-year periods has ranged from 4.57% (in 1964-2008) to 8.27% (in 1975-2019).

Then there are the political implications of investing government funds in corporate equities. At a hearing in 1937, Sen. Arthur Vandenberg (R-Mich.) asked Arthur Altmeyer, a Social Security staff member and future commissioner, how he proposed to invest a reserve fund that was then expected to grow to $47 billion.

You could invest it in U.S. Steel and some of the large corporations,” Altmeyer suggested.

“He just threw up his hands in holy horror,” Altmeyer recalled years later. “That would be socialism!” Vandenberg exclaimed.

In today’s fraught political environment, the prospect is high that stock market investments would be monitored and questioned by congressional busybodies.

Are the investment managers applying “ESG” considerations to their choices? (Those are environmental, social and governance standards that some investment fiduciaries utilize to judge the prudence of investments.) Red-state politicians are so exercised over the very thought that this is happening that they’ve boycotted management firms that use them — at the potential cost of hundreds of millions of dollars in income.

The truth is that elaborate schemes to reach for yield are totally unnecessary, as almost all Social Security experts know. What’s needed to close the gap between current revenues and annual benefit payouts is simply to eliminate the cap on the payroll tax and apply it to investment income.

This year, the tax is capped at 12.4% of all wage income up to a maximum of $160,200, with the levy shared equally by employers and employees. Investment income such as capital gains and dividends are entirely exempted. That’s a little-appreciated dodge enjoyed by the 1%, who on average receive about half their annual income from those sources.

To see how this works, consider that the maximum payroll tax this year (counting both the employer and employee shares) is $19,864. For someone in the 1% collecting, say, $600,000 in wage income, that tax amounts not to 12.4% of income, but only 3.3%. If that $600,000 was only half the taxpayer’s income, with the rest coming from investments, his or her effective tax rate would be only 1.66%.

That points to the most effective means of shoring up Social Security. Removing the wage cap and adding a 6.2% tax on investment income would eliminate the entire projected revenue shortfall, according to the American Academy of Actuaries.

Indeed, those changes would provide enough headroom to accommodate a couple of long-overdue improvements, specifically raising the surviving spousal benefit to 75% of the deceased spouse’s benefit from the current 50%, and counting as covered earnings up to five years of childcare, which currently are counted as zero earnings.

There’s a reason why such an obvious solution gets short shrift from policymakers: It would hit the patrons of federal lawmakers where they live. It’s much easier to pile the burdens of retirement funding onto middle- and low-income earners. They don’t have the political megaphones of the affluent.

What’s most offensive about the reform proposals swirling around in Washington is that they assume that America’s working class can be easily gulled into thinking these solutions will be painless. Raise the retirement age over time — why, everyone is living longer, so what’s wrong with that? Invest Social Security in the stock market? The riches will just flow in. Start cutting benefits now — who would really notice?

Let’s not overlook that the promoters of all these proposals promise that they would only affect young workers, not those nearing retirement or already on a pension. Where’s the justice in that?

There’s only one rationale for any benefit cuts in Social Security. It’s to build a wall around the wealth of the affluent by making everyone else pay. If you’re a member of the 99%, the “reformers” are coming for you.

This story originally appeared in Los Angeles Times.

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