Saturday, October 13, 2012


About Social Security

I watched the debate Thursday evening between Paul Ryan and Joe Biden.  For whatever it's worth, in my opinion Mr. Biden did very well.  Contrary to some of my Republican friends, I did not find him offensive or condescending.  Rather the show was like a political argument I had with my friends over coffee the next day.  We may laugh at each other, but it's in fun.  We enjoy a good lively argument.  That's my take on what Joe and Paul were having.  I enjoyed it.  I thought Mr. Ryan handled himself very well also.  He also laughed and smiled.

I was bothered by a remark by the moderator, Martha Raddatz.  She asked Ryan what plans he had for dealing with the problems of Social Security and Medicare, which are going to go broke in a few years.  It was as though she was spoon-feeding him a soft question, one that he had a well-rehearsed answer for.

My point is that Social Security isn't going to go broke.  I heard this explanation from Alan Sloan on a TV program.  His advice was to follow the money.

Let's follow the money.

The payroll tax was designed to provide for all the benefits to the retirees.  In fact, for many years it provided a surplus.  What should the Social Security Administration do with the surplus?  It didn't make sense simply to lock the cash up in a safe.  The best thing to do with it was and still is to invest it in very safe interest-bearing bonds.  The safest investment I know is US Treasury bonds.  The Social  Security excess is taken to the US Treasury in exchange for bonds.  The money then goes into the general fund where it is mixed with other income to the federal government.

As the number of retirees increases, more and more of the payroll tax is used for paying benefits and less is used to buy bonds.  When the payroll tax falls short of meeting the cost of benefits, the Social Security Administration will start cashing in the bonds.  The US Treasury will take money out of the general fund to redeem the bonds.  Even though the payroll tax doesn't cover all the benefits, the system will operate in this way until the last bond has been redeemed, sometime around the year 2040.

There are several very easy fixes for this problem.  First, the payroll tax will still pay for about 70 percent of the benefits.  One simple fix is simply to continue taking money out of the general fund to supplement the payroll tax.  That fix requires very little effort by Congress and can be done with little publicity and public debate if we agree that Social Security is a good thing and ought to be continued.  Another fix is to raise the limit on income that is subject to the payroll tax.  I don't know what the exact limit is at present, but it is somewhat less than $150,000 a year.  Increasing that limit will not require the rate of the tax to be changed.  Rather, it will require high-income earners to pay tax on a larger share of their income.

When I was a young man, just starting my working career, I heard comments from other workers expressing the idea that when they retired, Social Security wouldn't be there for them.  I don't know the source of that rumor, but it has been around long enough that many people believe it.  Remember what Josef Goebbels, Hitler's minister of propaganda, said: "If you tell a big enough lie [and tell it often enough] it becomes true."  The rumor that Social Security is going to go bankrupt is just that sort of big lie.  It is propagated by people who hate the very concept of a retirement program run by government.  I don't put Martha Raddatz in that category.  Rather, she is gullible.  Paul Ryan is smart enough to know how Social Security works.  He is one of those who wish it to go bankrupt and want to help it along.
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