Why Not Do Something Before Social Security Runs Out of Money?

by | Dec 11, 2023 | Social Security

It is time we realized that there is no fair way out from government Social Security commitments that exceed the funds available.

As recently reported by Reason’s Eric Boehm, “87 percent of Americans Want Politicians To Do Something Before Social Security Runs Out of Money.” Further, a new Taxpayer Protection Alliance poll reveals that the vast majority of Americans believe policymakers should make changes as soon as possible to extend the life of Social Security to avoid automatic cuts as its trust fund is dwindling (estimated to be exhausted by 2033), and only 5 percent think doing nothing to address it is the right thing to do.

As Boehm summarized, “Perhaps most importantly, 90 percent of voters say presidential and congressional candidates running for office in 2024 should discuss the financial challenges facing the entitlement programs,” for which “ignoring the government’s entitlement-driven debt crisis is not a real option.”

Yet President Biden has demagogued against the idea that reforms are necessary, as in his State of the Union Address. Former President and current candidate Trump has repeatedly committed not to touch Social Security benefits, and it is hard to find many politicians dealing at all seriously with the program’s issues.

That immense gap between the will of the people and the will of America’s politicians seems surprising, given how much verbiage has recently been devoted to “defending democracy.”

The dissonance between political posturing and the fiscal reality of the “third rail” of politics may be understood, however, in terms of fairness. It arises because the federal government has promised trillions of dollars more in Social Security benefits than taxes to fund them, and those overpromises leave us no fair way out now. But no politician wants to be attacked as being unfair. So political delay has long been more attractive than dealing with what will involve some major league pain.

Since Social Security began, each of the many times it has been expanded (including its offspring, Medicare), those in or near retirement got benefits far exceeding their costs. Those already retired paid no added taxes, and those near retirement paid more for only a few years. But both groups received increased benefits for the rest of their lives. Such unfunded “generosity,” however, must be paid for by someone else, forcing later generations not only to finance their own retirements but also to cover the unfunded benefits given to early retirees. The good deal Social Security has given retirees, (e.g., Ida Mae Fuller, Social Security’s first retiree, received benefits 924 times her contributions) therefore makes picking up the current bill very costly and inherently unfair.

The mere possibility of having to fight over that tab energizes those who fear that a change from the status quo might give them or leave them with less, even though the gaping financial hole involved cannot be sustained, meaning that “doing nothing” for now guarantees an even less fair deal for many soon. The situation means that any move toward improved fiscal responsibility and sustainability will be attacked as unfair. But every option is now unfair.

Reducing Social Security retirement benefits in one way or another is not fair, in the sense that government promises of ongoing retirement support have led people to adapt their behavior to those promises. Having done so they have become dependent on the government’s living up to them.

Of course, if we continue to do nothing to fix the fiscal hole, the money will soon run out and benefits will have to fall substantially, which would also be unfair to recipients, perhaps even more so.

These sorts of unfairness claims fail to consider the unfairness of the alternatives. While benefit cutbacks can be considered unfair to those now and soon-to-be dependent on them, every alternative is unfair as well. Rather than choosing between fair and unfair options, as every “don’t fix it that way because it is unfair” argument implies, we must choose between unfair ones.

If we impose substantially higher Social Security taxes, the problem is that people have adapted their behavior to the current extent of those taxes (which are already greater than income taxes for the majority of Americans), and some now depend on not losing any more take-home pay just as many recipients depend on not losing anticipated benefits.

Proposing that we just tax “the rich” more, by increasing or even eliminating the income limits on Social Security “contributions,” would especially increase its unfairness to higher income earners, who already pay far more in Social Security taxes than they will ever get back in benefits, and who also pay a sharply disproportionate share of income and other taxes as well.

Benefits could be maintained without increasing Social Security taxes by federal borrowing. But borrowing is just deferred taxation, so that would unfairly burden whichever taxpayers will be left with the bills, in addition to those necessary to fund massive federal deficits from other sources. It would also increase the tax uncertainty faced by all Americans, who face a harder task of guessing how, where, when, and on whom those future taxes will be assessed.

What about privatization? It could potentially increase the rate of return earned on retirement savings relative to what Social Security offers, improving the system from this point in time forward, but it can’t magically eliminate its current multi-trillion dollar unfunded liabilities. And if future benefits are to be more closely based on private contributions than the current system, as privatization would require, treating those savers more fairly would unfairly take funds now used to subsidize the retirement of current workers.

It is time we realized that there is no fair way out from government Social Security commitments that exceed the funds available. A history of overpromises means everyone has a plausible fairness claim on their side. Yet something must give. The closest we can come to being fair is to avoid making any new over-commitments, to search for ways to make the program more sustainable (to reduce future unfairness problems), and to look seriously at the contentious issue of which of the options will minimize the adverse impacts of unfairness that cannot be avoided altogether. Demonizing any real consideration of the various options only increases the likelihood that there will ultimately be more unfairness than necessary.

Made available by the American Institute for Economic Research.

Dr. Gary Galles is a Professor of Economics at Pepperdine. His research focuses on public finance, public choice, the theory of the firm, the organization of industry and the role of liberty including the views of many classical liberals and America’s founders­. His books include Pathways to Policy Failure, Faulty Premises, Faulty Policies, Apostle of Peace, and Lines of Liberty.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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