Social Security is not “going broke” because Social Security cannot go broke

Dan Crawford commends John T. Harvey’s blunt reminder, “Why Social Security Can’t Go Bankrupt.”

It is a logical impossibility for Social Security to go bankrupt. We can voluntarily choose to suspend or eliminate the program, but it could never fail because it “ran out of money.”

… It’s not a pension fund into which you put your money when you are young and from which you draw when you are old. It’s an immediate transfer from workers today to retirees today. That’s what it has always been and that’s what it has to be – there is no other possible way for it to work.

… This is how Social Security actually operates. As you can see, this needs no prior financing or savings, nor would that appear to be particularly helpful. At the national level, maintaining a class of retirees (whether via Social Security or private pensions) means redistributing existing output, not putting money under your mattress. Although you can run out of money for retirement, we, as a nation, cannot.

What, then, you may ask, is the Social Security Trust Fund, the pool of money that people say will dry up and make it impossible for anyone to receive their Social Security payments? It is the surplus that resulted from having collected more in taxes than was necessary to pay out to retirees. Let me say that again: it is how much existing workers were overtaxed relative to the need to pay retirees in the past. It was never the source of the money we’ve been paying to Social Security recipients all these years. Strictly speaking, it’s completely unnecessary if we are able to precisely and continuously match tax revenues and pay outs.

Yes. Please remember this: Anyone who tells you that Social Security is “going broke” is either lying to you or, at best, does not have the first clue how Social Security works.

Social Security is not going broke. Social Security cannot go broke.

It is not an account that can be depleted, it is an arrangement between generations. As long as there are generations, then Social Security will continue to exist.

There is no debt or deficit that can interfere with that arrangement. The arrangement, like any promise, can be deliberately broken, but it cannot go broke.

Only two scenarios can be imagined to make Social Security stop working:

1. Our grandchildren all turn out to be selfish assholes and oath-breakers, deciding en masse to screw over their retired parents and grandparents while also being so short-sighted as to invite their own children and grandchildren to screw them over in turn upon their retirement. If all of our children turn out to be evil and stupid, then Social Security will not be sustainable. But then if all of our children turn out to be evil and stupid, nothing else will be sustainable either.

2. Some kind of science-fiction, P.D. James, Children-of-Men scenario in which the human race mysteriously becomes incapable of reproducing. That would mean no future generation of workers to pay for Social Security benefits, and thus would entail the end of Social Security. But since it would also entail the end of everything else, including the human race itself, it’s hard to view such a potential problem as a flaw in the design of Social Security.

 

  • EllieMurasaki

    And, shit, when I told whatsthetroll I hadn’t been swearing…oops.

  • http://profiles.google.com/marc.k.mielke Marc Mielke

    You’re the first person I’ve seen who makes libertarianism sound attractive. BLOOD AND SOULS FOR ARIOCH!

  • http://profiles.google.com/marc.k.mielke Marc Mielke

    It’s okay. Looks like he stuck the flounce. 

  • Madhabmatics

     http://www.youtube.com/watch?v=Vmn9asN-8AE

  • Carstonio

    It would be so much simpler to lift the annual limit on FICA contributions so that the wealthy pay more. Ridiculous that someone whose annual income is in the billions would only have to pay $110,000 in these taxes  – it wouldn’t be worth the person’s time to bend down to pick up that amount from the sidewalk. The political realities are another matter.

  • http://blog.trenchcoatsoft.com Ross

    Now, however, I have learned from experience that the comment section of
    this blog is much less of a place for intelligent discourse than it is a
    place for propagandist positions and trolling.

    Translation: “I have learned from experience that the comment section of this blog is a place where reciting tired and debunked arguments and a bullying tone doesn’t let me dominate conversation and silence people whose positions are based on something other than arrogance, selfishness, and propaganda.”

  • ohiolibrarian

    I can’t help feeling that, as a member of the Baby Boom generation, we are not fulfilling our part of the inter-generational bargain that culminates in Social Security. The last couple of younger generations haven’t gotten enough of the stuff we should have been buying–like infrastructure and education–to help them in the future. Keeping in mind that helping them also helps us.

  • http://apocalypsereview.wordpress.com/ Invisible Neutrino

    It could be argued that with the current state of affairs – technogadgets notwithstanding – that the baby boomers have been milking the GenX and GenY efforts for quite a while, in particular by endorsing policies that have the effect of yanking away the ladder of upward economic mobility that they had access to.

  • P J Evans

     Most baby boomers aren’t going up that ladder either.

  • P J Evans

     The current income cap is about $113,000. That means that people only pay FICA on the first $113,000 of income, not that that’s the maximum. (Although at its (roughly) 6% tax rate, they could, with a large enough income, actually pay that much.)

  • http://flickr.com/photos/sedary_raymaker/ Naked Bunny with a Whip

    I, for one, welcome our new infant overlords.

  • EllieMurasaki

    No, six percent of 113K is only 7K. If the cap were removed, someone would have to make 1883K before tax to pay 113K in this six-percent tax.

  • Carstonio

     Thanks. That still equates to the very wealthy paying less than a reasonable share. In fact, I would make the calculation work the other way, where one pays FICA only if one’s income is greater than $35,000 or so.

  • SE

    The first person to retire paid 25 dollars and got 225000 in return. It is a pyramid scheme.

  • EllieMurasaki

    SOCIALISM!!11!

  • EllieMurasaki

    Mm-hm. What about the person who paid into the system all her life and died a year before she started getting payouts? How did she defraud anyone out of any money via Social Security? And yes, ‘defraud’ is the right word for anything for which ‘pyramid scheme’ is the right word. I truly hope you are not insinuating that your grandparents did/do not deserve to be supported by the society that they spent their lives supporting and contributing to.

  • http://loosviews.livejournal.com BringTheNoise

    Those two sentences don’t flow together as much as you seem to think.

  • Carstonio

     Silly me, favoring progressive taxation when it would mean the collapse of free enterprise. I shouldn’t have believed all those economists and textbooks that define socialism as government ownership of the means of production.

  • EllieMurasaki

    But you *can’t* tax the rich a higher percent of their income than the poor! That would–that–something *horrible* would happen!

  • Carstonio

     Good point. It helps to think of government as a giant membership corporation, or a mutual, where members pool their resources and their shared responsibilities and receive certain benefits.

  • Daughter

    But can we predict that succeeding generations will always be smaller? For example, there are fewer Gen Xers than baby boomers, but there are more millenials than Gen Xers.

  • http://lliira.dreamwidth.org/ Lliira

    Also, of course, the conventional wisdom about social security assumes that baby boomers are immortal.

    Baby boomers certainly seem to think they are, and that the world will end when they do. *grumble* Can one be a curmudgeon about one’s parents’ generation? 

  • Daughter

    We’re not productive when we’re commenting on Slacktivist? Surely not!

  • Dean

    Well, here’s the thing, I’m convinced that baby boomers PLAN on living forever.  I’m not sure they will be satisfied until they suck every last resource from this country and leave the rest of us with a dried up husk.  The problem really isn’t social security, everyone in the know understands this.  You can tweak SS here and there and it will be good to go for a very long time.  The true problem is with Medicare.  The baby boomers are retiring at a time when medical technology is going to be able to keep them alive for a very long time, albeit at the cost of resources for everyone else.  I don’t think anyone really has an answer for this, but don’t think that this is as simple as waiting around for people to die off, extreme longevity is not as far off as you might think.

  • http://blog.trenchcoatsoft.com Ross

     

    The first person to retire paid 25 dollars and got 225000 in return. It is a pyramid scheme.

    Kevin Spacey, would you mind assessing that statement?

    http://www.youtube.com/watch?v=tRVUOGUmxJI&feature=youtu.be&t=7s

    Thank you.

    Social Security works exactly the same way insurance works. It is not an investment account. It is not a pyramid scheme. You can tell because pyramid schemes fraudulent investment accounts ,whereas social security is not an investment, and not fraudulent and the payout is guaranteed by law.

    Please stop promoting a pernicious lie spread by wealthy investors greedy to steal the financial security of americans in order to play the ponies on wall street for the benefit of no one but themselves.

  • http://blog.trenchcoatsoft.com Ross

     The cap on contributions is not really the problem — the system needs to take in enough money from each contributor to cover all the beneficiaries. Assuming those numbers grow at comparable rates (which they more or less have to over long periods of time, or else you have some kind of social collapse and social security’s solvency is the least of your problems).

    The problem is that there are people out there making so much more than the average person that a sizeable chunk of “all the money” is tied up in their above-the-cap salaries.

  • http://lliira.dreamwidth.org/ Lliira

    And they’re keeping everyone else’s salaries down as well.

  • Carstonio

    The problem is that there are people out there making so much more than the average person that a sizeable chunk of “all the money” is tied up in their above-the-cap salaries.

    Why wouldn’t that problem be alleviated somewhat by lifting the cap? I’m not sure why the problem you describe is separate from the cap. I would think the best way is to have everyone pay a certain percentage of their income in FICA.

  • aunursa

    Social Security works exactly the same way insurance works.

    I’m not sure about that.  Unlike social security, some forms of insurance are optional, and even for those that are required, there are several different options.  People purchase insurance in order to protect their financial position from unexpected losses/expenses, whereas social security provides coverage for expected retirement expenses.  I don’t think that an insurance company can unilaterally change the terms of an insurance policy during the policy period. (They could change the terms at renewal, and the policyholder can choose whether or not to continue with the same policy or company.)  The government can change the terms of social security — raising the age for benefits, reducing benefits, providing means testing, etc.

  • JustoneK

    In what way is regular more private insurance optional?

  • Loki100

    Yeah. The Baby Boomers were incredibly selfish assholes. I blame some combination of the Cold War and being born after the hardships of the Depression and WWII. Generation X more or less checked out of the building the moment they were born. The only bright light is that the Millennials, growing up with the War on Terror, the internet, and the great recession, seems to be a generation of selfless (if self-righteous) do-gooders.

    I really hope that trend allows them to over take the Baby Boomers and what remains of the Silent Generation.

  • WalterC

    Pretty much, yeah. It’s not like the FICA tax or, indeed, any aspect of the Social Security system is set in stone or somehow unalterable in any possible way. Nominally the revenue from the FICA tax is separate from overall government revenues but that’s really not true (or possible) under the standard rules of government accounting anyway; there is no particular reason why the Social Security program and its associated taxes cannot be handled through the general appropriations process. 

    Well, there are reasons but all of them are political. We must still grapple with them but there’s no reason to act as if they are set in stone.

  • EllieMurasaki

    People purchase insurance in order to protect their financial position from unexpected losses/expenses, whereas social security provides coverage for expected retirement expenses.

    Funny, my health and dental insurance covers my expected expenses in those categories. Not in their entirety, I have copays, but mostly.

    Strangely enough, I’m in favor of government-funded universal medical and dental and social security, and in favor of the current system for auto and home insurance.

  • http://lliira.dreamwidth.org/ Lliira

    Generation X puts in more volunteer hours than any other generation since people started keeping track. It’s been true since I was a teenager and it’s still true today. The myth that we “checked out of the building” is just that: a myth. We didn’t take to the streets in huge masses over a war because there was no draft, and because there weren’t nearly as many of us as there were of Baby Boomers, and for that we get pilloried as not caring. But it is bullshit.

    Also, you think growing up in the War on Terror is bad? Try growing up during the Cold War.

  • Carstonio

    As a member of Generation X, my theory is that too many of my cohorts
    had their politics defined early by the Iran hostage crisis. They
    learned to falsely equate the Carter approach to foreign policy as
    timidness and weakness, favoring instead the US acting as the world
    bully.

    And the Boomers still seem bitterly divided over the 1960s after all this time. Some have remained do-gooders and some have remained Archie Bunker Jrs.

  • http://www.facebook.com/jon.maki Jon Maki

    In addition to what Lliira said, it’s worth pointing out that our host is himself (like many of us here) a member of Generation X.  I’m curious as to what this place would be like if he hadn’t “checked out of the building.”

  • P J Evans

     I think that was what I was saying.

  • P J Evans

     This boomer will be surprised to be alive in fifteen years. *grumble*

  • P J Evans

     It’s a trust fund. They use it to balance (or these days to unbalance) the budget, even though it isn’t a budget item.

  • stardreamer42

    I thought you were trying to lift yourself above that, but perhaps, I’m wrong

    More ad hominems. Bravo.

    FREE SPACE

    I suppose you don’t really like any sort of freedom unless it suits your agenda, do you?

    Now, however, I have learned from experience that the comment section of
    this blog is much less of a place for intelligent discourse than it is a
    place for propagandist positions and trolling.

    Bingo!

  • http://twitter.com/shay_guy Shay Guy

    Question: Do you seriously think this? Or are you simply ferrying a talking point over from the other side for the sake of “balance”? If one group of people says 2+2=4 and another says 2+2=5, it’s not necessary to tell the first, “Well, I heard it was five.” And a simple Google search can give you any number of reasons why this one isn’t true.

    Workers pay $X in taxes. Retirees get $Y during the same period. If X>Y, put $(X-Y) in the trust fund; if Y>X, take $(Y-X) from the trust fund. If Y>X and the trust fund is running low, either increase X or decrease Y.

    Anything wrong with the logic there?

  • http://twitter.com/shay_guy Shay Guy

    I think that part of the issue is when a succeeding generation is smaller than the proceeding one, the relative burden becomes a lot heavier, and if that newer generation is in an economic climate where they are paid little and have few opportunities there is that much less to pass on to the retirees.

    Now you’ve got me thinking about Japan’s economic problems. :(

  • Morilore

    As a “Millenial,” I’m not sure I believe all this “X demographic cohort is A personality characteristics, Y demographic cohort is B personality characteristics” stuff.  I mean, I’m sure there is some truth to it, but weren’t “Boomers” radical and revolutionary when they were our age?  

  • Katie

    As are host has pointed out, the biggest problem that Gen X has is that there just aren’t that many of us.  All of the allegedly revolutionary attitudes and behaviors in Generation Y are present in Generation X, which makes sense when you consider that Gen X and Gen Y are both largely made up of the children of Baby Boomers.  The difference is that Gen X was small enough to ignore, allowing the Boomers to dominate politics and culture for for another decade or so.

  • http://rightcrafttool.blogspot.com/ Sign Ahead

    Thanks, stardreamer42. I’m gonna be laughing about that for days.

  • http://www.nicolejleboeuf.com/index.php Nicole J. LeBoeuf-Little

    It seems like this is another problem that comes down to unemployment.

    Reduce unemployment, you increase the people receiving paychecks and therefore paying into the Social Security system.

    This is related to a couple of things noted above, the bit about lowering SS payout age = more people retiring when they want = freeing up more jobs, and the bit about how the problem is how much money is tied up in fewer people with above-the-cap paychecks. And the bit about how immigration (documented or otherwise) is actually helping, not hurting, because it’s more people employed in and therefore paying into the system.

    Making more jobs and employing more people! What can’t it help?

  • EllieMurasaki

    If they’re illegal, they have no number to identify them to the IRS and are therefore not paying any tax except sales. Or so I understand.

  • Derekl1963

    I’d suggest you actually research Social Security – because neither you, nor  Dan Crawford or John Harvey has a clue what they’re talking about.  Yes, we have a surplus, no we won’t have it forever – because over the next few decades more money will be taken out to pay retirees than will be coming in from existing workers.  The problem however is that there’s not much money in the trust fund – it’s mostly a stack of IOU’s from the Treasury.  If Congress doesn’t redeem those IOU’s on schedule, the fund goes broke.  If Congress does redeem them, the fund goes broke a little later than otherwise because people are living longer post retirement than planned on, and because the worker/retiree balance is going to be out of whack for decades as various demographic bumps work their way through the system.

    The only way to avoid the fund going broke is to either raise the social security tax (considerably), or to cut the benefits being paid out (equally considerably).  Neither is politically palatable, so *both* parties are trying to find ways to avoid dealing with the reality of the need to start paying back those IOU’s and the need to start thinking hard about what will happen in the 2020′s and beyond.

  • EllieMurasaki

    You know, I’m still not clear on why a coin with “$1 TRILLION” stamped on it getting minted, deposited in the Treasury, and put on display in the Smithsonian is an invalid means of being rid of the debt, including what the Treasury owes the SS trust fund.

  • P J Evans

     Actually, they have numbers that don’t belong to them, so they pay in, but can’t collect later.


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