The Great Lie About Social Security

The Great Lie About Social Security
By Carrie Lukas
2/1/2011

Back in the days before the State of the Union was used to showcase Congress's bipartisan spirit and parties still sat on opposite sides of the aisle, the American people could get a good read on a party's position on an issue from their reaction to lines in the speech.

One telling incident came in 2006, when President George W. Bush complained that “Congress did not act last year on my proposal to save Social Security.” Applause from Democrats in Congress—proud of having thwarted reform of their beloved New Deal era program—interrupted the rest of his sentence, which warned that “the rising cost of entitlements is a problem that is not going away.”

Five years later, with Social Security facing a deficit, President Obama renewed calls to reform the program stating that “we should also find a bipartisan solution to strengthen Social Security for future generations.” He then continued to describe all the ways Congress shouldn't bring the program into balance—such as reducing benefits or using market-based investments—leaving massive tax increases as the only real option left for discussion.

Americans are used to politicians using Social Security as a political football. It would hardly seem like a proper campaign season if our airwaves weren't peppered with accusations of one candidate wanting to gut Social Security and force seniors on to the streets. Americans expect State of the Unions to include a throwaway line about shoring up the program's finances. They also expect Congress to do absolutely nothing to follow through on the insincere call to action.

Yet this is a can that can only be kicked so far down the road. For nearly three decades, taxes paid to support Social Security more than covered benefits so that surplus revenue helped pay other expenses, and masked the full extent of the federal deficit. Yet in 2010, with high unemployment and Baby Boomers beginning to retire, Social Security's payroll tax failed to cover benefit payments. So instead of providing money to support the rest of the government, Social Security took a bite out of the budget.

Defenders of the status quo would quickly point out that Social Security has enough “assets” in its Trust Fund, which collected bonds during the era of Social Security surplus, to make up for shortfalls for decades. This is little comfort to taxpayers. The bonds in the Trust Fund may be assets of the Social Security Administration, but they are liabilities for the rest of us. Money will have to come out of the general treasury to repay those bonds, squeezing our already pinched federal budget even more. SSA's demands on the budget will be small at first, but as the ranks of the retired swell, Social Security will soon need tens of billions to pay promised benefits.

If President Obama opposes any measures to reduce promised benefits to future generations (including future generations of high-income earners), then workers should be warned that the current payroll tax holiday will be a very short, temporary reprieve. Congress and the President agreed to reduce payroll taxes for 2011 by two percentage points, believing that doing so would put money in the pockets of working Americans and encourage productivity by reducing marginal tax rates.

Yet if nothing is done to reform Social Security—and more specifically to bring down Social Security's costs and taxpayers' liabilities—tax rates are going to have to climb significantly. By 2037, when Social Security's Trust Fund is exhausted, payroll taxes would have to rise to about 17 percent or 40 percent higher than today to meet all of Social Security's promises.

President Obama and other champions of tax increases would likely protest that they would never simply allow the payroll tax rate to climb across the board and would instead force only those with higher incomes to shoulder more of the financial burden. And, certainly Congress could remove the current wage cap on Social Security so that everyone pays payroll taxes on their full wages, rather than just the first $106,800 they earn. Assuming that Congress would also change benefit formulas so that those extra taxes don't lead to extra benefits in the future (which would greatly diminish the program's link between what you pay in and what you get out, making it more like a traditional welfare program), this would help reduce Social Security's future shortfall.

Yet how many times can politicians target high income earners for additional taxes? How much more of a burden can Congress levy on small businesses that file through the individual tax code? If Congress is really going to squeeze this much more money out of high earners, do Americans really think the best use of that money is to fund all transfer payments through the Social Security system?

Americans in their forties and younger would welcome an honest conversation about the true state of the program and options for fixing it for their future. We know that we aren't going to get the same deal our parents and grandparents did. We know we either won't get the full benefits promised today or we will be paying exorbitant taxes for the rest of our working lives and endowing our children and grandchildren with an even bigger tax burden down the road.

Calls for improving Social Security should be more than political stunt. They should be the beginning of a real discussion about a government program that has clearly promised more than our economy can afford.