Q&A of the Day – Fixes for Social Security’s Looming Insolvency
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Today’s Entry: Good morning! I'll start with saying that like most Americans, I have no desire to see the tax burden increased on any individual. That being said, however, Social Security is going to become insolvent. That is a given. My question is this, if they were to remove the cap on income subject to SSI taxes, how much would that impact the solvency of the program?
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Bottom Line: Social Security has been a hot topic over the past couple of weeks on back of Elon Musk’s announcement that DOGE’s initial review found significant issues with the Social Security Administration's record keeping. Specifically, the SSA’s records show 18.9 million active Social Security numbers for people who’re too old to be alive...including for people said to be as old as 369! Now, in my recent investigation into the topic which I reported on in Monday’s Q&A, the level of fraud being committed by use of these Social Security numbers appears to be significant, with approximately 44,000 of those numbers having actively been used by someone collecting Social Security payments, but that even if addressed, doesn’t rise to the level of representing a permanent fix to Social Security’s looming insolvency issues.
The first projected program to reach insolvency is the Social Security Old-Age and Survivors Insurance fund. Upon insolvency in 2033 – it's currently projected that payouts would be cut to recipients by 21%. In 2035, all Social Security programs will have reached insolvency by current estimates, with benefit cuts averaging 17%. Most recently, with this year’s COLA adjustment, the average Social Security recipient receives $1,829 per month. In today’s dollars, that would represent an average cut of $311 per month in benefits.
The magic number to stave off Social Security insolvency is a whopping $3 trillion, or $300 billion annually, without changes being made to the program. Today’s question is about a commonly proposed idea floated to address Social Security solvency issues... Raising Social Security taxes by eliminating the Social Security tax cap.
Most recently Social Security tax collections are limited to the first $168,600 of an individual’s income. This was put in place due to there being a limit on Social Security payouts for recipients. Essentially, any taxes paid on incomes earned above the $168,600 level would be a direct nominal tax increase as the benefits of those additional tax collections would be redistributed to others. Nevertheless, this has been discussed as a possible solution to address Social Security’s solvency issues. So, in addressing today’s question...is it?
The most recent analysis on lifting the Social Security tax cap from the Congressional Budget Office took place in December. The estimate shows an additional $1.2 trillion in taxes would be collected over ten years. Potentially helpful? Sure. A Panacea? Obviously not, as this approach is projected to not even collect half of the projected Social Security deficit a decade from now. This helps to illustrate the extent of the challenges we face going forward with the current Social Security system. Cracking down on fraud is helpful, however with less than 1% of payouts estimated to be fraud, it’s a small piece of the puzzle. Massively raising Social Security taxes as we just discussed, could help close the gap but still wouldn’t be a fix. That’s because what’s happened with Social Security and for that matter, Medicare, for decades has been legalized fraud.
Everything with these programs changed in 1968. That year, Democrat President Lyndon Johnson and a Democrat controlled congress, reclassified Social Security and Medicare funds to be included in the annual federal budget as opposed to being standalone trust fund programs as they’d been established originally. Once added to the federal budgeting process, the funds in these programs were leveraged and borrowed against by politicians during the general budgeting process. In the mid 80’s, President Reagan spearheaded an effort to reverse this. Congress didn’t comply, but in 1990 President Bush was successful in decoupling the programs from the general funds in the budgeting process. However, what was kept was the mandatory funding of our debt spending with it.
Social Security is mandated under law to be “invested” in special issue government bonds, which allow for increased debt spending by the federal government. It’s a way to essentially accomplish the leveraging of the funds without having them specifically available within the general budgeting process. Due to that process, the program is a series of IOUs as opposed to a trust fund. Current benefits are paid by those currently working, which is where the looming shortfalls come from. At the point where the active workforce is outdone by those collecting benefits, the jig is up. As I’ve said for years when discussing Social Security, if it weren't a government program it'd be ID'd as a Ponzi scheme. Medicare is a slightly different version of a similar thing with funds used to buy new government issued bonds and current taxes going to pay existing needs.
The real fixes aren't easy, but they’re also not complicated. Social Security should be paid into an account, in your name, that can't be taken away from you that grows overtime until collected. That would require significant reform and political courage. Incidentally Senator Rick Scott has openly supported this in previous years and was demonized for it. It’s an indication of the lack of political will there is to end the Ponzi because the schemers have yet to run out of other people’s money. But it’s always better to do the hard thing now than to wait to do it later and in an era of DOGE seeking significant cost savings – it would be an opportune time. Most likely, however, nothing will be done until there’s no longer a choice because the programs have run out of collecting enough of other people’s money.