According to a verification team that includes Joseph Cordes, professor of economics at George Washington University, prior to 1983 Social Security income was not taxable. In 1983, Joe Biden voted in favor of taxing 50 percent of Social Security. As the professor notes, this was a bipartisan measure, so it’s not quite fair to blame the Delaware Democrat alone. In 1993, on the other hand, another measure increased the amount of taxable Social Security benefits from 50 percent to 85 percent. Sen. Biden and 49 Democrats voted for the measure, with Republicans united in opposition and Vice President Al Gore breaking the tie. 

In 2020, some workers who have lost jobs may opt to begin collecting Social Security at age 62, their first opportunity. Workers should understand that taxation of retirement benefits is hardly their only concern. At 62 they get their lowest possible payout, and if they opt to supplement Social Security with earnings from work, the government will deduct $1 for every $2 they earn beyond the limit of $18,240, hardly a princely sum. At full retirement age, 66 years and eight months, the limit is $48,600. Workers are better able to perform at 62 than 66, so the limitations make little sense. 

California government workers, by contrast, can retire as early as age 50, with gold-plated defined benefit plans. In some cases they keep on working at a different government job with no penalty whatsoever. The Federal Employees Retirement System (FERS) provides benefits from three sources, a basic benefit plan, Social Security, and the Thrift Savings Plan (TSP), whose contributions are tax-deferred. 

If embattled workers thought that benefits package is better than their basic Social Security, it would be hard to blame them. Workers could also be forgiven for thinking that whatever happens on November 3, those inequities are not likely to change.

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That’s the assessment of AEI resident fellow James Capretta, who indicates that the reckoning will mean big changes for mandatory entitlement programs whose spending has been running on autopilot for years, such as Social Security, Medicare, and Medicaid, which together represent the majority of future federal spending.

Spending, Capretta argues, will become even more difficult to sustain because of the mountain of debt the U.S. government has been accumulating to fund economic relief from the coronavirus pandemic and related government policies responses.

... forecasts of rising debt over the long run can effect economic performance even before the problem is on the doorstep. The U.S. is still viewed internationally as having the strongest economy, and the dollar is the world’s reserve currency. But perceptions can change, and will, if the U.S. remains on course to run up debt in excess of 200 percent of GDP, which is now a real possibility. Countries get into trouble when they struggle to extract sufficient revenue from their citizens to cover current obligations and service accumulated debt. The U.S. is not at that point, but could be soon. CBO estimates debt at 150 percent of GDP would necessitate net interest payments equal to 7.2 percent of GDP in 2050. These payments would come at the expense of the immediate needs of voters, and would benefit many foreign holders of Treasury debt instruments.

Capretta lists five steps that the U.S. government could take to close its wide budget gap, steps he believes could be phased in gently to put entitlement spending on a more sustainable path without greatly disrupting the lives of Americans who depend on these programs.

1. Automatically index the age for Americans to receive full Social Security retirement benefits, to stabilize the ratio of retirees to workers.
2. Progressively adjust Social Security benefits, by increasing the amount Americans with the lowest lifetime incomes receive and reducing the amount Americans with the highest lifetime incomes receive.
3. Establish personal retirement accounts for Social Security beneficiaries, to improve the solvency of the program by partially offsetting the amount of money that would otherwise have to be paid to retirees from taxes paid by working Americans.
4. Index the amount of Medicare premium support to the average cost of all competitive Medicare plan options, which the program’s beneficiaries can then use to pay toward the full cost of the coverage they choose each year.
5. Enroll Americans who are eligible for both the Medicare and Medicaid programs into a mandatory managed care program.

The last item is especially attractive because a disproportionate share of Americans killed by COVID-19 contracted the coronavirus in nursing homes, which house millions of Americans who qualify for both Medicare and Medicaid. Capretta argues that an effective managed care program would minimize the need for the expensive nursing home stays.

If that reform had been in place before 2020, these programs would be more fiscally sustainable and dually eligible Medicaid and Medicare beneficiaries would be getting better care. Moreover, fewer Americans would have been at put at risk of dying from COVID-19 because they wouldn’t have required longer stays in nursing homes.

Done right, reforms such as Capretta’s can both save lives and repair the U.S. government’s deteriorating fiscal situation.

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According to Social Security’s trustees, the Old Age and Survivors’ Insurance Trust Fund will run out of money in 14 years, meaning that beginning in 2035, all of Social Security’s beneficiaries will have their monthly income checks slashed by 21 percent.

Here’s the chart from the Trustee’s report that shows that happening under the Trustees’ intermediate (“most likely”) assumptions:

Social Security Trustees’ Report: Figure II.D2 – OASDI Income, Cost, and Expenditures as Percentages of Taxable Payroll

But it’s going to be much worse than that.

As the Social Security’s Trustees are communicating in a special message to the public on the report’s web site, they make clear their assumptions did not include any aspect of the coronavirus pandemic that has thrown nearly 39 million Americans out of work as of May 22nd.

With U.S. unemployment now estimated to be “north of 20 percent,” Social Security is experiencing something much closer to its worst-case scenario, where its trust fund that provides money to boost the retirement income of millions of Americans will run out of money years sooner.

The chart below shows what Social Security’s Trustees thought would be a worst-case scenario to consider, labeled as Alternative Scenario III in the chart, which shows benefits being slashed during 2031:

2020 Social Security Trustees Report Figure II.D6 – Long Range OASI and DI Combined Trust Fund Ratios Under Alternative Scenarios

But it’s going to be much worse than that. Social Security’s Trustees never considered the possibility of a global coronavirus pandemic that would prompt state and local government officials to close businesses and to order residents to stay at home, effectively shutting down a massive portion of the U.S. economy for weeks on end, with some attempting to do so indefinitely.

Factoring in the negative impact of the coronavirus recession, analysts at the Bipartisan Policy Center estimate that Social Security’s retirement trust fund will now run out of money in less than 8 years, well ahead of the schedule anticipated by Social Security’s Trustees’ worst case scenario:

Our preliminary analysis finds that the Disability Insurance (DI) trust fund’s reserves may be depleted during the next presidential term, and the Old-Age and Survivors Insurance (OASI) trust fund’s reserves may be depleted right around the time of the 2028 presidential election. These projections reflect a substantial further deterioration in the finances of a program that was already facing a large mismatch between income and outlays, making the need for action by policymakers even more urgent.

According to their analysis, the Social Security’s OASDI trust fund will be depleted much sooner for two main reasons:

• Fewer Americans are working to provide the revenue needed to sustain the trust fund longer through their payroll taxes at the current payroll tax rates.
• Because of job losses, more older Americans will be tapping Social Security benefits sooner, particularly those at or near the ages where they can draw early retirement benefits, which will accelerate the rate at which the OASDI trust fund will be depleted.

There are two main ways policymakers can address these problems.

• They can increase that payroll tax rates on working Americans incomes.
• They can cut promised benefits to some or all recipients of Social Security.

The bottom line is that Americans who rely on Social Security can now expect to both pay more for and get back less from the retirement income welfare program much sooner than they may have been expecting.

The coronavirus pandemic has moved up Social Security’s day of reckoning.

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Retirees, who are more at risk from the virus, still collect their pensions and Social Security, and suffer minimal economic consequences from the government’s shutdown of the economy. Younger people, who are at much less risk from the virus, bear that economic cost.

Remember, the economic turmoil that we are now experiencing is not the result of the virus; it is the result of government policies in response to the virus. These government policies are yet another example of policies that impose costs on the working population for the benefit of the elderly.

The federal government is a huge intergenerational transfer program, imposing costs on the young for the benefit of the old. The two largest government programs are Social Security and Medicare. Add in Medicaid payments going to the elderly and other transfer programs, and it is easy to characterize the federal government as an organization that takes from the young to give to the old. Policies in response to COVID-19 are another example. They take jobs away from the young to protect the health of the old.

The irony of all this is that there is no need to do it. If the safest thing for those at high risk is to self-isolate and stay at home, they can choose to do that without a government mandate, and without forcing everybody to stay home. Others, who are less at risk from the virus but have more financial risk if they are out of work, could choose to work without interacting with those who choose to shelter at home. The virus might spread more rapidly, but this would more rapidly build herd immunity and the pandemic would be over sooner. That would benefit both those who value their jobs and those who are most at risk from the virus.

The young and healthy are forced to bear the economic costs of the government’s COVID-19 policies partly based on the argument that if they got it, the virus could spread to their grandparents. The government’s reaction to COVID-19 is consistent with government policy in general: impose costs on the young for the benefit of the old.

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“In this world nothing can be said to be certain, except death and taxes.”

Alas, there is now a third thing of which we can now be certain of in this world, which has become apparent only because the first two things have joined together to reveal it: government waste.

Writing in Forbes, OpenTheBooks’ Andrew Andrzewjewski has added up all the taxpayer dollars the U.S. government has improperly paid out as benefits to dead Americans last year and found the number is not small.

Dead people received $1 billion in benefits. Medicare, Medicaid, social security payments and also the federal retirement annuity payouts (pensions) kept flowing to dead recipients.

That $1 billion of taxpayer dollars distributed to deceased Americans represents a “little expense” in a larger bucket of government waste, where improper payments like these are far more common and have been going on far longer than you might believe. Andrzewjewski describes those numbers and explains why they matter.

Since 2004, twenty large federal agencies admit paying out an astonishing $1.2 trillion in improper payments. That amounts to more than one-quarter of President Trump’s proposed $4.7 trillion budget for 2020. Last year, these improper payments totaled $140 billion – that’s about $12 billion per month.

But what exactly is an improper payment? Federal law defines the term as “payments made by the government to the wrong person, in the wrong amount, or for the wrong reason.”

In other words, there’s a lack of basic in-house financial controls within the largest federal agencies. When people or companies receive money they don’t deserve, it erodes our trust in government, our economy and government’s ability to finance everything from defense to health care.

Speaking of which, Benjamin Franklin also had something to say about little expenses that directly applies to how the U.S. government manages taxpayer money today:

“Beware of little expenses. A small leak will sink a great ship.”

There’s a reason why Franklin’s image is on the $100 bill! If only politicians would think more about the wisdom he offered before parting with the notes that bear his picture, we might not now be associating government waste with death and taxes as a certainty of life.

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The Wall Street Journal reports on Social Security’s deteriorating fiscal situation:

The Social Security program’s costs will exceed its income in 2020 for the first time since 1982—two years later than officials projected last year—forcing the program to dip into its nearly $3 trillion trust fund to cover benefits.

But by 2035, those reserves will be depleted and Social Security will no longer be able to pay its full scheduled benefits, according to the latest annual report by the trustees of Social Security and Medicare released Monday....

The costs of both programs are projected to rise substantially as a share of the economy over the next 16 years, as a wave of retiring baby-boomers boosts the number of beneficiaries, and lower birth rates over the past few decades weigh on employment growth and economic output.

Here’s what Social Security’s Trustees had to say about the program’s ability to pay out benefits after its Old Age and Survivor’s Insurance (OASI) trust fund, which will be tapped to fund higher benefit payments to pensioners until it completely runs out of money in 2034:

The OASI Trust Fund reserves are projected to become depleted in 2034, at which time OASI income would be sufficient to pay 77 percent of OASI scheduled benefits.

Under current law, after the OASI trust fund is fully depleted, Social Security will revert back to its original pay-as-you-go system, where the total amount of benefits that are paid out cannot exceed the amount of money it takes in through the Social Security payroll tax. That’s all the U.S. government has ever promised to pay after the OASI trust fund has been drained and, in this latest forecast, every American who might begin collecting Social Security retirement benefits before the OASI trust fund runs out of money in 2034 can expect to have their monthly income checks slashed by 23 percent after it does.

That’s no different than what Social Security’s Trustees forecast last year. What is different this year is their forecast about what would happen if politicians allow Social Security to divert the holdings in the trust fund for its Disability Insurance (DI) program to instead pay retirement pension benefits. Here is what they forecast would happen if the two trust funds are combined:

Under the intermediate assumptions, the projected hypothetical combined OASI and DI Trust Fund asset reserves become depleted and unable to pay scheduled benefits in full on a timely basis in 2035. At the time of depletion of these combined reserves, continuing income to the combined trust funds would be sufficient to pay 80 percent of scheduled benefits.

After stopping Disability Insurance payments to disabled Americans, Social Security would be able to continue making “full” retirement benefit payments to Americans for one year longer than if it kept its Disability insurance program intact before running out of money, after which, monthly retirement benefit checks would be permanently cut by 20 percent.

In response to these looming cuts, some politicians have recently proposed making Social Security’s benefits more generous and making the relatively smaller population of working Americans and businesses pay much higher Social Security taxes, increasing the combined employee-plus-employer tax rate from 12.4 percent of employee wages to 14.8 percent of their income.

A more interesting alternative would be to create a special, voluntary tax-free savings program through Social Security that would make it possible for the Americans who care the most about increasing their future retirement benefit checks to automatically set aside and save the cash they could use to boost their benefits in future years in a separate account they own, which wouldn’t require such a regressive tax hike.

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As we noted in 2014, dozens of ex-Nazis, including death-camp guards and former SS troops, were drawing Social Security payments to the tune of more than $1.5 million. The United States government allowed these suspected war criminals to keep collecting Social Security if they left the country voluntarily, but departure wasn’t always voluntary. Jakob Denzinger, a guard at Auschwitz, built a successful plastics business in Ohio. In 1989, when the U.S. government moved to strip his citizenship, Denzinger fled to Germany. In 2014, the former Auschwitz guard was still collecting $1500 a month in Social Security, courtesy of U.S. taxpayers. As the Associated Press discovered, at least 38 of 66 Nazi guards removed from the United States were allowed to keep their Social Security benefits and only 10 were prosecuted for war crimes in Europe. 

Those Nazi war criminals who remain in America can’t have much time on the clock, but they might be feeling more at home. Politicians preach socialism and seek to confiscate firearms. Those are the conditions that prevailed in National Socialist Germany, where disarming the people was a prelude to mass repression and the kind of facilities where Jakov Palij and Jakob Denzinger worked. For details see Stephen P. Halbrook’s, Gun Control in the Third Reich: Disarming Jews and “Enemies of the State,” and Gun Control in Nazi-Occupied France: Tyranny and Resistance.

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Milton Friedman

Milton Friedman, the 1976 Nobel Laureate in economics, was interviewed on the television program Uncommon Knowledge in 1999, and he offered a solution to Social Security’s financial problems: shut it down.

But Friedman didn’t advocate that the federal government walk away from its promises.

Social Security participants are owed a stream of payments during their retirement years based on a set of factors, including lifetime earnings, number of years worked, and age at retirement. This stream of Social Security payments has an expected present value.

Friedman advocated that each Social Security recipient, or future recipient, receive a bond equal to the current expected value of the benefit stream they have been promised under current law. The bond would be due at age 65 for future recipients and due today for current recipients.

Issue the bonds; then shut down Social Security.

This approach ensures that everyone gets what he or she has been promised. It brings the true cost of the unfunded liability above board. It funds the unfunded liability and requires the federal government to establish a specific financing plan to pay off the bonded debt. And it closes Social Security, a program whose tax and benefit design is morally indefensible.

Here’s what Milton Friedman said in 1999:

Friedman’s approach to Social Security can also be applied to ending the state and local government pension crisis. The programs are very similar: Social Security and state and local public pensions have massive unfunded liabilities; and they promise a stream of benefits after retirement.

Applying Friedman’s solution, state and local governments across the country would close their defined-benefit pension plans and issue bonds to beneficiaries equal to the current expected value of the stream of benefits owed. The bonds would be due today or at retirement depending on the beneficiary’s stage of life.

As with Social Security, this approach would ensure that people receive what they have been promised. It would force governments to acknowledge the true extent of the unfunded pension liabilities and establish a specific financing plan (something they refuse to do today). And it would permanently close these politically mismanaged defined-benefit plans.

Going forward, government employees would be offered 401(k)-style pensions, just like the plans offered to most private sector workers with employment based retirement plans.

Once again, Milton Friedman had the answer.

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