Beginning in 2020, cost is projected to exceed total income, and without changes combined Social Security Trust Fund reserves will become depleted in 2035. (Source: Office of the Chief Actuary, Social Security Administration.)

U.S. Rep. John Larson has proposed tax increases to address the Social Security system’s looming insolvency problem. He recently said, “Yes, they will pay more and they will get more for that extra dollar.” That sounds a lot like cutting off one end of a blanket and sewing it on the other end to get a longer blanket, or it’s smoke and mirrors economics.

Social Security taxes are imposed on a worker’s pay and are usually split so that an employee and his employer each pay half.

Craig Hoffman

The Social Security program was signed into law in 1935, when the average lifespan in the US was only 61.9 years and the age to begin collecting benefits was 65 years of age. That means that many of those who paid into the system never collected a dime because they died too soon.

Fast forward to when the program was modified by Congress to allow women (in 1956) and men (in 1961) to collect Social Security benefits at a reduced rate at the age of 62 instead of waiting until “full retirement age.” By then the average American life span was 70.3 years. This means people willing to accept lower benefits could collect from the system before age 65. They were collecting on average for 5.3 years after turning 65. Attaining the average age at death meant that a person could be collecting from the system for 8.3 years.

In 1983, the age for full 100% Social Security was gradually increased to 66 or 67 for people born between certain dates. This was done to supposedly fix the fund’s potential insolvency issues because outgoing payments were growing too fast. But that didn’t happen.

In 2010, the average American life expectancy was 78.7 years. Assuming that a person elected to take reduced benefits at 62 and lived to the average lifespan, they would be collecting for 16.7 years. If they waited until age 67 to collect full benefits, a person dying at the average age would collect for 12.7 years.

According to Wikipedia, fewer Americans are continuing to work past age 65: “In 1950, it was reported that as many as 40% of Americans over 65 were still employed in some capacity, but by 1980 that figure had dropped to less than 20%. In 1990, fewer than 11% of Americans over 65 were still employed, an all-time low after which the number began to slowly rise again.”

Also, Social Security taxes levied “in dollar terms has increased on the wage limit from $30 to $6,622, a 7.57% annual increase, which is double the rate of inflation between 1937 and 2010.” And between 1937 and 2015 the Social Security tax rate went from 2% on maximum annual earnings of $3,000 to 12.4% on maximum earnings of $118,500. During this time frame, the tax rate has increased 19 times and decreased twice.

So what is happening? In addition to widows, children, the disabled and others who may never have paid into Social Security, the income stream via payroll taxes on employers and employees is going to support aging beneficiaries for far more years than when the program was established. This is driven by advances in medicine that keep people alive a lot longer.

With people retiring earlier, the number paying into the system decreases. It is clear that increasing payroll taxes for Social Security is not as sustainable as making fundamental changes to the eligibility age so that benefits are not available until later in life. Either plan will be unpopular, but the tax increase plan just kicks the solvency issue down the road for a few more years.

The most logical way to fix the funding issue is to, first, raise the “early in” eligible age from 62 to 64 years, reverting to the earlier 3-year gap between partial and full benefits, and also increase the age for both full and partial benefits, and tie it to some number below the average lifespan.

That way, as average lifespan increases, so does the age at which one becomes eligible for full or partial Social Security benefits. If this fixed link isn’t created, our ever-advancing longevity will continue to make the program insolvent — even with Rep. Larsen’s proposed tax increases. The voters and taxpayers deserve a more permanent “fix” to the system than another tax increase.

Craig Hoffman lives in Cheshire.

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14 Comments

  1. So of all the solutions you simply default to moving the early retirement option? What about all the “disabled” that were never intended to be getting payments intended for elderly? What are American citizens who are being pushed out by outsourcing and the elimination of retiree benefits and pensions to do? When do you propose this be made effective, so I can get the local insurance industry to move the thousands of jobs they moved to India back, and send back all the H-1b guest worker visa Indian nationals who have our jobs here?

  2. The author ignores the most important feature of Rep. Larson’s plan: “Social Security taxes are not withheld from a person’s wages after that employee reaches a certain amount of earnings — $132,900 this year. Larson would reinstate the Social Security tax on anyone whose earnings rise above $400,000, creating a ‘doughnut hole’ where earnings between $132,900 and $400,000 do not face payroll taxes.”
    If Social Security taxes had no cap for high earners, the problem would be much better addressed.

    1. I was unaware of the “doughnut hole” in Rep. Larson’s plan. Once again, that appears to be a gift to some taxpayers (major campaign contributors?) at the expense of others. As you stated, a flat tax with no upper limit would be 100% fair and certainly help solve the funding problem. Also, like CT’s budget issues, it should be criminal for any politicians to divert any funds that are collected for a specific purpose (SS, transportation, etc.). Politicians who vote to transfer those types of funds should be arrested, prosecuted, fined and/or jailed after a short trial.

  3. Let’s hear this discussion recognizing that life expectancy for Americans is on average now FALLING. This is because there is a sharp divide based on economic status; lower income Americans are now seeing a shorter life expectancy; higher income Americans longer. So what is being proposed would come on the backs of lower income Americans (disproportionately minority) and very much to the benefit of higher income and longer lived Americans. We deserve a much more nuanced discussion of the challenges with the financial stability of Social Security (which is a complex system which protects the disabled, the orphaned, as well as retirees); it is NOT an insurance system.

  4. The author’s average life expectancy numbers aren’t very precise.
    For example, if the author is using life expectancy at birth, that number will be lowered by infant and child mortality. The more relevant number is life expectancy at age 16, say, the age at which someone might start paying into social security.
    Then, life expectancy numbers are based on deaths over a period of time. Relatively recent medical innovations probably do extend life, but we won’t know how much until the population helped has died. So long as medical innovations continue, gains in life expectancy will be a work in progress. By the way, there are a of factors besides medical innovations affecting life expectancy at any time.
    So we don’t know what social security will cost in the future.

  5. Raising the eligibility age for social security sounds like a good idea for reducing expenses. But its political unpopularity makes it impractical.
    The more likely change to social security is a benefit increase. In the absence of savings and defined benefit pensions, people will be relying on social security more and more. They want to retire at what they consider an appropriate age, and they don’t want to live in poverty when they do.
    If they had to rely on their own resources, they’d keep working until laid off or too sick to continue, and block hiring and promotions for younger people.
    Elected officials who threaten to overrule people’s decisions would be unpopular. The only real questions are, When will the discussions of benefit increases start? and How much will the increases be?

    1. Sadly, you are probably right, Philidor. We seem to have very few politicians these days who serve to work for the betterment of the entire country rather than just those who will get them reelected. And that’s a good reason to implement term limits.

  6. Better yet, remove the limit on FICA-taxed income, and double it for compensation exceeding $1 million. It seems to me that wealthier people live longer and collect far more than they need. It’s too bad so many folks who pay in all their lives and die before reaching eligibility never get the benefits they earned.

  7. Let’s make it an even 100 and hope everyone dies fast! Talk about breaking promises to working people who put their faith and trust in SS

  8. I just turned 69 and have not yet filed for Social Security (SS). Luckily for me there was no need or desire to file early even though my last full-time employment was terminated at age 59. I was able to start a private practice as a consulting engineer – actually forced to since no company wanted to hire an experienced engineer at my age. From this perspective I offer the following thoughts:

    1. Implement means-testing for SS benefits. If you have been wise and financially planned for retirement and are well situated, forgo with the SS payments (which are likely not significant by comparison). Yes you and your employer(s) have paid in – let those funds be used for those less fortunate.

    2. Increase the maximum earning upon which SS taxes are imposed. Upper income salaries are obscenely high compared to the average worker, so continued withholding for SS would not be a burden.

    3. Incrementally increase the % withheld as the income level increases well beyond that of the average worker.

    If someone has been fortunate enough to have a career path that provides for retirement benefits kicking in well before SS eligibility, good for them. But perhaps SS withholding should continue until they have reached SS eligibility age.

    I question why highly compensated upper management personnel with gold-plated retirement options should be eligible to collect SS benefits.

    1. Hi CT_Yankee_1, we welcome your comments but please note that our guidelines require that comments be limited to 1,000 characters. We will not be able to approve comments that exceed that limit going forward.

    2. In response to you question in the last sentence the answer is, “Because it’s their money”. On August 27 of this year the great Thomas Sowell tweeted, ““I have never understood why it is “greed” to want to keep the money you have earned but not greed to want to take (or keep)someone else’s money”

    3. Income taxes are collected on Social Security benefits, so that’s means testing to a degree.
      Whether taxing benefits for the elderly is a good idea is another issue.

  9. There are lots of things working against Social Security. Boomers outnumber millennials and greatly outnumber Generation Z. As an entitlement, my money has already been spent…and I’m dependent on cash coming in from younger people…who may never make as much as I do. As Ray Dalio pointed out on 60 Minutes, the American Dream is badly broken. The entire world creates way too much crap for the world to absorb, and robots and automation will only make that worse. The top 5% clearly need to pay more into the system with no upper income cap…but it also may be time to go to a Federally mandated 4 day work week so more people can be employed.

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