Friday, May 24, 2013

Social Security means testing debate: references on the "integrity" of the self-funding payroll tax mechanism

On May 16, I wrote a posting here about a suggestion for immediate means testing of Social Security. I received a comment (posted at the end) to the effect that Congress abandoned “self-funding” for Social Security, as apparently intended by FDR, in the 1940s, and that the program is “financed” rather than “funded” today.  The comment responds to my suggestion that Congress should pass a law (answering Flemming v Nestor) giving beneficiaries some actuarially-based ownership rights to their contributions.  I actually believe the GOP and conservatives would support that, and that such a measure could help reach a bigger budget compromise in Congress.  The posts suggest that this would present future legal or constitutional problems.
I tried to find some more factual basis on the “finance” v. “funding” debate. 
Social Security has a couple of complicated accounts that could prove definitive, but they need interpretation. 
One of these is an “Internet Myths” page here.
Another is an FAQ page where Social Security discusses the history of the Trust Fund and the significance of the accounting gimmicks and terminology, which have flipped back and forth over the years, here
There are many reputable sites that explain how Social Security is supposed to be funded by the FICA Payroll Tax (largely), like FAIR (Peter Hart), here

Andrew Biggs has an interesting perspective on the self-funding paradigm. First Congress weakened the contributory aspect of FICA by paying lower income workers more relative to what they had contributed (progressivity).  And the Congress and the president gave workers a two-year-long cut of 2% of the payroll tax, which was rescinded at the beginning of 2013 with the Fiscal Cliff legislation passed Jan. 1.  That means that these workers will have paid less relative to what they get than they should have, actuarially speaking. The link is here.  I’ve always thought that the FICA tax holiday was “irresponsible” and could invite further erosion of benefits already “earned”.
What does all of this mean?  Two points stand out.  One is that the Social Security Trust Fund does have a legal claim on the Treasury in case of default (as with the debt ceiling).  It is likely that federal courts would see it this way, in the absence of further direction from Congress.  (AARP and others would certainly be eager plaintiffs.)
The other is that gradually the claims from retirees are gradually outstripping the income from FICA.  Technically, this first happened in 2010 (making the tax holiday even more dubious).  The reason is “demographic winter”.  People live longer, and there are fewer children and fewer workers, although in the US immigration does help take up some of the demographic slack.  It’s just “do the math”.  For any annuity-style retirement program to be stable, there has to be an increase in “premiums” (FICA taxes) and a constantly increasing retirement age to account for the demographics.  A chained CPI could help.

Essentially, you have to help people take care of themselves before they can take care of others. And people can't help themselves as well in a fiscal system that jeopardizes its own stability and, particularly, integrity.  That’s why a “self-funding” system should be kept sound, with ownership rights (even privatization) before Social Security is used for “wealth redistribution”.  

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