With everything else that is going wrong in the country and the world in 2020, the one policy issue that I imagined was simply not going to pop back up on the radar screen was Social Security. True, there is always an uninformed audience in the media that falls for fantastical tales of doom and gloom in our retirement system, but with so much genuine doom and gloom in the world, I had hoped that Social Security would escape unscathed.
But Donald Trump has now come up with a truly ridiculous short-term policy that is part of a long con, and it might actually end up destroying Social Security altogether. As I explain below, Social Security would be fine if it were left alone, even under bad long-term scenarios. There are also straightforward ways to make it even better.
Trump’s recent talk, however, for the first time raises the very real possibility that—much like everything else he touches—the entire Social Security system could be burned to the ground. We cannot allow that to happen.
The Press and the Public Fundamentally Misunderstand Social Security, and They Always Have
The problem begins with already-dangerous levels of public ignorance and political opportunism regarding Social Security. Reporters and pundits truly do not understand much if anything about the system, so when they hear people say (for example) that the system’s Trust Fund might be depleted at some point in the future, a Chicken Little response quickly follows.
Indeed, for many years, I knew that I would have to write columns here on Verdict or elsewhere as soon as the trustees of the Social Security system issued their annual reports. The news cycle would quickly be dominated by stories about the system going “bankrupt,” “belly up,” or “running out of money.” I would then feel honor-bound to publish a column pointing out that this is nonsense, even though I had written pretty much the same column the previous year (and the year before that, and so on).
As I noted in 2018, however, I had at that point gone almost two years without writing about Social Security here on Verdict. It was hardly a coincidence that the Republicans’ retirement fearmongering had stopped at the end of 2016. Trump, after all, had promised his older, White base of voters that he would leave Social Security alone; and because the system was fundamentally sound, there was no need for anyone to make a big deal about it. And with Trump’s relentless noise machine running full blast on other issues, everyone finally seemed willing to leave Social Security alone.
But, skeptical readers might be asking, how can it be that Social Security is fundamentally sound, when “everyone knows” that it is not financially sustainable. The simple answer is that what everyone thinks they know is wrong. For readers who might understandably not have the time or inclination to read my earlier columns on the topic, I will briefly summarize here.
Social Security was always designed to be what is known as a pay-as-you-go system, or PAYGO. Under PAYGO, a system takes in revenues and immediately uses them to pay benefits, with current workers supporting current retirees (knowing that they will in turn be supported in retirement by younger generations of workers). This means that, unless something unusual happens, there is no need for the system to build up a financial surplus, and total revenues received will equal total benefits owed each year.
The “something unusual” that affected Social Security was, of course, the Baby Boom. Because of that surge in post-World War II births, the 1980s saw the entry into the labor force of untold millions of young workers. For the short term, that was a good thing for Social Security, because it meant that there were relatively more workers paying revenues into the system than there were retirees receiving benefits. And because those workers were becoming ever more productive, they could easily support Social Security recipients.
Indeed, it would have been possible to cut payroll taxes or to increase retirement benefits, at least in the short term. But in the longer term, we knew that the Baby Boom would create a mirror-image problem when they neared retirement. Even with ever-rising worker productivity, the surge of retirees starting in the 2010s would have strained the system.
Policy makers in the early 1980s came up with an extremely smart and highly disciplined response. Rather than cutting payroll taxes or increasing benefits, they increased revenues and left the benefits formula unchanged, resulting in a huge surplus that accumulated for decades. That surplus is what we call the Social Security Trust Fund, and it simply reflects the total excess revenues that Baby Boomers and their children paid into the system starting in 1983, plus interest.
The Depletion of the Trust Fund is Not Bankruptcy or Anything Like It
Fast forward to the 2010s, and everything was working as planned. Importantly, that plan necessarily involved reaching a date at which the Trust Fund would be depleted—very much on purpose. From that date forward, we would be back to a PAYGO system, with annual benefits matching annual revenues.
Yet the shocking levels of innumeracy and financial illiteracy among reporters and politicians led far too many people to say that reaching zero in the Trust Fund would mean that the whole system is flat broke.
For example, a group called GovTrack.us bills itself as “the leading non-governmental source of legislative information and statistics.” Whether or not it provides accurate information, at least one of its writers clearly does not understand how Social Security works, offering this whopper:
Social Security’s costs are projected to overtake its expenses starting next year, in 2020. Worse still, the program is projected to become entirely insolvent—meaning they essentially won’t have any money left to pay out benefits at all—in 2035. (See page 5 in that PDF link.)
The PDF file in question is the Social Security trustees’ 2019 annual report, and on the fifth page of that document, the trustees tell us that if their possible-but-not-definite forecast that the Trust Fund will reach zero in 2035 turns out to be true, “scheduled tax income is projected to be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2093.”
So the Social Security trustees say that, if the Trust Fund reaches zero in 2035, the system would pay about 75 percent of “scheduled benefits” over the following six decades. GovTrack.us, however, says that this means that the system will be “entirely insolvent—meaning they essentially won’t have any money left to pay out benefits at all—in 2035.” No benefits at all, or three-quarters of scheduled benefits? Even if we would prefer to be able to pay full scheduled benefits, paying 75-80 percent (which is what the trustees predict) is hardly being “entirely insolvent.”
Unfortunately, this level of sheer ignorance is hardly limited to one obscure website. A Politico column a few months ago carried this headline and sub-headline: “Coronavirus could push Social Security to insolvency before 2030: ‘This is a train wreck that’s going to happen and you can see it coming.’” The very best that one can say is that “insolvency” might plausibly be defined as “not being able to pay ‘scheduled benefits’ in full,” but most people will not read it that way. They will instead think that Social Security will simply disappear, which is utterly false.
The point that the Politico article was trying to make is that the reduction in payroll tax revenues caused by 2020’s economic slump is going to deplete the Trust Fund sooner than expected. Again, however, that simply means that the system will move back to PAYGO sooner, not that it is going to go belly up.
Let me emphasize that I do not in any way think that it would be good to reduce Social Security benefits from scheduled levels. Indeed, if it were up to me, I would adopt something like the plan that Senator Elizabeth Warren has proposed to increase retirement benefits and to finance them sustainably.
My point here is simply that the system is already sustainable in the long run, with the only question being whether we will face a time in the next decade or two when we need to decide whether to allow benefits to be adjusted downward by 20 to 25 percent. That is, to say the least, not at all the same thing as saying that Social Security is doomed or anything like it.
The Trump Executive Order and His Ramblings About Social Security Taxes
Donald Trump, however, has now blundered his way into the Social Security arena, and his semi-coherent musings suggest that he might be willing to undermine our country’s entire retirement program.
An executive order that Trump signed last month, and that took effect earlier this week, delays some workers’ payments of payroll taxes for Social Security from the end of this year to the beginning of next year. Interested readers might find my Dorf on Law column from two days ago useful in understanding the details of the order, but the bottom line is that workers earning less than about $100,000 per year will be able to pay no payroll taxes from September through December but would then pay double their payroll taxes from January through April 2021.
Trump’s order is a terrible idea in many ways, as I discuss in my column, but the one thing it does not do is to threaten the long-term stability of the Social Security system. Setting some minor details aside, the Treasury would collect the same amount of money over the next eight months under either the old system or Trump’s new one.
But it is Trump’s non-binding loose talk about what he would do next that is both fascinating and horrifying.
I should note that Republicans have long loathed Social Security, but as far as I know, they have never proposed anything that would make it impossible to pay retirees any benefits at all. George W. Bush’s 2005 proposal to divert funds from Social Security was a bad idea, but at least it included a proposal to make the diverted funds available to retirees—albeit subject to the vicissitudes and fees of the financial markets.
By contrast, Trump’s order includes a call for his Treasury secretary to “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.” That is, rather than having the money recouped in the first part of 2021, Trump would have the payroll taxes permanently forgiven.
What that would mean, as should now be clear, is that we would be moved closer to the date at which the Trust Fund reaches zero and we return to PAYGO. In essence, then, unless the Trust Fund ends up not being depleted because the economy does much better over the next decade than now seems imaginable, Trump wants to cut taxes today in order to cut Social Security benefits in about 2030.
I suspect that Trump thinks he will still be in office at that time, but even in that dystopian future, he would hardly worry about being blamed for something that happened in 2020. This, then, is a classic example of a politician promising pleasure now and hoping people will not think about the pain that will happen later. Trump has broken nearly every political norm, but here he is no different than any of the worst politicians who promise a free lunch and hope never to be held to account when the tab must be paid.
But wait, there’s more—and it is much, much worse. In his stream-of-consciousness remarks last month after announcing his Social Security order, Trump said: “If I win, I may extend and terminate. In other words, I’ll extend it beyond the end of the year and terminate the tax.”
If he were in fact to terminate the payroll tax, however, Trump would leave the Social Security system with no ongoing funding at all. We could not pay as we go, because we would no longer be collecting any money to pay out.
In that case, the remaining Trust Fund balance would be depleted within a year or two, and at that point the system truly would grind to a halt. There would be no money—none—from which the system could pay even a dollar of benefits starting in about 2022 or 2023 at the latest.
In other words, Trump’s unscripted and uninformed meanderings would, if taken seriously, do what Republicans have not been able to do since their forebears opposed creating Social Security in 1935: end the program outright, leaving tens of millions of retirees with no way to support themselves. (Half of all retirees depend entirely on Social Security, and all but a small number of fortunate people have only a small amount of savings and other income to supplement their benefits.)
But surely, this could not happen, could it? Trump did surprise me by making one good point, which is that we could finance Social Security with a different kind of tax. Indeed, I have long argued that we should supplement Social Security’s finances with an income- or wealth-based tax that is highly progressive, but that is quite obviously not what Trump would support—and Republicans actually like payroll taxes, because they hit middle class and poor people relatively hard, while Republicans and their rich donors hate income and especially wealth taxes.
What Trump is doing here has very strong echoes of his mismanagement of health care. Even though he has never delivered on his longstanding promise to create a “tremendous” program to replace the Affordable Care Act, he has nonetheless proceeded to try to destroy the existing system. All destruction, no creation.
Here, Trump is talking about simply eliminating payroll taxes, meaning that Social Security—and, by the way, Medicare (which also is financed by payroll taxes)—would be left with no money unless Trump surprised everyone by proposing a new, adequate tax to replace what he would destroy.
The good news is that Trump’s inane musings are unlikely ever to be turned into policy. On the other hand, we have spent the last four years being constantly surprised when his ill-considered ideas (travel bans, paramilitary troops sent to cities, and so on) suddenly become all too real.
We cannot sit by and let that happen again, especially for something as universal and essential as the support of Americans in retirement. Trump’s failure to understand Social Security (or anything else) could destroy people’s lives, unless he is stopped.