Broadcast Retirement Network’s Jeffrey Snyder discusses the different alternatives to improve the solvency of the Social Security Trust Fund with the American Enterprise Institute’s Andrew Biggs, PhD.
Jeffrey Snyder, Broadcast Retirement Network
Joining me now is Dr. Andrew Biggs of the American Enterprise Institute. Andy, great to see you.
Thanks for joining us on the program this morning.
Andrew Biggs, PhD., American Enterprise Institute
Good to see you, Jeffrey. Happy to be with you. Always happy to come back.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, it’s great to talk to you about retirement in general. You do so much different types of research at AEI, but I thought today we’d talk about social security. Dr. Biggs, there have been a lot of suggestions and alternatives on ways to solve some of the insolvency problems. If you wouldn’t mind, would you talk about what these options are and then we can get into the kind of pros and cons of each? Sure.
Andrew Biggs, PhD., American Enterprise Institute
Well, as most people know, social security is the largest federal spending program. It pays retirement, disability, and survivor’s benefits. The Social Security Trust Fund for Retirement Program is projected to become insolvent in 2032.
When that happens, legally speaking, the system can’t pay full benefits. It would have to cut benefits according to the CBO by roughly 28%. So this doesn’t mean that can’t be fixed, but it means we do have a hard stop coming up.
In broad terms, the real question comes down to, do we want more money going in or less money coming out? The more money coming in, primarily things like payroll taxes, maybe some other source of revenues. The less money going out is, there’s all sorts of different ways you can do it.
You can raise the retirement age. You can cut the initial benefits people get. You can reduce cost of living adjustments, the COLAs.
You can make the system more progressive, say by cutting benefits for high-income Americans. But all of these come down to, I hate to say, sort of a worsening of the for Social Security, in the sense people were told for decades, if you pay this tax rate, you’ll get benefits from this formula. The tax rate and the benefit formula, again, we’ve known for 40 years are mathematically incompatible.
They can’t fit together. So reform means telling Americans, okay, you’re going to have to pay more and get less. And politically, that’s very, very difficult to do.
Jeffrey Snyder, Broadcast Retirement Network
Yeah. And that’s why they call this, I think, the third rail of American politics. And usually politicians don’t want to talk about this at all in the campaign trail, whether you’re running for the Congress or the Senate or the presidency.
Okay. So I guess I’ll ask this. This is my follow up question to that.
So if you come to me, not you, Andrew Biggs, Dr. Andrew Biggs, but if they come to me and say, I’ve been paying in at X rate for, I’m 54, I’m going to be 54 in two weeks, for 30 plus years. Now you’re telling me I’m not going to get my benefit and you’re going to cut back my benefit just because of arbitrarily, I’m going to have a problem with that, Andrew, because I don’t think that’s not fair and equitable.
Andrew Biggs, PhD., American Enterprise Institute
Well, social security is an unusual federal program in that these fairness issues come in, in the sense of social security is set up where you pay into it throughout your working life, this payroll tax that comes out of your wages automatically. And then your benefits are also based on your wages. So people get this feeling, this is a little bit like a retirement account or an insurance policy.
I paid for it. People call them earned benefits. That creates a very different dynamic for reform than some like corporate subsidy or farm subsidy, where if we have to roll it back, the recipients aren’t happy with the cuts, but they understand this is not something they’re getting because they paid for it.
So that moral component is a huge thing. And so if you’re telling people, okay, look, you were promised these benefits all your life, and now we’re gonna have to pare them back, they feel that is unfair. But let me put it to you in another perspective, which also hits unfairness.
If you look at projections from the Congressional Budget Office, they say, if we have people retiring in the 2030s, 2040s, if we’d pay them all the benefits they’re promised, the ones they think they paid for and earned, in fact, they’re going to receive over a third more in benefits over their lifetimes than they paid in taxes plus interest on those taxes. In other words, they are being promised something of a windfall benefit. They’re getting back dramatically more than they paid in.
And if we’re going to honor that promise, what that means is that future generations have to pay more or get less, that it’s unfair to the future generations. So you have this different fairness components. Yes, it is sort of unfair to when you told people all their lives, if you pay these taxes, you’re gonna get these benefits.
It’s unfair to cut those benefits. But it’s also unfair to pay people windfall benefits and make future generations make up the loss. So the fairness is one of these issues where you’re going to violate it one way or the other, no matter how you fix social security.
So you want to focus more on what are the essential things that social security needs to do? And what are reforms that are good or bad for economic growth? I’m not saying fairness shouldn’t be a component, but it cannot be the only component because there’s no 100% fair way to fix this.
Jeffrey Snyder, Broadcast Retirement Network
That’s a really great point and an excellent answer, Andy. In terms of cutting back benefits for certain groups, there’s kind of a, isn’t there a precedent for this or at least popping what they call is the wage cap, right? Because Medicare, doesn’t Medicare take into account all the wages that you earn in order to fund Medicare?
So couldn’t they do the same thing in social security? I’m not saying that’s right or wrong, but in order to create greater solvency, couldn’t they do that? And they’re actually talking about trimming back benefits, up to $100,000 for high earners.
Sure.
Andrew Biggs, PhD., American Enterprise Institute
The social security payroll tax applies to wages up to about $180,000 this year. It changes every year and it just changed, so I’m a little bit stalled, but around $180,000 a year. Earnings above that, you don’t pay any taxes.
You also don’t earn any benefits. Your benefits are calculated based on the earnings that are subject to the tax. So if you eliminated that payroll tax ceiling, what we call the tax max, that would bring in more money to the system, especially to bring in more money in the short term.
Over the longterm, you know, if you wanted to keep the system as an earned benefit, you would have to pay additional benefits out. And so, you know, that’s a solution that’s on the table. I will be surprised if something doesn’t happen on that, but you want to realize what that means.
The social security payroll tax is 12.4%. So if you uncap the social security payroll tax, that’s a 12.4 percentage point increase in our top tax rate, the top marginal tax rate under income. That’s a big deal. And it’s a big deal economically.
It’ll take the U.S. top tax rate among the very highest in the world. When you add state taxes, if you’re in New York City or California, it’s going to be a lot of money. And, you know, those high tax rates have economic effects.
But even if you don’t care about that, you know, let’s say you’re somebody who’s very progressive and wants to tax the rich more, there is this issue of, okay, is this what we want to use the extra money for? I mean, if you were to fix social security entirely by raising taxes on the rich, you know, that’s the largest peacetime tax increase in U.S. history. You’re not going to get it again.
Is this what you want to use it for? Social security reform can protect low-income people without a lot of trouble. There aren’t very many poor retirees.
Their benefits aren’t very high. That’s not hard. What is hard is paying those $100,000 benefits to a very high-income couple.
That’s expensive. And so it’s balancing these things out.
Jeffrey Snyder, Broadcast Retirement Network
All right. Let me follow up on that. This is an excellent discussion.
I think we’re going to have to bring you back to talk because we’re not going to solve social security solvency in eight to 10 minutes. But let me follow up on that. You know, there’s been a lot of talk about, I get this question all the time from people that I’ve run into on the street here in Charlotte, that tariff income that we get.
The president, you know, I know that’s a subject of debate. There has been Supreme Court rulings, but let’s just say hypothetically that that windfall continues in some way, shape or form. Could that be used to pay into social security?
That’s number one. Number two, let’s talk about the private retirement system. So should we be focused on getting more Americans into a private retirement system, try to shore up social security, but getting people into 401k type programs?
Because by all accounts, people are saving. Maybe they’re not be saving, you know, globs and globs of money, but they have a vehicle to save and that’s fully funded because you’re paying in.
Andrew Biggs, PhD., American Enterprise Institute
The first point, I don’t have on the top of my head how much the tariff income or tariff revenues are each year. I don’t think they come close to covering, you know, social security pays out a trillion and a half a year. When a trust fund runs out, you’re going to need, I don’t know, an extra three, 400 billions.
I mean, you’re not getting that money from tariffs. So it’s, this is, I mean, social security is a big deal in terms of its scale. And so often people mix, I want to say apples and oranges, but things are very different scales, not understanding how big social security is.
So there’s no easy tax effects on us like the tariffs. I apologize. What was your second question?
Jeffrey Snyder, Broadcast Retirement Network
Sure. My second question was, let’s focus on the private retirement system. Yeah.
So the 401k-esque type system, that seems to be working for many. It’s not perfect by any stretch, but is it time to try to get something in place for people that maybe don’t have a 401k type plan in place? Yes.
Andrew Biggs, PhD., American Enterprise Institute
I think absolutely. And the reason for this is social security today does two things. First, it’s sort of a transfer welfare program for the poor, for poor retirees, for poor disabled.
But on top of that, it essentially is a middle-class and often upper middle-class pension program. Now, if you’re starting social security today, the government would do the welfare safety net component. The only government can do that.
Nobody would say we need to be having $100,000 of government-paid benefits to high-income couples if we were starting it today. Nobody else on earth does this, by the way. So they would simply say, sign them up for a 401k.
If you look at a country like Australia, which reformed its pension system much more recently around 1990, they take that division of labor. They say, we’re going to have a very strong safety net against poverty in old age. But the income replacement part, the part where people are saving not to stay in poverty, but to maintain their standard of living, that is more efficiently done through retirement plans.
And so in Australia, everybody has the equivalent of a 401k, some DV pensions. They’re required to be offered it. They’re required to be enrolled.
Their employer pays into it. So that division of labor, it’s a stronger safety net. The protection against poverty is much stronger in the U.S. But at the same time, the long-term cost of their government program is about a third of what Social Security will be because everybody is signed up for a retirement plan. It’s one of these things where people will say, well, we need high Social Security benefits because people aren’t saving enough for retirement. The alternative is if we make sure everybody’s saving what they should for retirement, Social Security’s job becomes much easier. And people feel very differently about paying into a 401k that they own.
They know the money’s not going to go for other things than they do paying a tax into Social Security where, right or wrong, they don’t trust they’re going to get their benefits. The economic effects of those two things are very different.
Jeffrey Snyder, Broadcast Retirement Network
So my last question, and we’ve got about a minute left. I apologize. But as I said, we’re going to have to bring you back to continue the conversation.
We’re not the only ones talking about this. I read you were featured in another piece on USAToday.com with other people. So there are people talking about this.
What is it going to take? And this is where I think I’d like to ask you for your political hat for, we don’t want to wait till the last minute to fix things. And that’s what people tend to do.
I’m one of those people that puts things off, but we can’t wait till the last minute. How does this bubble up politically so that we get ahead of the game of 2030 or 2032?
Andrew Biggs, PhD., American Enterprise Institute
I was in Washington, D.C. a few weeks ago and went to a dinner of sort of center left and center right people focused on Social Security. What became very clear there was a policy solution is not hard to do. What really is the problem is the political process, that it is not what you think of partisanship of Republicans really do want to do one thing, Democrats really want another and they’re fighting it out.
It’s nobody wants to do anything. Yeah. I joke that if you want to understand Social Security’s problems today, read the New York Times in 1990.
We all understand the issues, we understand the choices, but it’s the political process is what is letting us down. And so you get a groan when you say we need a bipartisan commission. We need something to get around that political process because that is what is holding us back from a solution.
And this is the sort of thing, if you let it go to 2032, you say, oh, well, we’re just going to borrow the money. You know, hello, financial crisis. That’s that’s the real danger we face.
So this is an important issue that we find some way of getting on top of as soon as we can.
Jeffrey Snyder, Broadcast Retirement Network
Yeah. And I think it’s forums like these, but other forums, it’s got to bubble up. You know, when the citizens decide that it’s an important issue, the politicians will respond accordingly.
I believe that that’s that’s you know, there’s a currency, there’s votes and they want votes. So when this this will bubble up, I think because of that, Dr. Biggs, we’re going to have to leave it there. It’s always great to see you.
Thanks for joining us. We look forward to having you back again very soon.
Andrew Biggs, PhD., American Enterprise Institute
My pleasure. I’ll come back anytime.