Thursday, April 08, 2021

Would Americans Object If Billionaires (Partially) Paid for Social Security?

by Neil H. Buchanan

Today, I thought I might take a short break from despairing about the Republicans' apparently unstoppable efforts to end constitutional democracy in the United States.  Thinking about substantive policy issues is a good palate cleanser, and I had the pleasure earlier this week of presenting some ideas about the American retirement system at the Tax Policy Workshop Series at Duke Law School (via Zoom, unfortunately).  The convenors, Professors Rich Schmalbeck and Larry Zelenak, were gracious hosts, and their twelve seminar students were engaged and offered thoughtful comments and questions.

One series of questions from the students has inspired me to write down a few thoughts about the nature of political buy-in for government programs.  In what some pundits are calling a breakthrough moment in the U.S., voters are at long last rejecting Ronald "government is not the solution to the problem; government is the problem" Reagan's toxic legacy in favor of President Biden's purportedly FDR-esque New New Deal.  Republicans are no longer spending political capital on efforts to privatize Social Security or even to repeal the Affordable Care Act (much less Medicare).  Can we now make positive changes to those programs in a way that maintains or even expands the public's buy-in?

In my first sentence above, I wrote that this column will be a vacation from worrying about the death of the American republic.  That means that the analysis here will proceed under the assumption that something resembling the normal political rules will continue to operate in the future.  In particular, that means assuming that wildly unpopular things will not be politically viable and that both parties will try to pursue at least arguably vote-getting policies.
 
Admittedly, even before the 2020 election and its nihilistic aftermath, Republicans spent years pursuing extremely unpopular policies (their flat-out rejection of even the most minimal gun control measures being the most obvious).  And now?  Yikes.  I thus concede up front that there will be something of a quaint air to this column, as I describe how to achieve widespread political support for a particular policy agenda.  Call me retro.

Although my writing over the years, both academic and in "public intellectual" columns like this one, has covered a wide variety of topics, Social Security has been one of the issues to which I have returned again and again.  In part, this is because the law requires that the trustees of the Social Security System produce an annual report with 75-year forecasts of the finances of the system, the publication of which leads almost every year to a flurry of news articles about "Social Security going bankrupt!!!" or something along those lines.

This year is likely to be especially annoying, because the report (due to be released next month, although in some years it has been delayed) will likely show that the pandemic has made the short-term outlook for Social Security worse.  Although Social Security's expenditures on benefits have been reduced by the concentration of COVID deaths among the elderly (a grim point that Professor Schmalbeck noted during my talk), the huge spike in unemployment has depressed revenues from payroll taxes, and the latter effect is almost certainly greater than the former.

I thus predict that headlines will soon announce that the system's predicted "insolvency date" has been moved up from 2035 (last year's prediction) by a few years, and everyone will have a good old-fashioned freakout for a few days.

But then what?  Biden has proposed a mild, technocratic, progressive response that would solve that relatively immediate problem.  That proposal could pass, I suppose, and maybe life will move on.  Forgive me for doubting it.

To understand what is at stake, we need to step back and stop focusing on various symptoms instead of the core of the problem.  For one thing, the so-called insolvency date is not actually about insolvency.  As the trustees' reports say clearly every year -- although they then muddy the waters by emphasizing the wrong issues in their summary statements, which are the only things that any reporter reads (if even that) -- the system would NOT go bankrupt.  The date about which everyone obsesses is the year in which the trust fund could reach a zero balance.  That sounds bad, and in a way it is.  It is, however, not nearly as bad as people assume.

Currently, the system is in the phase of its existence -- long planned and completely anticipated -- in which we are drawing down the balance of the trust fund.  This only started a few years ago, when enough Baby Boomers were retired that annual benefits started to exceed annual payroll taxes.  Again, however, we have been expecting this for years.  As I explained in an article a few years ago, the trust fund simply accounts for the excess taxes that Baby Boomers paid into the system for decades, plus interest, and now that we are in the draw-down phase, the U.S. Treasury is supplementing annual payroll tax revenue with general funds.

Another way to say that is that the Social Security system is now running an annual deficit, and it is being assisted with funds from non-payroll-tax sources.  That is acceptable, however, because the decades of surpluses (which we call the trust fund) are merely being paid back.  Treasury received extra money from Social Security, and it is now repaying that (huge) loan.

We thought and hoped that the payback period would be smooth and that the trust fund would reach zero -- yes, we want the trust fund to reach zero -- on a glide path that would allow payroll taxes to cover all of the scheduled benefits going forward.  Depleting the trust fund before then, possibly in the 2030's (but maybe never), could require a less-than-smooth adjustment, because Treasury's supplements would suddenly stop at a time when payroll taxes cannot cover the full amount.

That is the "drop-dead date," and if it happens, it would require approximately a 20 percent reduction in benefits below the future scheduled amounts (scheduled amounts that are higher than today's benefits).  We hope -- and there is even a reasonable probability -- that this will never happen.  If it does, however, then the trustees' forecasts tell us that Social Security's benefits would pay out at an 80 percent rate in perpetuity.

Not only is that good-ish news -- responding to "the system's going belly up" with "no, it'll at worst still pay 80 percent forever" -- but it raises an important question that our obsessive focus on the trust fund's depletion date has obscured.  Why would benefits be permanently reduced by 20 percent, even after all of the Baby Boomers are gone?  Maybe the trust fund, and the Baby Boomers' effect on the Social Security system, are not the real story.

The core problem is that the growth of inequality has interacted with the tax and benefit structure of Social Security in a way that (unless, as noted above, the less pessimistic forecast trends become a reality) will prevent the system from paying as much as we thought it could pay.  Lagging incomes for non-rich Americans (nearly flat inflation-adjusted wage growth) from 1980 onward might soon force Social Security to pare back benefits.

Another way to say this is that we have essentially frozen the incomes of all but the wealthiest Americans for the past forty years, and as a result, we are also about to make those unlucky people poorer in their retirements.  Making things bad made them even worse than we thought.

What to do now?  As I noted above, Biden's plan would supplement Social Security's finances in a progressive way, adding a payroll tax to above-$400,000 earners and thus avoiding cutting benefits below scheduled amounts.  Is there a better way?

I have been arguing for years that the system should simply look for supplemental funding, thus breaking from the tradition of relying only on payroll taxes to fund itself.  This is already happening, as I described above, in the sense that current-year benefits are being paid in part from general funds.  We justify that as repaying earlier loans, which makes it look as though the system is still self-financing.

Even if we are happy with that justification, we have broken the self-financing model in at least one other way.  In 2009-10, the Obama stimulus (which I mentioned in a different context in yesterday's column) provided a short-term payroll tax reduction, from 6.2 to 4.2 percent, in a (successful) effort to boost the economy.  Social Security did not, however, lose the 2 percent of revenues that were at that point adding to the trust fund, because the law required Treasury to make up the difference.  That was very good policy, because we were only using the payroll tax as the most administratively simple vehicle to provide a tax cut that was going to be paid by Treasury in any event.  Even so, we did have something other than payroll tax revenues (and repayments of earlier excess payroll tax revenues) partially financing Social Security.

My proposal is simply to say going forward that Social Security will have two revenue sources: the traditional payroll tax and a wealth tax (or other progressive tax).  We could set that second source to cover the possible 20 percent shortfall, but we could also use it to increase benefits in the future.  Social Security is, after all, paying an average of about $14,500 per year in benefits to current retirees, so it is far from generous.

The objection here -- and it is a very important one -- is that this change might break the mass psychology that makes Social Security politically sacrosanct.  People do not think of Social Security (or Medicare, or even unemployment insurance) as a handout, because they think: "Like everyone else, I paid into the system for my entire working life, so I deserve to receive benefits."  What happens if people instead think: "Wait, now Social Security is being paid for in part by rich people.  Isn't that ... (gulp) ... WELFARE?"

Maybe, but I doubt it.  The two things that make wildly popular programs wildly popular are the sense that they are universal and that everyone pays to participate.  Universality is not remotely questioned by my proposed change, but what about the "everyone pays" principal?

It is true that, as FDR intended, people incorrectly think of Social Security as a personal retirement account from which to draw in their golden years.  Even so, the system has long been set up to provide much higher implicit rates of return for lower earners than for higher earners.  That is what makes the system progressive in the aggregate, even though the tax base is capped at $142,800 in annual earned income (in 2021) and is thus regressive on the revenue side.  Only right-wing cranks have tried to say that this is socialism, and they have not succeeded.

Still, is it possible that being more straightforward about what is happening could break the groupthink that allows everyone to think of Social Security as something other than a Big Government Tax-and-Spend Program?  Again, yes.  It is possible.  But even if that happens, what would happen next?  Would people say, "No, Social Security is supposed to be paid for only by taxing working people, so we should all accept lower benefits and avoid tapping other revenue sources?"

My strong sense is that most people would not understand any of this, nor would they care to try.  That is not an insult to non-wonks, however, because I am saying that they sensibly do not care about these details.  They want to believe that they are not welfare recipients, which they can continue to tell themselves for those same two reasons that I noted above: (1) everyone participates, and (2) "I paid in."

Perhaps there could be psychological/political purchase to the retort: "Yes, you paid in, but you're getting more back than you deserve.  Rich people are supplementing your retirement, and they shouldn't have to."  Again, I doubt it.  When a person puts her money in a 401(k), and the investment pays off at higher rates than expected, she thinks of that as either good luck or savvy investing.  She does not think: "But wait, who really paid for my good fortune?"  It is difficult to picture anyone saying, in response to my proposal: "I refuse to take money from rich people.  I should take a 20 percent cut."

Is there a limit?  There must be.  But just as it is true that a central bank could create hyperinflation by creating way too much money way too fast, or that a government could cause a credit crisis by running up massive amounts of debt, magnitudes matter.  Conservatives warned of U.S. hyperinflation from 2008 onward, and they said that the national debt was going to ruin us by 2012.  On both money growth and debt accumulation, it turned out that there is a lot more running room than we thought.  Japan has a debt-to-GDP ratio that is roughly double ours, but even after years at what we used to think were unsustainable levels, there has been no crisis in that country.

Similarly, if we went to a Social Security system that, say, drew one percent of its money from payroll taxes and 99 percent from a tax on billionaires, it is possible that people would start to think of the system as something other than an earned benefit.  (I say "possible" because even that is not certain.)  But in the range that we are currently contemplating, with the vast majority of funding continuing to come from payroll taxes, the mass psychology that supports Social Security is highly unlikely to crumble.

To return to my original depressing caveat, I must note that the psychology of voters' support for various programs might soon become politically irrelevant.  If the U.S. becomes a one-party state, not only would Republicans not follow my progressive policy proposal, but they would be able to stop caring even about what their base voters care about.  It is true that even autocracies have their limits, and Republicans would be wise not to suddenly yank away Social Security and Medicare, because they should want to preserve domestic tranquility.  Short of that, however, we might never again have to think about how to keep people happy about paying into Social Security -- or about anything else.