"It is true that my generation will have to pay twice — covering today’s retirees while pre-funding our own retirement. But alas this is the heavy burden created by postponing a known problem. A burden which will only grow heavier with every year that we delay."
Tbh I'm not sure whether "just give up and don't even attempt to mildly inconvenience the boomers" is really the solution here.
I would do something similar. To reveal my prior, I’ an anarchist, but I recognize that no one is going to agree with me, so I tend to prefer predictable, stable government. Our current social security program is a future disaster.
I say that give you the expectation that I’d be heavily opposed to raising taxes. And I am. But I really think there’s no way to solve this problem without doing so.
Given that, I think taking the cap off is the most rational step, partly because is directly feeds into how I would then fix it for the long haul. I would start converting social security to private accounts. Yes, it would take hundreds of years under my plan, but everyone would be better off as we go.
Beyond eliminating the cap, I think we put some long-term benefit-growth reductions in place, restore the taxability of benefits, and — most importantly — create and automatic mechanism to set the tac rate equal to whatever percent of wages is necessary to pay for last year’s benefits plus any deficit from the prior year. We should anticipate the rate rising over time.
We would then start the long-term reform by saying that people under the age of 20 as of some date in the near future (because we need an implementation period) have 1 percentage point of their current 6.4% employee-paid tax and 1 point of their current 6.4% employer paid tax contributed to a private account. Those 6.4% numbers will be higher, because tax rates will rise in order to pay for the program and to then to pay for the redirection of funds to private accounts. Then every 50 years, start another cohort with 2% and 2%, then 3% and 3%, and so on.
Each cohort gets its benefits coming from traditional social security cut by one sixth. After 300 years, traditional social security is gone.
In order to protect people who are lazy or make terrible investment decisions or just get really unlucky, we might add a feature, but it would cost money. The feature would allow (and probably require) anyone with less than $X when they hit retirement age to get a subsidized life annuity (from a private provider, not the government) at an amount sufficient to keep them from dire poverty (and adjusting for inflation). For people who do that, any post-exchange social security taxes would pay off the subsidy first. Or, we could just change our anti-poverty programs to better address old folks.
Also, I think we should change our unemployment insurance program to similarly be a forced savings program. This idea is not original with me: you would be able to borrow from your account and, if it is negative when you die, the government pays it off. So part of the unemployment insurance tax would go to that, but most would go to accounts.
Your unemployment account (if it has a positive balance) would roll into your retirement account at some retirement age, after which you can’t take unemployment benefits. Additional unemployment taxes (on any post-retirement wages) after that would simply transfer through to your retirement account.
I’d also do one thing to enhance the counter-cyclical effect of the unemployment program. Set a maximum and minimum rate for the unemployment tax. Then have a formula that determines when the rate rises or falls based on the inflation rate being above or below target. Absent anything else, it ought to drift back towards the minimum rate, which ought to be what’s enough to healthily fund the unemployment benefit over the long term. Over time, this would tend to push money out of consumption and into savings during periods of high inflation. It would also mean additional contributions that would reduce the need for government to pay off negative accounts and subsidize life annuities.
I’ve been advocating it for a long time, but the reluctance to consider any fix on the revenue side, particularly scrapping the wage tax has prevented progress. Lots of things have changed since the 1980, but the ONE thing that cannot change is the tax rate on the tax base that Tip and Ron agreed to one night over a few whiskies. 😊 https://thomaslhutcheson.substack.com/p/social-security-managing-a-crisis
Pretty good but I have to push back on the payroll tax cap being removed so quickly. That's a huge tax increase that you kind of gloss over, raising some marginal rates from 37% to over 50%. This would also raise corporate taxes quite a bit on their high earners and you'd likely see compensation shift from wages to other forms that skirt the tax laws. Then you add in means-testing, which functionally transforms social security from a program that we all support to another redistribution program. It is functionally that already but I think it would benefit America to recover a sense of that communal spirit. Canada actually caps its public-pension contributions on the first $85k (CAD) of earnings, which is much lower than the US $184.5k.
For high earners, it's easy to villainize them, but if you're making $300k like a physician and paying student loans, you'd have to contribute another $8k-$9k to SS
One thing worth mentioning is that many states are now requiring auto-enrolled 401k plans around 3% of each paycheck. How would that factor into a program like Social Security?
This is a huge problem. A couple of ways to even it out:
First, convert that ridiculous Medicare Net Investment Income Tax (3.8% of non-wage income if you make over $125k singly) back to being charged across all wages.
Second, netting out the benefit of that reduction, cut income tax rates to make it revenue neutral.
That still leaves you with a budget deficit problem to solve, of course. But it fixes social security, mostly.
In less than a century, the world has become an unrecognizable mush of low consequence distractions. Technology is responsible for most of this however, systems of welfare naturally create weakness and dependency. Transfer payments such as Social Security and Medicare are in the same bucket as insurance and easy credit, which tend to encourage risk, insolvency and inflation. We have funded the dissolution of the family and neighbor community, and the value of currency, even while complaining about the same.
The solution to broken systems is rarely “more money“ but rather to clear out the dysfunctional support framework and instead keep responsibility where it belongs- within the individual, the family, and local institutions. The strength of an individual or a society will not increase absent stress. Struggle is not a bad thing, necessity is still the mother of invention.
Very good essay. My mom always tells me that her family depended on survivors benefits just to make ends meet, and my paternal grandma lived on it for years. We need something like Social Security, whatever form it happens to take.
I believe that Bill Cassidy co-sponsored a bill similar to what you’re proposing re the trust with a Democratic counterpart, and I know Moreno and Warren proposed a law raising the payroll tax cap. Some version of what you’re highlighting here, then, seems like it might realistically become law in the coming years, so that SS doesn’t run out of money just as people are getting ready to vote in 2032. If we wait until then, expect an irresponsible solution.
Welfare is bad. Massively increasing taxes in the productive and also cutting their benefits is bad.
Canada has a cap of $85,000 cad ($60,000 usd) on its payroll taxes. In other words its cap is dramatically lower the. The us at $183,000! You want to get ride of our cap!
Canada has more manageable payments because it collected a lot less in tax from young people in the first place, and thus has less of an obligation to them when they are old.
Investing in the stock market only works if the market goes up. What if the market acts more like the Nikkei for the last 30 years?
Are you truly proposing we move to a Defined Contribution system (your benefits are what they are and if the market is down you get nothing)? Or are we keeping the defined benefit structure and just using an assumed ROI from the stock market (note this is why all those state pension funds are underfunded).
There are only two things that ought to happen with SS:
1) just cut everyone’s benefits the same amount when the trust fund runs out. No means testing. No “the rich who can afford it.” If it’s 23% or whatever everyone gets a 23% cut.
2) the problem is the childless. The childless need to be paying higher payroll taxes/receive lower benefits. It’s their fault! They need to pay!
Raising my tax rate by double digits while I’m trying to raise three kids and cutting my benefits. Drop dead!
I’m all on board with a corporate restructuring of the government to be fundamentally more results-oriented than rights-oriented. I’m also happy to have social security controlled by an independent agency, given its size and importance. But I have a lot of problems with this proposal, honestly.
The first is billing this as addressing the generational contract, but actually addressing the problem of social security insolvency. The generational contract, as it relates to the social safety net, is what percent of payroll income is transferred from the working to the retired. This is totally divorced from the fact that benefits paid out are higher than payroll tax income. This piece doesn’t address it, except insofar as to propose a 9% increase in revenue, coming from high earners. But more importantly, it leaves the inputs to social security with the exact same problems as before by leaving them in congress’s control without any safeguards or ceilings. Stealing from the future to pay the present is easy, and old people are more civically engaged than the young, especially on this topic. This distorts how the government responds, and it’s why all previous social security reform has failed.
The second problem is that unless you’re planning on cutting far more off the top of the scale than I imagine, increasing the wages that payroll tax applies to by 9% doesn’t cover the 11-29%+ increase in revenue that social security would need to break even, much less turn a profit to start investing. If the math needs to work, and it does, then cuts to far more than the richest retirees are necessary. Any reform simply has to pass the basic calories in minus calories out test before getting on to fancy corporate governance, and this is without even taking into account that fertility is going to continue to be low and lifespans are going to continue to extend. Raising the retirement age and giving a broad haircut of 10% or more to all payroll tax-funded outlays, including medicare and social security for poor retirees, is just plain necessary. This is the hard part, and you have to be upfront about where the money comes from and that it actually exists.
That is, without completely turning social security from (from the taxpayer’s POV) a mandatory low-interest retirement savings account safeguarding against people’s shortsightedness and lack of risk aversion into a welfare program. This is what only cutting the benefits to the rich would do. I understand that this part is a partisan debate and it’s well-trodden at that, but the position that Schumer and Bernie hold is the right one. As has been said from the very start of social security and medicare, they simply cannot turn into means-tested programs without being destroyed - they’re too big to not fail if they do. The buy-in from rich retirees, which depends on it looking like a low-interest retirement account because of the income cap and rich retirees getting a fair payout at the end, is necessary for this. Seeing it as a welfare program rather than a mandatory personal safety net is not only a minority view that continues to be unpopular and makes proposals that use it give the ick to voters and legislators, but it is not conducive to the continued existence of the programs in any form similar to the current one.
Basically, I think the meat of the proposal is a good idea, but it also totally misses what it’s billed as, what the main stuff necessary to fix social security is, and the stuff necessary for social security to continue existing. Whistling past the graveyard on a number of different levels, honestly.
What distortionary effects did you find from the TSP accounts? They’re mostly a selection of index funds, and the employees direct them. Seems pretty unanalagous to the CCP investment fund.
"It is true that my generation will have to pay twice — covering today’s retirees while pre-funding our own retirement. But alas this is the heavy burden created by postponing a known problem. A burden which will only grow heavier with every year that we delay."
Tbh I'm not sure whether "just give up and don't even attempt to mildly inconvenience the boomers" is really the solution here.
my preference is to mildly inconvenience them! so as to avoid majorly inconveniencing them.
I would do something similar. To reveal my prior, I’ an anarchist, but I recognize that no one is going to agree with me, so I tend to prefer predictable, stable government. Our current social security program is a future disaster.
I say that give you the expectation that I’d be heavily opposed to raising taxes. And I am. But I really think there’s no way to solve this problem without doing so.
Given that, I think taking the cap off is the most rational step, partly because is directly feeds into how I would then fix it for the long haul. I would start converting social security to private accounts. Yes, it would take hundreds of years under my plan, but everyone would be better off as we go.
Beyond eliminating the cap, I think we put some long-term benefit-growth reductions in place, restore the taxability of benefits, and — most importantly — create and automatic mechanism to set the tac rate equal to whatever percent of wages is necessary to pay for last year’s benefits plus any deficit from the prior year. We should anticipate the rate rising over time.
We would then start the long-term reform by saying that people under the age of 20 as of some date in the near future (because we need an implementation period) have 1 percentage point of their current 6.4% employee-paid tax and 1 point of their current 6.4% employer paid tax contributed to a private account. Those 6.4% numbers will be higher, because tax rates will rise in order to pay for the program and to then to pay for the redirection of funds to private accounts. Then every 50 years, start another cohort with 2% and 2%, then 3% and 3%, and so on.
Each cohort gets its benefits coming from traditional social security cut by one sixth. After 300 years, traditional social security is gone.
In order to protect people who are lazy or make terrible investment decisions or just get really unlucky, we might add a feature, but it would cost money. The feature would allow (and probably require) anyone with less than $X when they hit retirement age to get a subsidized life annuity (from a private provider, not the government) at an amount sufficient to keep them from dire poverty (and adjusting for inflation). For people who do that, any post-exchange social security taxes would pay off the subsidy first. Or, we could just change our anti-poverty programs to better address old folks.
Also, I think we should change our unemployment insurance program to similarly be a forced savings program. This idea is not original with me: you would be able to borrow from your account and, if it is negative when you die, the government pays it off. So part of the unemployment insurance tax would go to that, but most would go to accounts.
Your unemployment account (if it has a positive balance) would roll into your retirement account at some retirement age, after which you can’t take unemployment benefits. Additional unemployment taxes (on any post-retirement wages) after that would simply transfer through to your retirement account.
I’d also do one thing to enhance the counter-cyclical effect of the unemployment program. Set a maximum and minimum rate for the unemployment tax. Then have a formula that determines when the rate rises or falls based on the inflation rate being above or below target. Absent anything else, it ought to drift back towards the minimum rate, which ought to be what’s enough to healthily fund the unemployment benefit over the long term. Over time, this would tend to push money out of consumption and into savings during periods of high inflation. It would also mean additional contributions that would reduce the need for government to pay off negative accounts and subsidize life annuities.
Great essay, never understand why states can invest pensions with the Defined Benefit model but not federally.
I’ve been advocating it for a long time, but the reluctance to consider any fix on the revenue side, particularly scrapping the wage tax has prevented progress. Lots of things have changed since the 1980, but the ONE thing that cannot change is the tax rate on the tax base that Tip and Ron agreed to one night over a few whiskies. 😊 https://thomaslhutcheson.substack.com/p/social-security-managing-a-crisis
Pretty good but I have to push back on the payroll tax cap being removed so quickly. That's a huge tax increase that you kind of gloss over, raising some marginal rates from 37% to over 50%. This would also raise corporate taxes quite a bit on their high earners and you'd likely see compensation shift from wages to other forms that skirt the tax laws. Then you add in means-testing, which functionally transforms social security from a program that we all support to another redistribution program. It is functionally that already but I think it would benefit America to recover a sense of that communal spirit. Canada actually caps its public-pension contributions on the first $85k (CAD) of earnings, which is much lower than the US $184.5k.
For high earners, it's easy to villainize them, but if you're making $300k like a physician and paying student loans, you'd have to contribute another $8k-$9k to SS
One thing worth mentioning is that many states are now requiring auto-enrolled 401k plans around 3% of each paycheck. How would that factor into a program like Social Security?
This is a huge problem. A couple of ways to even it out:
First, convert that ridiculous Medicare Net Investment Income Tax (3.8% of non-wage income if you make over $125k singly) back to being charged across all wages.
Second, netting out the benefit of that reduction, cut income tax rates to make it revenue neutral.
That still leaves you with a budget deficit problem to solve, of course. But it fixes social security, mostly.
This is a banger! And a few overlapping ideas from my essay submission for this essay sprint!
This essay sprint has been a hell of a lot of fun, and you + the Boyd Institute folks have been cooking with fire on these federal deficit essays
(Really hoping the next sprint is about population / the fertility rate tho!)
https://www.grantvarner.com/p/how-does-america-escape-its-fiscal?r=3221f1&utm_campaign=post&utm_medium=web
Thank you 🙏
In less than a century, the world has become an unrecognizable mush of low consequence distractions. Technology is responsible for most of this however, systems of welfare naturally create weakness and dependency. Transfer payments such as Social Security and Medicare are in the same bucket as insurance and easy credit, which tend to encourage risk, insolvency and inflation. We have funded the dissolution of the family and neighbor community, and the value of currency, even while complaining about the same.
The solution to broken systems is rarely “more money“ but rather to clear out the dysfunctional support framework and instead keep responsibility where it belongs- within the individual, the family, and local institutions. The strength of an individual or a society will not increase absent stress. Struggle is not a bad thing, necessity is still the mother of invention.
In most cases I broadly agree but I do think I, personally, think of old age as different. Obviously your millage may vary.
excellent analysis politics and self interest have kept our heads buried I hope that we awaken soon
Thank you!
Very good essay. My mom always tells me that her family depended on survivors benefits just to make ends meet, and my paternal grandma lived on it for years. We need something like Social Security, whatever form it happens to take.
I believe that Bill Cassidy co-sponsored a bill similar to what you’re proposing re the trust with a Democratic counterpart, and I know Moreno and Warren proposed a law raising the payroll tax cap. Some version of what you’re highlighting here, then, seems like it might realistically become law in the coming years, so that SS doesn’t run out of money just as people are getting ready to vote in 2032. If we wait until then, expect an irresponsible solution.
Thank you! And yeah fingers crossed we get something ~responsible~ now while we still have time.
Huge unequivocal downvote.
Welfare is bad. Massively increasing taxes in the productive and also cutting their benefits is bad.
Canada has a cap of $85,000 cad ($60,000 usd) on its payroll taxes. In other words its cap is dramatically lower the. The us at $183,000! You want to get ride of our cap!
Canada has more manageable payments because it collected a lot less in tax from young people in the first place, and thus has less of an obligation to them when they are old.
Investing in the stock market only works if the market goes up. What if the market acts more like the Nikkei for the last 30 years?
Are you truly proposing we move to a Defined Contribution system (your benefits are what they are and if the market is down you get nothing)? Or are we keeping the defined benefit structure and just using an assumed ROI from the stock market (note this is why all those state pension funds are underfunded).
There are only two things that ought to happen with SS:
1) just cut everyone’s benefits the same amount when the trust fund runs out. No means testing. No “the rich who can afford it.” If it’s 23% or whatever everyone gets a 23% cut.
2) the problem is the childless. The childless need to be paying higher payroll taxes/receive lower benefits. It’s their fault! They need to pay!
Raising my tax rate by double digits while I’m trying to raise three kids and cutting my benefits. Drop dead!
I’m all on board with a corporate restructuring of the government to be fundamentally more results-oriented than rights-oriented. I’m also happy to have social security controlled by an independent agency, given its size and importance. But I have a lot of problems with this proposal, honestly.
The first is billing this as addressing the generational contract, but actually addressing the problem of social security insolvency. The generational contract, as it relates to the social safety net, is what percent of payroll income is transferred from the working to the retired. This is totally divorced from the fact that benefits paid out are higher than payroll tax income. This piece doesn’t address it, except insofar as to propose a 9% increase in revenue, coming from high earners. But more importantly, it leaves the inputs to social security with the exact same problems as before by leaving them in congress’s control without any safeguards or ceilings. Stealing from the future to pay the present is easy, and old people are more civically engaged than the young, especially on this topic. This distorts how the government responds, and it’s why all previous social security reform has failed.
The second problem is that unless you’re planning on cutting far more off the top of the scale than I imagine, increasing the wages that payroll tax applies to by 9% doesn’t cover the 11-29%+ increase in revenue that social security would need to break even, much less turn a profit to start investing. If the math needs to work, and it does, then cuts to far more than the richest retirees are necessary. Any reform simply has to pass the basic calories in minus calories out test before getting on to fancy corporate governance, and this is without even taking into account that fertility is going to continue to be low and lifespans are going to continue to extend. Raising the retirement age and giving a broad haircut of 10% or more to all payroll tax-funded outlays, including medicare and social security for poor retirees, is just plain necessary. This is the hard part, and you have to be upfront about where the money comes from and that it actually exists.
That is, without completely turning social security from (from the taxpayer’s POV) a mandatory low-interest retirement savings account safeguarding against people’s shortsightedness and lack of risk aversion into a welfare program. This is what only cutting the benefits to the rich would do. I understand that this part is a partisan debate and it’s well-trodden at that, but the position that Schumer and Bernie hold is the right one. As has been said from the very start of social security and medicare, they simply cannot turn into means-tested programs without being destroyed - they’re too big to not fail if they do. The buy-in from rich retirees, which depends on it looking like a low-interest retirement account because of the income cap and rich retirees getting a fair payout at the end, is necessary for this. Seeing it as a welfare program rather than a mandatory personal safety net is not only a minority view that continues to be unpopular and makes proposals that use it give the ick to voters and legislators, but it is not conducive to the continued existence of the programs in any form similar to the current one.
Basically, I think the meat of the proposal is a good idea, but it also totally misses what it’s billed as, what the main stuff necessary to fix social security is, and the stuff necessary for social security to continue existing. Whistling past the graveyard on a number of different levels, honestly.
A lovely cloud castle plan. What's your plan for getting Republicans to agree to your fix or any other fix? That's the real nut to crack.
What distortionary effects did you find from the TSP accounts? They’re mostly a selection of index funds, and the employees direct them. Seems pretty unanalagous to the CCP investment fund.