Social Security 101

Perhaps if we called Social Security what it is - an old age pension, it would be better understood. Regardless, it's only the single most effective social welfare program in our nation's history and has protected tens of millions of seniors from poverty in old age. Moreover,  it is structured in an ingenious way - it is paid for through a dedicated funding source (a 6.2% tax on income you probably know as "FICA") that is immune to the vagaries of budget battles and income tax rates. The upshot? Social Security does not contribute to our budget deficit. In fact, it does just the opposite. Because the Social Security Trust Fund collects more in revenue than it pays out in benefits, it runs a surplus, which the government borrows against for day-to-day needs. In fact, over the years, the federal government has skimmed more than $5 trillion from the Social Security Trust Fund [1]. Even with its surplus being skimmed, and assuming that the funds the government has borrowed will never be paid back, Social Security can still pay out 100% of its benefits until 2036, at which point, it will begin running a deficit resulting in citizens receiving less than their full benefit. 

Regardless of the fact that the program is on strong footing for the next 23 years, officials in Washington want to solve this problem that does not really exist. So what are the options? Republicans have floated the idea of changing the way inflation is factored into cost of living increases in a way that will result in a benefit cut. This calculation, known colloquially as "chained CPI," would trim the program's costs by somewhere around $200 billion over its first 10 years and more going forward; however, it would reduce beneficiary payment by .2% each year, which would result in a nearly 10% decrease for a beneficiary between ages 65 and 90 [2]. While this may sound like a small bite, remember that the average Social Security check is about $1,230 a month, is relied on by nearly two-thirds of all seniors for the majority of their income, and keeps about 14 million senior citizens out of poverty every year [3]. 

Ok, so chained CPI would take a modest bite out of beneficiary checks that are relied on by the majority of those people for basic needs. Is there another way? Indeed, there is. FICA is a regressive tax - it is levied against people equally, but is capped at roughly $113,000, so all income you earn above that cap is not subject to the tax (the best estimate I could find is between 10-15% of workers earn $113,000 or more per year [4]). A study done by the Congressional Research Service indicated that removing the FICA cap would ensure Social Security's solvency for 75 years [5]. 

While eliminating the cap would be the simplest (and fairest) way to ensure the program's long-term solvency, Democrats may be reluctant to "raise taxes" on people earning $113,000, even though a tax bump at that level would hit less than one in five people. So what are some alternatives? I have three, any of which would be more progressive than switching to chained CPI and would accomplish the objective of extending the life of the Social Security trust fund:

Option 1: Simply raise the FICA cap to 90 percent of all income, or roughly $180,000 and enshrine that ratio in legislation so it increases along with advances in income. This proposal was advanced by former Clinton Labor Secretary Robert Reich [6], who pointed out that the last time a commission "reformed" Social Security (in 1983, when FICA taxation was raised to its current level), it recommended that FICA be collected at that ratio, but now, because of income disparity, the cap only collects about 80-85% of all income. 

Option 2: Create a "donut hole" for FICA and have it kick in again at the $400,000 income level that is now in place for income taxes. By doing so, FICA would be in harmony with the tax increase that was recently enacted and would affect fewer wage earners, as income between $113,000 and $400,000 would be exempt from FICA. 

Option 3: Raise the cap but lower the withholding rate. To me, this is the "middle ground" proposal that I would think might attract some bipartisan support. If the FICA tax was lowered from 6.2% to 4.2%, but the cap was raised to $400,000, that would provide a tax cut for middle class Americans (because less of their salary would be withheld) but would raise taxes on the wealthy because income that is not currently subject to FICA (i.e., anything above $113,000) would now be taxed. 

So, if you're scoring at home, we can tweak the way inflation is calculated to squeeze $50, or maybe $100 a year from poor seniors who need that money to live, or, we can ask people in the top 10-15% of wage earners to pay a little extra for a benefit that helps millions of people stay out of poverty. Doesn't seem like a tough call to me.

[1] http://www.huffingtonpost.com/2013/01/20/obama-deficit-second-term_n_2506882.html

[2] http://www.dailyfinance.com/2012/12/18/chained-cpi-how-washington-is-likely-to-slice-social-security-b/

[3] http://www.cbpp.org/cms/index.cfm?fa=view&id=3261

[4] http://www.mybudget360.com/how-much-does-the-average-american-make-breaking-down-the-us-household-income-numbers/

[5] http://aging.senate.gov/crs/ss9.pdf

[6] http://www.huffingtonpost.com/robert-reich/budget-baloney-why-social_b_824331.html