Editor’s Note: Journalist Philip Moeller is here to provide the answers you need on aging and retirement. His weekly column, “Ask Phil,” aims to help older Americans and their families by answering their health care and financial questions. Phil is the author of “Get What’s Yours for Medicare,” and co-author of “Get What’s Yours: The Revised Secrets to Maxing Out Your Social Security.” Send your questions to Phil; and he will answer as many as he can.
Understanding how Social Security works is especially important as we approach November’s midterm elections. President Donald Trump said during his campaign that he would protect Social Security and Medicare. But he has done little to fulfill that promise since taking office.
A Republican-controlled Congress approved his trillion-dollar tax cut last year, and the predictable increase in federal deficits that has ensued has prompted some Republican leaders to say we can no longer afford to pay for the government’s major social programs – Social Security, Medicare, and Medicaid.
Proposing cuts to any of these programs is hardly a winning campaign strategy, so don’t expect Republican candidates to say much about it over the next couple of months. But many Democrats will bring it up, arguing that the party needs to regain control of at least one chamber of Congress to prevent Republicans from weakening the nation’s social safety net.
Claiming that Social Security adds to the federal deficit or that Washington somehow has squandered Social Security funds has long been part of the political rhetoric about the program. Do you remember Al Gore’s tortured “lock box” defense of the program during the 2000 presidential campaign?
The reality, however, has always been much different. There are two Social Security trust funds, one for retirement payments and the other for disability benefits. Worker payroll taxes are allocated among the two funds. The disability fund sometimes has been in worse financial shape than its larger retirement sibling, and Congress has stepped in to divert money from the larger fund to shore up the disability fund. However, these monies always have stayed “within the family,” funding benefits to Social Security beneficiaries.
Assets in the Social Security trust funds have only been raided by the federal government one time. During the recovery from the Great Recession, there was a 2 percentage-point reduction in payroll taxes in 2011 and again in 2012. Instead of paying 6.2 percent of their wages in payroll taxes, workers paid only 4.2 percent. This reduction put more money in worker paychecks but, of course, reduced the money flowing into Social Security to help pay benefits. Congress later restored these funds to the system.
Together, the two trust funds have enough resources to continue paying all program benefits until the year 2034, at which time they would be able to pay only 79 percent of scheduled benefits, according to the annual report from the system’s trustees.
At the beginning of this year, there were nearly $2.9 trillion surplus dollars in the two Social Security trust funds. But for the first time, benefits paid in 2018 will be more than the sum of payroll taxes from current workers plus the interest earnings on those trust-fund assets. Without Congressional action, trust-fund holdings will dwindle to zero in 16 years.
The program’s interest earnings ($85 billion last year) are generated from U.S. Treasury securities which, by law, are the only investments in which trust-fund reserves may be placed. These Treasury bills are the source of confusion over the relationship between Social Security funds and government deficits.
Fueled by that big tax cut, federal deficits are again increasing and headed toward $1 trillion, despite falling unemployment and an economy that was doing well even before the cuts. The outstanding federal debt is approaching $21.5 trillion and will keep rising for the foreseeable future.
Within that $21.5 trillion debt are those $2.9 trillion in Treasury bills that are owned by the Social Security trust funds. To the extent the government has access to that money, it’s possible to say those funds have been hijacked by the Feds to fuel their deficit-spending bacchanal. But that’s ludicrous in practical terms. Social Security is simply one of many investors in U.S. debt. Without that $2.9 trillion, the federal government would simply turn to another source to buy its paper.
Historically, one of the great strengths of Social Security has been that it is totally funded by worker and employer taxes, and not by general federal revenues. This has allowed the program to operate with relative independence from Washington’s increasingly bloody budget wars. It also has meant that Social Security is an earned benefit, not a Washington entitlement. Workers have paid for the benefits they receive.
Looking to the midterms and beyond, it’s clear that Social Security’s annual spending of about $1 trillion has placed it in the crosshairs of people who say the U.S. can no longer afford to honor its commitments to older Americans. Republican tax cuts have narrowed the government’s ability to fund Social Security, Medicare, and Medicaid without some combination of reduced spending on other programs, higher taxes and benefit cuts.
Whatever terms are used to describe proposed changes to Social Security – reform, fixing, right-sizing, etc. – it’s essential to look beneath the rhetorical sugarcoating.
For example, Florida Republian Sen. Marco Rubio has partnered with first daughter Ivanka Trump to advocate for expanding parental leave rights. The proposal would be self-funded by parents via early withdrawal of their earned Social Security benefits. There’s nothing that would force parents to do this, and it can be argued that they should have the right to do so. But taking money out of a person’s Social Security at a young age would amount to a reduction in their later retirement benefits. Don’t expect this bill – the Economic Security for New Parents Act — to be promoted as a cut in Social Security benefits. But it is.
Proposals to raise the retirement age for Social Security benefits also would result in a cut to benefits unless the basic structure of the program is also changed. This impact is hard to see at first glance, so please bear with me.
Right now, people can elect to receive benefits as soon as they turn 62 and can defer benefits until as long as age 70, when they reach their maximum monthly amount. The full retirement age was 66 but is rising in two-month increments to 67 for those born from 1955 to 1960.
Raising the full retirement age further to 68, 69, or even 70 would – everything else being equal – force Social Security to trim benefits for people who elect to take benefits early after they’ve turned 62. Right now, a person whose full retirement age is, say, 66, receives a benefit that is 25 percent larger than if they claimed at age 62. That gain is spaced over four years and, in simple math, worth 6.25 percent a year in higher benefits for people who hold off filing.
However, if the full retirement age were raised, that same 25 percent increase would have to be spaced over six or seven years. If the full retirement age was 68, for example, the annual benefit for deferred filing would not be 6.25 percent but slightly less than 4.2 percent. Thus, if the retirement benefit stayed the same, this would amount to a benefit cut for anyone claiming benefits after they turned 62 and before they reached the new retirement age.
Lots of proposals to change Social Security have deceptively misleading names and results that differ from what you might think. For those with spare time, and the appropriate amount of caffeine to keep you focused, you, too, can become an expert by reading the agency’s detailed impact studies on major proposals to change the program.
Phil Moeller is the author of “Get What’s Yours for Medicare: Maximize Your Coverage, Minimize Your Costs” and the co-author of the updated edition of The New York Times bestseller “Get What’s Yours: The Revised Secrets to Maxing Out Your Social Security,” with Making Sen$e’s Paul Solman and Larry Kotlikoff. On Twitter @PhilMoeller or via e-mail: email@example.com.
Editor’s note: It was incorrectly reported that benefits paid in 2018 will be less than the sum of payroll taxes from current workers plus the interest earnings on those trust-fund assets; benefits will in fact be more.