39*COSTSCENARIOSBASEDONECONOMICGROWTH,DATA:SOCIALINFLATION,SECURITYANDTRUSTEES’DEMOGRAPHIC 2020 FACTORS.REPORTTheSafetyNetFrays
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valueoftrustfundILLUSTRATION BY THOMAS COLLIGAN
◼ SOLUTIONS Bloomberg Businessweek August 31, 2020perceive the program as welfare rather than a mutual insur-
ance compact among workers. Democratic Representative
Richard Neal of Massachusetts, chairman of the Ways and
Means Committee, responded to Trump’s gambit with an
Aug. 14 statement saying, “Make no mistake: This is an
attempt to undermine Social Security entirely.”
On the other hand, drawing on general funds would
make it easier to pay scheduled benefits to the Baby Boom
generation without big hikes in payroll taxes. It could also
lessen inequality, since the IRS’s tax code is more progres-
sive—that is, with higher rates for higher incomes—than the
Social Security Administration’s. “The most likely scenario”
as the path of least resistance “is somehow general rev-
enues will be tapped” to help pay benefits when the trust
funds run dry roughly a dozen years from now, says John
Shoven, an emeritus professor of economics at Stanford.
Benefits are paid out of two trust funds, a big one for
old age and survivor benefits and a small one for disabil-
ity insurance. Since a formula change in 1983, the funds
have grown because receipts and interest have exceeded
expenses. Sometime this year—it’s not clear when—their
combined value is peaking at $2.9 trillion. Then it will be all
downhill, because benefits have begun to exceed the com-
bination of receipts and interest. The trustees’ report this
spring predicted the main fund would run out of money in
2034 and the disability fund in 2065. The Covid-19 pan-
demic is likely to accelerate the depletion of the main fund
by two or three years by reducing payroll tax receipts and
pushing people into earlier retirement, Shoven estimates.
Exhaustion of the funds doesn’t cause benefits to go
to zero, because fresh money will still arrive in the form of
payroll taxes on current workers. But that will cover only
76% of old age and survivor benefits, the Social Security
trustees estimated this spring.
Faced with this scenario, the usual response is to
choose from an unpalatable menu for fixing Social
Security’s finances, such as raising the retirement age,
choosing a stingier cost-of-living adjustment, or increas-
ing the payroll tax rate. Democratic Representative John
Larson of Connecticut, chairman of the Social Security
subcommittee of the House Ways and Means Committee,
is sponsoring the Social Security 2100 Act, which raises
benefits slightly while gradually lifting the payroll tax rate
for workers and employers from 6.2% to 7.4% and subject-
ing wages over $400,000 a year to payroll taxation.
But none of the choices on the menu undo the core
problem, which is that American society has aged. The
number of beneficiaries per 100 covered workers has
risen from 25 in 1965 to 29 in 2000 to 36 this year, and it’s
expected to reach 45 by 2040. And wages—the source of
Social Security financing—have shrunk as a share of the
economy. Labor’s share of the costs of the private, non-
farm business sector fell to 62% in 2018 from 68% in 2000,
according to the Bureau of Labor Statistics.Using general revenue would allow Social Security to
tap into sources of money that have grown as a share of
the economy, such as business profits. Capital’s share of
the costs of private, nonfarm businesses has risen to 38%
from 32% over the 18 years since 2000, the BLS calcu-
lates. That trend could continue if automation wipes out
more jobs while raising income from investments.
Trump’s intentions on the financing of Social Security
have been unclear. On Aug. 8 he ordered Treasury
Secretary Steven Mnuchin to defer some payroll taxes for
the period from Sept. 1 through Dec. 31 as a way to com-
bat the Covid-19 slump by leaving more money in work-
ers’ pockets. Trump went much further in spoken remarks
that day in Bedminster, N.J., while signing the directive,
saying, “If I’m victorious on Nov. 3, I plan to forgive these
taxes and make permanent cuts to the payroll tax.” OnAug. 12 he told reporters at the White House, “We’ll be ter-
minating the payroll tax after I hopefully get elected.” But
aides to Trump said that wasn’t actually the plan. White
House Press Secretary Kayleigh McEnany said on Aug. 13
that Trump wanted nothing more than “a permanent for-
giveness” of the four months’ worth of payroll taxes. “The
president’s very clear on this matter,” she said.
Connecticut’s Larson says there’s an “esprit de corps”
among Social Security recipients that would be strained
if the system relied on general revenue. But that sense of
togetherness, assuming it exists, will get more strained
if the system’s finances are fixed on the backs of high
earners, either by raising their taxes or cutting their ben-
efits. (Fixing it on the backs of low earners is, for good
reason, a political nonstarter.) Making Social Security
moreprogressivebychangingthetaxandbenefitfor-
mulastohelplower-income families is probably the right
move economically, but it will inevitably make the pro-
gram seem more like a means-tested transfer program.
In which case, why not go ahead and truly make it a