It’s a Sunday Morning and an excellent time to check out Social Safety. SS a program masking hundreds of thousands of individuals within the US. A program which Trump and Elon (who capabilities in some kind of capability for him) want to alter, eliminate, or minimize the variety of folks from it.
Indignant Bear have proposed a repair for Social Safety as proposed by Dale Coberly and Bruce Webb. You will get a sense for the arguments for and in opposition to right here, right here, and right here. Three completely different authors, not counting myself, discussing Social Safety, its profit, and why it’s sustainable.
We’ve got handed the time restrict of imposing a one-tenth of 1% improve in SS withholding as an answer. It must be a extra aggressive improve per 12 months now. Not that such a rise was not imposed upon us in previous years. It was (if my reminiscence nonetheless has not failed me). It’s that easy to repair. Tenths of a % improve in withholding per 12 months . . .
Anyway, a brand new article by Paul Krugman confirmed up in my inbox and I’m sharing it at Indignant Bear for its readership.
The Clear Little Secret of Social Safety
It’s a fairly good program, and we (the US) can afford it.
Social Safety is within the crosshairs of the Musk/Trump administration. First Musk got here out with the declare that tens of hundreds of thousands of useless individuals are nonetheless receiving advantages. This declare has been totally debunked, however nonetheless made its manner into deputy president Trump’s massive speech Tuesday. Then Musk started declaring that the 90-year-old program is a Ponzi scheme.
The primary declare appears to mirror the truth that the Dunning-Kruger children — the largely very younger staffers DOGE despatched into the Social Safety Administration, too incompetent to see their very own incompetence — didn’t know learn how to interpret SSA databases. The second declare confirmed that Musk doesn’t perceive what Social Safety is or the way it works.
To be truthful, nevertheless, Musk isn’t alone in his lack of information, though he could also be distinctive in his mixture of vanity and ignorance. So I assumed I’d commit this week’s primer to the fundamentals of Social Safety. Past the paywall you’ll discover:
- How Social Safety works from staff’ viewpoint
- The way it’s financed
- Why the problem of retaining the system going isn’t as arduous as you suppose
How Social Safety works
In the event you work for another person, as most of us do, your pay stub exhibits your gross wage with a deduction for FICA — brief for the Federal Insurance coverage Contributions Act. A part of this deduction is for Medicare, which I gained’t discuss immediately. However 6.2 % of your paycheck, as much as a most of $176,100, goes to Social Safety, matched by an equal contribution out of your employer. Solely 6 % of staff earn greater than that most, so the nice majority of staff contribute 12.4 % of their earnings to Social Safety. In return, they begin receiving advantages as soon as they attain a sure age — 62 in the event that they’re keen to simply accept lowered advantages, 67 if they need full advantages.
To an informal observer, Social Safety seems to be like an old school pension plan: you pay in throughout your working years, then get a refund when you attain retirement age. And there’s an excellent purpose Social Safety seems to be that manner: When FDR created the system he needed it to appear to be a private-sector pension plan, in an effort to keep away from criticism that it was “socialist.”
Whereas there are essential options of Social Safety which might be like a non-public pension plan, there are two crucial variations.
Like a non-public pension plan, Social Safety advantages do rely upon how a lot you earned, and therefore how a lot you contributed, throughout your working years. In truth, that’s the one factor that issues. The Social Safety system is remarkably unintrusive into your private life: the system doesn’t ask for proof that you just want the cash, it simply pays out.
However, in contrast to a non-public pension plan, the connection between what you contribute into Social Safety and what you get out isn’t one-for-one. There may be, in reality, some redistribution of earnings inside Social Safety. People who earned very low wages get most of these wages changed by SS advantages. However excessive earners are handled a lot much less generously.
Right here’s the connection between month-to-month earnings when you had been working and the proportion of these earnings changed in 2025:
If this makes Social Safety appear to be a a lot better deal for low-wage staff, that’s as a result of that’s, in reality, the intention: This system was quietly designed to be progressive, serving to low-wage staff rather more than higher-wage staff. And one of many clear little secrets and techniques of Social Safety is it has labored very nicely to attain that goal: poverty among the many aged, which was pervasive, has been nearly utterly eradicated.
The second manner that Social Safety differs from an unusual pension plan is that it’s backed by comparatively few property compared to its obligations. Most of immediately’s retirement plans are “defined contribution”, through which your employer is barely obligated to place a sure cash into an funding account to fund your retirement. Nonetheless, many staff nonetheless have conventional “defined benefit” plans, through which you’re owned a set quantity each month to your retirement. Outlined profit plans are legally required to carry sufficient property to cowl their anticipated future funds — even when the corporate providing the plan goes bankrupt.
Social Safety, nevertheless, has “only” $2.7 trillion in property. That may sound like a giant quantity, however we’re speaking a few very massive system. If it needed to rely solely on these property to pay advantages, the system would run out of cash in lower than two years.
Due to this fact, in an effort to meet its obligations, Social Safety is determined by the persevering with influx of cash from FICA — that’s, funds into the system by present staff. Presumably Elon Musk is conscious of this truth, main him to name Social Safety a “Ponzi scheme.”
In typical vogue, Musk apparently didn’t verify with anybody who understands Social Safety earlier than saying it to be a fraud. If he had checked, he would have discovered that Social Safety actually isn’t a pension fund. It’s, as an alternative, a authorities program supported by a devoted tax — certainly one of many examples of that follow, though Social Safety is the largest.
Paying for Social Safety
Governments acquire cash by quite a lot of taxes. On the federal stage the large ones are the non-public earnings tax, the company income tax, and payroll taxes — as a result of that’s what FICA actually is. On the state and native stage the combination contains earnings taxes in some however not all states, gross sales taxes and property taxes.
Governments additionally spend cash on quite a lot of issues. On the federal stage, the primary classes are retirement (Social Safety), well being care (Medicare and Medicaid) and protection. On the state and native stage the large gadgets are schooling and legislation enforcement.
The best manner to consider authorities funds — and likewise, for many functions, the best manner to consider them — is to think about all the things going into or popping out of 1 massive pot of cash. Taxes put cash in, whereas authorities applications take cash out.
What if the cash going out exceeds the cash coming in? Then the federal government borrows to cowl the distinction. Typically that borrowing is an effective factor, serving to to spice up a depressed economic system. Typically it’s a nasty factor, diverting funds that the personal sector might need put to productive use. And even deficit doves like myself fear that beneath sure situations governments could borrow sufficient to lift considerations about their solvency.
I wrote about these points two weeks in the past. However to know the Social Safety dialogue you must know that the one-pot image of presidency finance is a bit oversimplified. Why? As a result of governments typically hyperlink explicit taxes to explicit applications.
Most income goes into a typical pot, and most spending comes out of that pot. However some taxes are devoted to particular applications, which due to this fact have their very own sub-budgets.
A reasonably acquainted and, I hope, not too controversial instance is the Freeway Belief Fund. Federal taxes on gasoline and diesel gas, plus some smaller vehicle-related taxes, are used to pay for spending on highways and mass transit.
Why assign sure taxes to sure applications? Mainly, it’s about politics. It’s simpler to get voters to simply accept new taxes or tax will increase in the event that they’re explicitly linked to paying for one thing folks need. To take a latest instance, New York’s new congestion cost is especially supposed to cut back congestion (duh), nevertheless it’s additionally a brand new income supply, and the plan was bought partly by linking the brand new income to funding in enhancing public transit.
Now, the separation of particular person applications from the overall finances is so much much less inflexible in follow than it could look in a stylized image. Particularly, it’s fairly widespread to “top up” essential applications if their devoted income sources appear insufficient. For instance, over the previous couple of many years Congress has repeatedly allotted extra funds for transportation infrastructure over and above the cash raised by gas taxes. However such allocations require new laws, whereas utilizing cash from devoted taxes doesn’t, so it will be mistaken to say that the system of devoted taxes is meaningless.
Which brings us to Social Safety, which is supported by FICA — a tax levied on everybody’s wages.
Individuals like Musk appear to think about that staff placing cash into Social Safety are like, say, small buyers shopping for $Trump cash, whose naivete is the one factor permitting earlier buyers to money out. However paying payroll taxes isn’t a voluntary particular person resolution; like paying fuel taxes on the pump, it’s the legislation. And there’s no purpose in precept why Social Safety couldn’t be run indefinitely on a pay-as-you-go foundation, with taxes on present staff paying for retirees’ advantages. In truth, that’s roughly how the system was run till the Nineteen Eighties.
By 1980, nevertheless, it was apparent that some changes must be made. Why? As a result of the child boomers had been getting older.
The demographic problem
After World Battle II the troopers got here dwelling, the economic system boomed, the suburbs opened up and People had a lot of youngsters. The Child Growth is mostly thought-about to have run from 1946 to 1964.
Kids finally turn out to be working-age adults. Working-age adults, nevertheless, finally turn out to be seniors, who acquire Social Safety advantages.
So there was a surge within the “old-age dependency ratio,” the share of adults over 65, as the vanguard of the child growth hit retirement age:
This created an apparent financing drawback for a program that gives advantages to seniors, supported by a tax on staff. Nonetheless, this was an issue everybody paying consideration noticed coming many years upfront. So Ronald Reagan convened the Nationwide Fee on Social Safety Reform, usually known as the Greenspan Fee, to move off the predictable financing drawback.
Following the Fee’s suggestions, Congress elevated FICA and likewise set in movement a gradual rise within the full-benefits retirement age. You’ll be able to see, by the best way, what I imply concerning the political benefits of devoted taxes. If Reagan had merely stated, “Now that I’ve given big tax cuts to high earners, I’m going to raise taxes on ordinary workers,” there would have been a serious backlash. However what he really stated was, in impact, I’m growing contribution charges to safe the way forward for Social Safety, and the general public went alongside.
The aim of those adjustments was to allow Social Safety to run substantial surpluses in the course of the years when boomers had been nonetheless working and never amassing advantages. The buildup of those surpluses created a considerable Social Safety belief fund, which peaked in 2020 at $2.9 trillion and remains to be, as we’ve seen, $2.7 trillion.
Is that this belief fund “real”? No and sure. It consists fully of U.S. authorities debt, which signifies that it’s simply claims by one a part of the federal government on the remainder of the federal government. So you could possibly say that it’s simply an accounting fiction. However it has essential authorized and political implications. We’ve now reached the purpose the place profit funds are greater than income from FICA. However for now, the Social Safety Administration can keep funds by drawing on the belief fund, with no fast want for laws to bail the system out.
The Greenspan Fee’s reforms had been initially supposed to maintain the system working with out extra interventions till 2060. This nearly actually gained’t occur; at this level it seems to be as if the belief fund will probably be exhausted round 2034 or 2035. The principle purpose for the shortfall is rising inequality: a rising share of wages are going to folks making greater than the Social Safety most, and earnings above the utmost isn’t taxed.
In any case, as soon as the belief fund is gone, one thing must occur. No, Social Safety gained’t go “bankrupt.” Even with the belief fund gone, payroll tax receipts will nonetheless cowl 77 % of scheduled advantages. However seniors would, understandably, be livid if their advantages had been abruptly minimize.
So the almost certainly final result — or no less than that’s my guess — is that Congress will discover a manner to supply Social Safety with extra money. One apparent manner to do that could be to lift, perhaps even get rid of, the FICA most. Solely 6 % of staff earn greater than that most, however a few of them earn a lot extra, so this may elevate a considerable quantity.
I’m not wedded to this answer; one drawback with it’s that high-income People get numerous their cash from funding earnings, which an prolonged payroll tax wouldn’t contact. However a method or one other, we must always preserve Social Safety going, not with harsh profit cuts, however by discovering cash to fill the hole as soon as the belief fund is exhausted.
However can we afford to maintain Social Safety within the face of an ever-aging inhabitants? Sure.
It typically appears to me as if discussions about Social Safety are caught in a time loop the place it’s at all times 2005, and Very Severe Individuals concern ominous warnings about what’s going to occur when the grey wave of child boomers hits the system. However it’s 2025, and so they (we) are already right here. A lot of the fiscal affect of an growing older inhabitants is already within the finances numbers.
And the opposite clear little secret of Social Safety is that it gained’t be too arduous to soak up what’s left of that affect, given the political will.
Right here’s a comparability of Social Safety revenues and outlays in 2005, when George W. Bush tried to make use of dire warnings concerning the future to denationalise the system; proper now; and 2035, which seems to be just like the 12 months the belief fund will probably be exhausted:
As you possibly can see, the system has in reality moved from surplus to deficit, and can transfer considerably deeper into deficit over the following decade because the final of the child boomers begin amassing. And sustaining full advantages past that time would require discovering a major sum of money — 1.3 % of GDP — a sum that can develop, however solely slightly, over time.
The query you must ask is, how massive is 1.3 % of GDP? It’s not a trivial quantity, nevertheless it’s not a crushing burden both.
Right here’s a degree of comparability: Home Republicans simply handed a finances decision calling for $4.5 trillion in tax cuts, primarily for the rich, over the following decade. If we examine these cuts with CBO financial projections, they quantity to … 1.2 % of GDP.
So roughly talking we might elevate sufficient cash to maintain Social Safety as it’s just by not letting Republicans minimize taxes for the wealthy. OK, I do know that we might have a deficit drawback even with out these tax cuts. However you possibly can’t concurrently help the G.O.P.’s tax agenda and declare that Social Safety is in determined monetary straits, which might solely be solved with radical cuts or privatization.
There’s much more I’d prefer to say, however this primer is already lengthy, so I’ll put it aside for future posts. For now, let me depart you with three key factors:
- Social Safety isn’t a Ponzi scheme or a rip-off; it’s only a authorities program supported by a devoted tax, which is completely regular
- It’s a extremely profitable program, which has vastly improved older People’ lives
- It faces a monetary shortfall, however the shortfall isn’t that massive, and sustaining Social Safety is nicely inside America’s means.
Above all, don’t let Elon Musk and his children panic you into considering that we should destroy Social Safety to put it aside.
