There's always only been one option for Social Security

3/29/2014 03:09:00 PM
If you are in the US and have a pulse, you probably know that all Social Security projections say that the Social Security trust fund being exhausted by or before 2037. If not, here's the graphic:
It's basically certain that the trust fund will be exhausted by 2037 if we do nothing. And that's ok, because the trust fund doesn't actually do anything for anyone.
What you may not know is that Social Security is not and never was funded out of the trust fund, and that Social Security will not and cannot go bankrupt.

No. Social Security is funded by a dedicated tax stream known colloquially as "payroll taxes" which are separate from the Federal Income Tax. The first Social Security benefits were paid out in 1935, the same year people started paying in, which means that this has always been a pay-as-you-go system, and that no one ever intended the trust fund to finance the program. Moreover, these dedicated payroll taxes are not the only source of revenue for Social Security--congress can, and at times has, appropriate additional funding to the program through the normal budget process, which President Clinton did in the late 1990s to hide the budget surplus from Newt Gingrich. However, payroll taxes are the only funds that the Social Security Administration can use without requiring an annual appropriations from congress.

So what's all this business about the trust fund? The trust fund is just a bank account where the Social Security Administration deposits it's surplus revenues each year after all benefits are paid out. Legally, since all of the money in the trust fund came from the dedicated payroll taxes, the Social Security Administration is also allowed (actually, required) to fund any shortfall between revenues and outlays out of the trust fund without requiring an appropriation from Congress. Until just the last couple years, there has historically always been an annual surplus in the Social Security budget--payroll taxes were far higher than were needed to fund benefits--which is the only reason we ended up with such a large trust fund. But make no mistake: the trust fund was never, ever intended to be able to finance Social Security benefits, and was never meant to get this large relative to benefits.

Thus, the trust fund is nothing more or less than the cumulative annual surpluses and deficits of the Social Security budget. It's size is totally unrelated to Social Security outlays, which is why graphics like these are thoroughly misleading:
The trust fund ratio is the ratio of the trust fund balance to total current outlays. But who the heck cares? The trust fund was never intended to finance Social Security benefits, and it certainly was never intended to grow this large.

Now, it's true that for various demographic reasons--that have a lot less to do with baby boomers than you've been told--social security outlays will exceed revenues from the dedicated payroll taxes for the next few decades, resulting in a projected cumulative deficit that exceeds the size of the trust fund. But this doesn't mean that social security will "go bankrupt" when the trust fund runs out as every one seems to think--in fact Social Security can't go bankrupt because it has a dedicated tax stream. All that happens when the trust fund runs out is that benefits get automatically cut down to the level where current outlays equal current revenues. That's basically a 20 percent reduction in the average benefit from current levels. Here it is in a graph:
The solid line shows what happens to Social Security outlays once the trust fund is exhausted if we do nothing at all. The dashed line shows where we'd have to raise taxes to in order to continue paying current levels of benefits.

But here's the thing: whether we cut now or wait for the trust fund to beexhausted, amount that would have to be cut is exactly the same: a 20 percent reduction in the average benefit, regardless. Cutting Social Security now to "extend the life of the trust fund" is totally inane because the trust fund doesn't actually do anything for anyone, and no one benefits from keeping it at current levels. Let me be clear about this: no matter how or when we cut benefits, we will have to cut the average benefit by 20 percent for outlays to equal revenues. Chained CPI is irrelevant. Raising the retirement age is irrelevant. Extending the life of the trust fund is irrelevant. Exhaustion of the trust fund is irrelevant. It's all irrelevant. It's all different ways of saying "reduce average benefits by 20 percent."

Since "go bankrupt" actually means an eventual 20 percent reduction in benefits, then there was only ever one way to prevent Social Security from going bankrupt: you gotta raise taxes. That's the only option. Either there's going to be a 20 percent reduction in average benefits, or we are going to raise taxes. There's a lot of different ways we could raise taxes--we could opt for annual appropriations out of general revenues instead of raising the dedicated payroll taxes (what we did for Medicare). Or we could create new dedicated revenue streams for the Social Security Administration, such as a national sales tax perhaps. Or we could just raise the Social Security payroll tax.

So, the choice is this: if we do nothing, benefits get cut by 20 percent. All other options are just different ways of saying "raise taxes." There was only ever one option here.