• Tag Archives social security

  • Entitlement Liabilities Are a Graver Threat to the Next Generation of Americans Than Climate Change

    Posted on by Azrael Comment


    On January 31, 1940, Miss Ida Fuller received a check for $22.54. She was the first person to retire under the Old-Age, Survivors, and Disability Insurance (OASDI) scheme, better known as Social Security. At the time of her retirement in 1939, she had paid just $22 in Social Security taxes. Ms. Fuller lived to be 100, cashing over $20,000 worth of Social Security checks.

    If she had only paid $22.54 in contributions, where did the $20,000 Ms. Fuller received in Social Security payouts come from? It came, as it does now, from the taxpayers of the day. As of 2019, your employer deducts 6.2 percent of your wages up to $132,900 a year, matches this amount, and sends it to the Social Security Administration (SSA). The SSA deposits this with the Treasury, which spends it and receives Treasury bonds in return. This is the fabled trust fund that guarantees Social Security.

    But these Treasury bonds are simply IOUs redeemable against the income of tomorrow’s taxpayers. When one of the Treasury bonds held by the SSA falls due for payment, the Treasury can only get the funds to meet this liability by taxing, borrowing (taxing the taxpayers of tomorrow), or printing money (imposing an inflation tax). In each case, what really guarantees Social Security is not the money you paid in but the earnings of today’s or tomorrow’s taxpayers.

    Such a pay-as-you-go scheme could chug along well enough as long as there were lots of workers relative to retirees. When the program began, every 100 workers were supporting three retirees.

    This favorable ratio encouraged politicians to be more generous. Originally intended to cover only about 50 percent of all workers, Social Security was expanded even before Ida Fuller received her first check to provide benefits for dependents of retired workers and surviving dependents. In the post-war years, Social Security grew further. Disability benefits, payable as early as age 50, were added in 1956, and during the 1950s coverage was extended to other previously excluded workers, making it essentially universal. Congress passed across-the-board benefit increases of 7 percent (1965), 13 percent (1967), 15 percent (1969), 10 percent (1971), 20 percent (1972), and 11 percent (1974). In 1972, benefits were tied to the Consumer Price Index, yielding an annual “cost of living adjustment.”

    In 1965, Medicare was signed into law, establishing a heavily subsidized federal health care program for the elderly. Former President Harry Truman and his wife received the first Medicare cards without paying a cent in Medicare taxes.

    Like Social Security, Medicare is financed by a payroll tax of 2.9 percent split between employer and employee, up from 0.7 percent in 1966. Like Social Security, that money gets paid right out to meet current expenses, which were vastly expanded by passage of Medicare Part D in 2003. And like Social Security, such a pay-as-you-go scheme could chug along well enough as long as there were lots of workers relative to retirees.

    Two things derailed that. US birth rates fell from births 3.65 births per woman in 1965 to 1.80 in 2016, and life expectancy rose from 68 in 1950 to 79 today. Together, this meant ever more retirees relative to the workers supporting them. By 2017, 100 workers were supporting 25 retirees.

    These shifting demographics have shredded the solvency of the “trust funds.” Social Security is estimated to run out of reserves in 2034, after which benefits would have to be reduced by about 25 percent to keep spending within available annual revenue. Over 75 years, Social Security has an unfunded liability of $13.9 trillion.

    The Medicare hospital insurance trust fund will run out of reserves in 2026. Medicare’s second trust fund, for physician and outpatient services and for prescription drugs, is permanently “solvent” because it has an unlimited call on the general fund of the Treasury—the incomes of future taxpayers. Premiums paid by the beneficiaries will cover only about 25 percent of program costs; the rest of the spending is unfinanced. Medicare’s overall unfunded liability over 75 years is more than $37 trillion.

    The taxes levied to fund Social Security have already risen drastically. In 1937, the Social Security tax rate was one percent on earnings up to $3,000 ($53,449 in 2019 dollars) to be matched by the employer. By 1971 it was 4.6 percent on earnings up to $7,800 ($49,411 in 2019 dollars). It now stands at 6.2 percent up to $132,900.

    This is only going to get worse. According to Census Bureau projections, by 2030 each 100 working-age Americans will be supporting 35 retirees, and this could rise to 42 by 2060. Another way to think of this is to calculate the number of retirees each worker must support. In 1946, the burden of one retiree was shared between 42 workers. Today, according to the SSA, roughly three workers cover each retiree’s Social Security and Medicare benefits. By 2030, however, there will be only two workers supporting each retiree.

    In other words, a working couple will have to support not only themselves and their family but also someone outside the family thanks to Social Security and Medicare.

    To make Social Security solvent again, the payroll tax rate would need to be hiked immediately from 12.4 percent to 15.2 percent, or Social Security benefits would need to be cut on a permanent basis by about 17 percent. According to economists Roger LeRoy Miller, Daniel K. Benjamin, and Douglass C. North:

    [F]or Social Security and Medicare to stay as they are, the payroll tax rate may have to rise to 25 percent of wages over the next decade. And a payroll tax rate of 40 percent is not unlikely by the middle of the twenty-first century.

    Teenage climate activist Greta Thunberg recently made international headlines with an impassioned speech to the United Nations in which she complained that her future had been stolen by inaction on climate change. An American Ms. Thunberg’s age could say the same about entitlement spending on Social Security and Medicare.

    By the expanding eligibility for and hiking the benefits of a pay-as-you-go system while at the same time having fewer children to fund it, the generations preceding that child have left a fearsome financial obligation. Either taxes will go up sharply for the workers of tomorrow, lowering their standard of living, or benefits will go down for the retirees of tomorrow, lowering their standard of living. One group is going to feel pretty angry.

    These problems were foreseen even as politicians were hiking payouts. In 1978, the economist Paul Samuelson wrote:

    [O]ur Social Security system is also an actuarially unfunded system…there is no obligation for this generation to have children at the same rate as did previous generations. Therefore, when those born during the baby-boom period of the ‘50s reach retirement age in the next century, their stipends will be felt as more of a burden by the thinner ranks of the then working population

    We are on the brink of inter-generational strife. We have the political shortsightedness of decades past to thank for that.


    John Phelan

    John Phelan is an economist at the Center of the American Experiment and fellow of The Cobden Centre.

    This article was originally published on FEE.org. Read the original article.


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  • We’re on the Precipice of an Economic Crisis–and Everyone Knows It’s Coming

    Posted on by Azrael Comment

    Writing about federal spending last week, I shared five charts illustrating how the process works and what’s causing America’s fiscal problems.

    Most importantly, I showed that the ever-increasing burden of federal spending is almost entirely the result of domestic spending increasing much faster than what would be needed to keep pace with inflation.

    And when I further sliced and diced the numbers, I showed that outlays for entitlements (programs such as Social Security, Medicare, Medicaid, and Obamacare) were the real problem.

    Let’s elaborate.

    John Cogan, writing for the Wall Street Journal, summarizes our current predicament.

    Since the end of World War II, federal tax revenue has grown 15% faster than national income—while federal spending has grown 50% faster. …all—yes, all—of the increase in federal spending relative to GDP over the past seven decades is attributable to entitlement spending. Since the late 1940s, entitlement claims on the nation’s output of goods and services have risen from less than 4% to 14%. …If you’re seeking the reason for the federal government’s chronic budget deficits and crushing national debt, look no further than entitlement programs. …entitlement spending accounts for nearly two-thirds of federal spending. …What about the future? Social Security and Medicare expenditures are accelerating now that baby boomers have begun to collect their government-financed retirement and health-care benefits. If left unchecked, these programs will push government spending to levels never seen during peacetime. Financing this spending will require either record levels of taxation or debt.

    Here’s a chart from his column. Only instead of looking at inflation-adjusted growth of past spending, he looks at what will happen to future entitlement spending, measured as a share of economic output.

    And he concludes with a very dismal point.

    …restraint is not possible without presidential leadership. Unfortunately, President Trump has failed to step up.

    I largely agree. Trump has nominally endorsed some reforms, but the White House hasn’t expended the slightest bit of effort to fix any of the entitlement programs.

    Now let’s see what another expert has to say on the topic. Brian Riedl of the Manhattan Institute paints a rather gloomy picture in an article for National Review.

    …the $82 trillion avalanche of Social Security and Medicare deficits that will come over the next three decades elicits a collective shrug. Future historians—and taxpayers—are unlikely to forgive our casual indifference to what has been called “the most predictable economic crisis in history.” …Between 2008 and 2030, 74 million Americans born between 1946 and 1964—or 10,000 per day—will retire into Social Security and Medicare. And despite trust-fund accounting games, all spending will be financed by current taxpayers. That was all right in 1960, when five workers supported each retiree. The ratio has since fallen below three-to-one today, on its way to two-to-one by the 2030s. …These demographic challenges are worsened by rising health-care costs and repeated benefit expansions from Congress. Today’s typical retiring couple has paid $140,000 into Medicare and will receive $420,000 in benefits (in net present value)… Most Social Security recipients also come out ahead. In other words, seniors are not merely getting back what they paid in. …the spending avalanche has already begun. Since 2008—when the first Baby Boomers qualified for early retirement—Social Security and Medicare have accounted for 72 percent of all inflation-adjusted federal-spending growth (with other health entitlements responsible for the rest). …

    Brian speculates on what will happen if politicians kick the can down the road.

    …something has to give. Will it be responsible policy changes now, or a Greek-style crisis of debt and taxes later? …Restructuring cannot wait. Every year of delay sees 4 million more Baby Boomers retire and get locked into benefits that will be difficult to alter… Unless Washington reins in Social Security and Medicare, no tax cuts can be sustained over the long run. Ultimately, the math always wins. …Frédéric Bastiat long ago observed that “government is the great fiction through which everybody endeavors to live at the expense of everybody else.” Reality will soon fall like an anvil on Generation X and Millennials, as they find themselves on the wrong side of the largest intergenerational wealth transfer in world history.

    Not exactly a cause for optimism!

    Last but not least, Charles Hughes writes on the looming entitlement crisis for E21.

    Medicare and Social Security already account for roughly two-fifths of all federal outlays, and they will account for a growing share of the federal budget over the coming decade. …Entitlement spending growth is a major reason that budget deficits are projected to surge over the next decade. …The unsustainable nature of these programs mean that some reforms will have to be implemented: the only questions are when and what kind of changes will be made. The longer these reforms are put off, the inevitable changes will by necessity be larger and more abrupt. …Without real reform, the important task of placing entitlement programs back on a sustainable trajectory will be left for later generations—at which point the country will be farther down this unsustainable path.

    By the way, it’s not just libertarians and conservatives who recognize there is a problem.

    There have been several proposals from centrists and bipartisan groups to address the problem, such as the Simpson-Bowles plan, the Debt Reduction Task Force, and Obama’s Fiscal Commission.

    For what it’s worth, I’m not a big fan of these initiatives since they include big tax increases. And oftentimes, they even propose the wrong kind of entitlement reform.

    Heck, even folks on the left recognize there’s a problem. Paul Krugman correctly notes that America is facing a massive demographic shift that will lead to much higher levels of spending. And he admits that entitlement spending is driving the budget further into the red. That’s a welcome acknowledgment of reality.

    Sadly, he concludes that we should somehow fix this spending problem with tax hikes.

    That hasn’t worked for Europe, though, so it’s silly to think that same tax-and-spend approach will work for the United States.

    I’ll close by also offering some friendly criticism of conservatives and libertarians. If you read what Cogan, Riedl, and Hughes wrote, they all stated that entitlement programs were a problem in part because they would produce rising levels of red ink.

    It’s certainly true that deficits and debt will increase in the absence of genuine entitlement reform, but what irks me about this rhetoric is that a focus on red ink might lead some people to conclude that rising levels of entitlements somehow wouldn’t be a problem if matched by big tax hikes.

    Wrong. Tax-financed spending diverts resources from the private economy, just as debt-financed spending diverts resources from the private economy.

    In other words, the real problem is spending, not how it’s financed.

    I’m almost tempted to give all of them the Bob Dole Award.

    P.S. For more on America’s built-in entitlement crisis, click here, here, here, and here.

    Reprinted from International Liberty.


    Daniel J. Mitchell

    Daniel J. Mitchell is a Washington-based economist who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.

    This article was originally published on FEE.org. Read the original article.



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  • Report: Social Security overpaid disability recipients $17 billion

    Posted on by Azrael Comment

    Social Security overpaid nearly half the people receiving disability benefits over the past decade, according to a government watchdog, raising questions about the management of the cash-strapped program.

    In all, Social Security overpaid beneficiaries by nearly $17 billion, according to a 10-year study by the agency’s inspector general.

    Many payments went to people who earned too much money to qualify for benefits, or to those no longer disabled. Payments also went to people who had died or were in prison.

    Social Security was able to recoup about $8.1 billion, but it often took years to get the money back, the study said.

    With the disability program going broke next year, it is especially troubling that Social Security is failing to protect precious taxpayer dollars.

    “Every dollar that goes to overpayments doesn’t help someone in need,” said Sen. Chuck Grassley, R-Iowa. “Given the present financial situation of the Social Security Disability Insurance trust fund, the program cannot sustain billions of dollars lost to waste.”

    The trust fund that supports Social Security’s disability program is projected to run out of money late next year, triggering automatic benefit cuts, unless Congress acts. The looming deadline has lawmakers feuding over a solution that may have to come in the heat of a presidential election.

    The program’s financial problems go beyond the issue of overpayments — Social Security disability has paid out more in benefits than it has collected in payroll taxes every year for the past decade.

    Source: Report: Social Security overpaid disability recipients $17 billion


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