I have little to quibble with what you’ve written, other than two points:
1) Something that cannot go on forever, will not go on forever.
(Of course, faster economic growth and higher *legal* immigration with more people paying into the system *is* in fact an alternative, and at minimum will lessen the problem.)
But the bigger one is this:
2) Yes, Social Security has a problem, and yes it would have been better to have addressed it earlier. But the funding problem for the Social Security entitlement in its current form is *nothing* compared to the funding problem of Medicare in its current form, and yet your piece doesn’t even mention that far, far greater issue.
Entitlements are the one place Trump is just as bad as Democrats in terms of being irresponsible. Well, he’s slightly less worse because at least his economic policies are in aggregate pro-growth, where Dem policies are not. But that just means he gets an F+ while they get an F-.
You are absolutely right, especially about the point that Medicare is the far greater issue. In fact, Medicare's unfunded obligation is more than twice the size of Social Security's funding shortfall...at $53 trillion over 75 years versus $25 trillion for Social Security. Moreover, only 35 percent of Medicare spending is funded by payroll taxes with the remaining 65 percent being funded based on a combination of other revenues, higher borrowing, and premium payments (roughly 22 percent of total Medicare spending). I'm writing a piece to illustrate Medicare's vast funding problem, next. Be on the lookout for that one and I look forward to your comments on it.
At the end of the day, I’m confident that eventually a compromise will be reached that tweaks all of the parameters (retirement age, rate of growth of benefits, [especially for higher incomes], income cap and, unfortunately, tax rates) and SS will be addressed.
I.e. my point 1) prevails, we will muddle through, because we have to. And yes, the solution will have on the margin stolen from the younger to pay for the older because of the delay in addressing it, and this is immoral.
But Medicare, OTOH, simply cannot be solved using the same method. And its timeline is much shorter. So it is the true elephant in the room, not Social Security.
At this pace, the US will sooner or later have to adopt European style tax rates. My colleague Adam Michel is putting the finishing touches on a piece that explores this dilemma in great depth. Hear, hear!
"If raising the payroll tax sufficiently to cover the cost of currently legislated benefits is out of the question, how then will politicians avoid both automatic benefit cuts when Social Security’s trust fund borrowing authority expires in 2033 and cover the $25 trillion shortfall the program faces over the next 75 years?"
We've already seen one major component of the answer: inflation.
Bingo. Since current Social Security benefits are indexed to inflation, it's going to be very difficult to use inflation to outrun the shortfall. New initial benefits are indexed to wages, and the question arises how real wage growth will be impacted in a fiscal dominance inflation regime.
Hi Andy G, you are correct that current (ongoing) benefits are indexed to inflation. The payroll tax threshold is actually indexed to wage growth, which may or may not keep pace with inflation -- this depends on other economic factors such as productivity growth and how tight the labor market is. It was amendments adopted in 1977 that specified that the taxable maximum be adjusted, or indexed, annually to match the growth in average wages. However the level of income that triggers income taxation on Social Security benefits is not indexed to inflation. The fact that the threshold for taxing Social Security benefits is not adjusted for inflation means that a high COLA (inflation-adjustment) may increase one's tax burden. We're working on a more extensive analysis now that assesses how inflation will impact Social Security cash-flow under different economic assumptions. Thanks for your comment!
Rich boomers continue to steal from younger workers. The richest generation in the history of mankind is like a vacuum, sucking from their children's and grandchildren's pockets. For what?
A quirk of the decision to continue funding SS and Medicare with a tax on wages rather than a VAT. Of course any sort of pension, even one funded by a VAT, will on average be paid for by younger income earners.
But the generosity of the payment and the rate of growth of the payment, combined with the unwillingness to raise the retirement age remotely enough to correspond with life expectancy, is why this particular system is far more “theft” by the older generations from the young than it needed to be.
I have little to quibble with what you’ve written, other than two points:
1) Something that cannot go on forever, will not go on forever.
(Of course, faster economic growth and higher *legal* immigration with more people paying into the system *is* in fact an alternative, and at minimum will lessen the problem.)
But the bigger one is this:
2) Yes, Social Security has a problem, and yes it would have been better to have addressed it earlier. But the funding problem for the Social Security entitlement in its current form is *nothing* compared to the funding problem of Medicare in its current form, and yet your piece doesn’t even mention that far, far greater issue.
Entitlements are the one place Trump is just as bad as Democrats in terms of being irresponsible. Well, he’s slightly less worse because at least his economic policies are in aggregate pro-growth, where Dem policies are not. But that just means he gets an F+ while they get an F-.
You are absolutely right, especially about the point that Medicare is the far greater issue. In fact, Medicare's unfunded obligation is more than twice the size of Social Security's funding shortfall...at $53 trillion over 75 years versus $25 trillion for Social Security. Moreover, only 35 percent of Medicare spending is funded by payroll taxes with the remaining 65 percent being funded based on a combination of other revenues, higher borrowing, and premium payments (roughly 22 percent of total Medicare spending). I'm writing a piece to illustrate Medicare's vast funding problem, next. Be on the lookout for that one and I look forward to your comments on it.
Thx.
At the end of the day, I’m confident that eventually a compromise will be reached that tweaks all of the parameters (retirement age, rate of growth of benefits, [especially for higher incomes], income cap and, unfortunately, tax rates) and SS will be addressed.
I.e. my point 1) prevails, we will muddle through, because we have to. And yes, the solution will have on the margin stolen from the younger to pay for the older because of the delay in addressing it, and this is immoral.
But Medicare, OTOH, simply cannot be solved using the same method. And its timeline is much shorter. So it is the true elephant in the room, not Social Security.
Hailing from the other side of the pond those tax rates are turning me green with envy..
At this pace, the US will sooner or later have to adopt European style tax rates. My colleague Adam Michel is putting the finishing touches on a piece that explores this dilemma in great depth. Hear, hear!
"If raising the payroll tax sufficiently to cover the cost of currently legislated benefits is out of the question, how then will politicians avoid both automatic benefit cuts when Social Security’s trust fund borrowing authority expires in 2033 and cover the $25 trillion shortfall the program faces over the next 75 years?"
We've already seen one major component of the answer: inflation.
Bingo. Since current Social Security benefits are indexed to inflation, it's going to be very difficult to use inflation to outrun the shortfall. New initial benefits are indexed to wages, and the question arises how real wage growth will be impacted in a fiscal dominance inflation regime.
(Mostly) Incorrect, benefits are indexed to inflation, as are tax rates. Inflation has no effect on this issue
Hi Andy G, you are correct that current (ongoing) benefits are indexed to inflation. The payroll tax threshold is actually indexed to wage growth, which may or may not keep pace with inflation -- this depends on other economic factors such as productivity growth and how tight the labor market is. It was amendments adopted in 1977 that specified that the taxable maximum be adjusted, or indexed, annually to match the growth in average wages. However the level of income that triggers income taxation on Social Security benefits is not indexed to inflation. The fact that the threshold for taxing Social Security benefits is not adjusted for inflation means that a high COLA (inflation-adjustment) may increase one's tax burden. We're working on a more extensive analysis now that assesses how inflation will impact Social Security cash-flow under different economic assumptions. Thanks for your comment!
Rich boomers continue to steal from younger workers. The richest generation in the history of mankind is like a vacuum, sucking from their children's and grandchildren's pockets. For what?
A quirk of the decision to continue funding SS and Medicare with a tax on wages rather than a VAT. Of course any sort of pension, even one funded by a VAT, will on average be paid for by younger income earners.
But the generosity of the payment and the rate of growth of the payment, combined with the unwillingness to raise the retirement age remotely enough to correspond with life expectancy, is why this particular system is far more “theft” by the older generations from the young than it needed to be.
Tax evasion and the underground economy will become more and more common.