This year marks the 80th anniversary of the U.S.’s most successful anti-poverty program. In a world where freakishly intelligent people devote much of their existence to building innovative social programs – think charter schools, opportunity zones, inclusive zoning – it’s really quite embarrassing how simple the standard-bearer for poverty alleviation is. By simply mailing a monthly check for ~$1180 to residents 65 years and up (with some exceptions), the Social Security Administration is able to lift 25 million people above the poverty income threshold every year.
The rhetoric around Social Security has ignored it’s success as an anti-poverty program for some time. Instead, politicians of all stripes worry publicly about the program’s future solvency. Their hysterics, perhaps unsurprisingly, mirror the concerns of the affluent, and they seem to have conjured great concern among younger people. Despite Social Security being wildly popular, 51% of respondents to a recent Gallup poll doubt that they will get benefits upon retirement. That’s a shockingly high number for a pay-as-you-go program, and it makes you doubt whether people really understand how Social Security works. As I’ll explain below, the only way you won’t get Social Security benefits is if Social Security is scrapped entirely or is fundamentally altered as a universal program. Short of that, you are guaranteed benefits.
Social Security, unlike most other social programs, is entirely self-funded. For every dollar your employer pays you, s/he sends $0.062* to the Social Security Administration (SSA). In addition, for every dollar you receive from your employer (or at least the first ~$118,000), you send another $0.062 to the SSA. So, in good times and bad, the SSA collects 12.4%** of the nation’s payroll to operationalize the nation’s largest poverty program. They receive no funding outside of the payroll tax***. When Congress completes their annual ritual of drafting a budget to be sidelined in committee, exactly zero of those budget dollars are earmarked for Social Security.
The SSA collects their funding from the 12.4% payroll tax and uses it to finance retiree benefits in accordance with a formula Congress legislated. This formula yields an average benefit of $1180 per month per beneficiary. Some years, they collect more in taxes than they distribute. Other years, they spend more than they collect. When SSA collects more, they run a surplus and the surplus is placed in the Social Security Trust Fund and invested in non-marketable securities. Conversely, when they spend more, they sell off assets in the Trust fund to finance the deficit.
For a long time, the SSA ran surpluses and built up a sizable Trust Fund. Assuming a constant return on investment, there are two ways that this can happen. One, the workers:retirees ratio grows. More workers relative to non-workers means more people to tax relative to people to spend on. Two, economic growth. Holding the worker:retiree ratio constant, a higher growth rate means a larger payroll for the 12.4% tax to be levied on – it also questions our prior assumption of constant investment returns. The postwar economic boom and the entrance of the Baby Boomers into the workforce delivered on both counts, and the Trust Fund grew.
Slowing economic growth and the retirement of the Baby Boomers has combined to weaken the outlook for Social Security’s Trust Fund. Recent estimates suggest that the Trust Fund’s asset/cost ratio will approach zero in twenty years. That means that if in twenty years the SSA collects less in taxes than they pay out to beneficiaries, there will be no assets to sell to cover the difference. What happens then?
Well, the SSA estimates a 21% shortfall, meaning they’ll be able to pay to beneficiaries $0.79 of every dollar their formula says is owed. This would be a disaster to Social Security’s standing as the nation’s most successful anti-poverty program. However, it wouldn’t spell a disaster for Social Security. So long as 12.4% of payroll is collected, at least 12.4% of payroll can be spent. Cutting Social Security benefits now to save it later misses this crucial point. You can’t get blood out of a stone; 12.4% is 12.4%. The program’s ‘solvency’ is irrelevant, a silly lens to analyze a program through that is forbidden from borrowing. Put another way, what good does it do to cut benefits today because you are worried about funding being short tomorrow? Either way, you are collecting and spending 12.4% of all annually created value.
It’s quite possible, and in my opinion very likely, that 12.4% of all value created will be insufficient to provide future retirees with an existence that isn’t also impoverished, but that’s a wholly different discussion. It demands attention to income inequality and requires the use of a theory of just distribution to determine what a retiree deserves. Future retirees, then, aren’t at risk of receiving nothing, though without that discussion, it’s possible that they won’t receive much. The cynic in me now asks: can you think of a better way to destroy Social Security than that?
*Tax equivalence suggests that when employees have less bargaining power they pay a majority of the employer tax.
**Some people make more than $118,000 per year, so this is an upward limit.
***Another, more accurate, way to think about this is that <12.4% of all value annually produced is set aside for retirees. With or without Social Security, retirees need food, shelter and the like to continue existing. The government guarantees a large part of these necessities by extending property rights to retirees in the form of a $1180 monthly Social Security check. In the absence of Social Security, retirees might save more money throughout their working career, but this has no effect on 12.4% of all value created being directed to people who no longer create value. After all, my spending = your income.