FIX THE DEBT WANTS TO SAVE SOCIAL SECURITY BUT WHY?

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Dan Crawford
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by Dale Coberly

FIX THE DEBT

WANTS TO SAVE SOCIAL SECURITY

BUT WHY?

I received an email a few days ago from Chris Dreibelbis,Fix the Debt, purporting to explain “why the Social Security Trustees urge action.”

“Fix the Debt” is a project of the Committee for a Responsible Federal Budget (CRFB) which is funded in part by Peter Peterson, a very rich person who has made something of a second career writing and saying misleading things about Social Security.  So have CRFB and “Fix the Debt.”

The present email from Dreibelibis looks reasonable enough,  but also misleading enough, that I thought it worth writing this short post.

Dreibelbis quotes the Trustees, “Both Social Security and Medicare face long term shortfalls under currently scheduled benefits and financing….The Trustees recommend that lawmakers take action sooner rather than later to address these shortfalls…”

Dreibelbis says, “The newest report forecasts that Social Security’s combined trust fund will run dry by 2034.  At that point, all recipients will see a 23% cut in benefits.  For example a typical person born in 1990 … will see a cut of over $160,000 dollars in scheduled lifetime benefits.”

To check this, I assumed that person would pay FICA taxes on income equal to 12.4% of the average income each year from 2020 through 2054.  I looked at Table V.C7 (Trustees Report p150} for a person who obtains age 65 in 2055 and retires at age 67 to find a scheduled yearly benefit of $33430.  Since the numbers in the table are given as constant 2017 dollars, I assumed the “real” value of the benefit would not change and multiplied it by the 20 years that person could expect to live in retirement, for a total of 668600 dollars.  Now, if the benefits are cut by 22% that person would lose $158,778 in total benefits over his lifetime. This is close enough to Dreibelbis figure, assuming he may have done the calculation slightly differently.

But what Dreibelbis did not do was calculate the cost of avoiding the benefit cut by raising the payroll tax 4%.  This turns out to be $93566 or about 60% of the value of the lost benefits.  Sounds to me like a better deal.  Moreover the tax would be paid out of an income of 2.339,153, leaving him an after the tax total income of $2,245,587, or an average of about $64,159 per year (2017 dollars).   Taking the benefit cut would leave him a total of $509,822 in benefits, or an average of about $25,491 per year to live on when he is old.

There are probably games you can play with “present value”  or “what you could have earned from interest,”   but that does introduce some “if’s.”  In any case, a first look at the numbers suggest that paying the extra tax makes more sense than taking the benefit cut.  It turns out that most workers would only see half the taxes (the other half being paid by the employer:  (i am quite aware of the “employers share is “really” the employees money” argument, but that is a metaphysical argument meant to distract from the payroll facts on the ground.)  Taking that employee’s share only, and phasing in his 2% tax increase one tenth of one percent (about a dollar per week at today’s average wage) per year would leave his total tax cost of avoiding the $153,778 benefit cut at about $35710.  This means every dollar he pays in “extra” taxes would get him $4.31 in saved benefits.

By the way, these numbers are in “real” dollars.  Accounting for inflation would make the benefit of paying the tax look much larger.  Or BE much larger, since any attempt to make up for the SS tax by “personal savings”  would have to first make up for what would be lost to inflation.

Dreibelbis does not address this. He strongly implies we need to cut SS now in order to “know what you can count on in the future.”   He never considers that we could just pay an invisibly larger tax now and keep (earn) the benefits we will will most definitely need in the future.