How Not to Panic About Social Security

Today's myth is from Paul Krugman’s erroneous How not to Panic About Social Security (2-28-23).  (A far more accurate, complete, useful and relevant take can be found at https://socialsecurityworks.org/).  Sloppy articles like this on such an important topic are my pet peeve.

First error:   "I haven’t studied the detailed history of the program’s origins [that would be advisable next time, Paul], but I’m pretty sure [what if I used that metric in my practice, pretty sure?] that it was set up to look like an ordinary pension fund [emphasis mine] because that made it politically easier to sell. . . it was designed to encourage misconceptions”
In reality, from day one its mission was inherent, transparent and politically popular as well:  To prevent poverty among widows, orphans and the elderly.  And later, the disabled. It was, and is, wage insurance.  It never was promoted as anything like a Federal pension.  And the only sales strategy needed was the Great Depression and 25% unemployment.  However, Social Security could not be "sold" to big business and the church.*  So Roosevelt just overpowered them.

 Next error:  "for the first half-century. . .it had almost no assets. . . it has always operated on a pay-as-you-go basis".  Totally wrong!  The trust funds were built up for three years before benefits began to be paid, at which point its balance was $2 bil.  The lowest trust fund balance ever was at the end of its first year in 1937:  $766 million.

Cavalierly written articles like Krugman's encourage people to file for benefits incorrectly, often losing hundreds of thousands in benefits.

But he's not the only one.  Ric Edelman writes in ThinkAdvisor:

"FDR [Franklin Delano Roosevelt] assumed that you’d retire at 62 and die by 65; the Social Security system worked well when people paid into the system for 40 years and withdrew from it for three years. The system was never meant to pay benefits to anyone for 20, 30 or 40 years."

This is simply not true.  FDR "assumed" nothing.  All he did was sign the legislation.  The actuaries serving on FDR's Committee for Economic Security (chaired by the brilliant Frances Perkins) did such a good job that they were only two years off on longevity estimates for beneficiaries, 90 years later.  Longevity risk was one of its main targets.

To his credit, Krugman goes on to point out that the rationale for further raising the Full Benefit Age- increasing longevity -simply isn’t valid for the wage earners who most depend on Social Security.  The bottom half of wage earners have gained one year in life expectancy since 1921.  And recently their longevity has been slipping  The top half of wage earners have gained seven years. 

The source of the problem is not the decline in number of workers in relation to beneficiaries.  That claim makes my hair catch fire.  The real funding problem is two-fold:

1. That only wages, or "earned" income, are taxed for Social Security.  And then only up to $160,400 taxable income.  The wealthy have gradually shifted their income sources to be tax advantaged as well as exempt from Social Security taxation.
2. That real wages, adjusted for inflation, have been flat for 30 years.

Social Security tax shortfalls will begin happening not because there aren't enough workers but because more and more of our economy's financial rewards are going to fewer and fewer people in forms that are not subject to Social Security tax.

What better place to seek additional funding for the Social Security trust funds than the top half of income earners rather than just wage earners?  That would also solve the problem of a shrinking pool of contributors.

 Nobody wins from anyone living in poverty, although many believe they do.  Everyone wins when no one lives in poverty, although many think they don't.

Gary Duell

*(big business because they don't like to pay any taxes at all, the church because they thought it would encourage sloth.).

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