One Simple Measure That Would Save Social Security and More

August 23rd, 2012
in Op Ed

by Joseph M. Firestone, letsgetitdone at Corrente

Reposted from New Economic Perspectives

The Fiscal Times is a digital rag funded by Peter G. Peterson to propagandize the ideology of neoliberal austerity. Today, a post by Josh Boak highlighted the proposal of “fixing” Social Security by lifting the cap on payroll taxes.

"Social Security already appears to be running aground, just two decades before the program—which accounts for about 20 percent of federal spending—is projected to crash into insolvency.

"The program launched during the Great Depression—keeping millions of senior citizens from sliding into poverty—has steadily been paying out more in benefits than it collects in taxes, relying on the interest earned on federal bond holdings to help bridge the difference. Social Security costs are estimated to total $789 billion this year, paid for by $623 billion in payroll taxes.

"There’s an easy repair, but it involves drastically hiking taxes, so voters aren’t hearing about it on the campaign trail. Under federal law, millionaires and billionaires get to dodge payroll taxes on a substantial percentage of their salaries. Employers and workers are charged payroll taxes on salaries up to $110,100 a year, meaning anything above that—a category that includes someof the middle class—is payroll-tax free. Simply lifting that cap would cover about 90 percent of the projected shortfall over 75 years, according to forecasts by the Social Security Administration.

Follow up:

Boak then goes on to point out other difficulties with, as well as benefits of, the proposal. Even though this proposal is very simple; there is an even simpler solution the problem, without the drawbacks. Stephanie Kelton outlines it this way:

"Every year, the Trustees of Social Security and Medicare issue an annual report that examines the financial status of the various “trust funds” that purportedly sustain these vital programs. Social Security’s (OASI) and (DI) Trust Funds, as well as Medicare’s (HI) Trust Fund all face chronic problems, some in the not-too-distant future. In contrast, Medicare’s (SMI) Trust Fund always receives a clean bill of health. Why is that?

"The answer is so simple it apparently escapes notice, but here it is, straight from the annual report:

"The Hospital Insurance (HI) Trust Fund is expected to remain solvent until 2029. The Disability Insurance (DI) fund is projected to become exhausted in 2018. And the Old-Age and Survivors Insurance (OASI) Trust Fund is considered adequately financed until 2040. In contrast:

"Part B of Supplemental Medical Insurance (SMI), which pays for doctors’ bills and other outpatient expenses, and Part D, which pays for access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs."

"In other words, it is sustainable—INDEFINITELY—because the government is committed to making the payments. Indefinitely."

"And, as we have argued many times on this site (and elsewhere), the same commitment can easily be made to sustain Social Security (OASI and DI) and Medicare (HI) in their current form. There is no economic justification for cuts to either program. The decision is entirely political.”

So, the simple solution to the Social Security solvency “problem” (if something with such a simple solution can be called a “problem”) is for Congress to make the financing for Social Security (OASI and DI) automatic.

Of course, the first thing anyone will say about this simple solution for Social Security is that it’s not really a solution to the SS solvency problem because it just transfers the financing problem from payroll taxes to general tax revenues, and the solvency problem from SS alone to the whole Federal Government. However, as I’ve been at pains to point out in many, many posts in the past, there is no solvency problem for a Government like the US with a non-convertible fiat currency, a floating exchange rate, and no debts payable in currencies it doesn’t issue. For example, here’s how automatic financing of SS by Congress could easily be managed.

  • First, the President should use the authority provided by a 1996 law to mint a $60 Trillion coin and deposit it at the Federal Reserve.
  • Second, Congress should make SS funding automatic.
  • Third, Congress should also provide for imposition of the payroll tax at the discretion of the President, with the maximum payroll tax set at what it is today, but with the payroll tax salary cap removed to reduce the regressive character of the payroll tax.
  • Fourth, the President should reduce the payroll tax to zero for both employers and employees, until full full-time employment is reached. At that point he or she can use the authority provided by the Congress to gradually re-impose the tax if and when inflation reaches 3%.

The effect of these changes would be to immediately add $625 Billion plus to the Federal deficit, but not to the Federal debt because the increased deficit spending would be covered by credits issued by the Federal Reserve to the Treasury upon depositing the $60 T coin. We can use this increase in the Federal deficit to move the economy forward, since we know that most SS recipients would just spend the additional money, and since the Federal deficit is projected at about $1.2–1.3 Trillion right now which is at least 3% of GDP UNDER where the macroeconomic sectoral financial balances model says it should be for full employment, assuming that the trade deficit will be about 4% of GDP and savings will be at 6% of GDP. I say, at least, because so much of the deficit spending is tied to subsidies for well-off corporations and individuals and so has low fiscal multipliers, providing more space than otherwise for even higher deficits before demand-pull inflation becomes a problem.

Apart from the extra stimulus provided by using deficit sending to finance SS, the changes I’ve proposed would provide an additional automatic stabilizer to the economy. SS would contribute much more stimulus to the economy on a continuing basis to the economy than it does now. But in addition, and unlike the situation from the 1980s until very recently SS would provide a fiscal drag on the economy, only when a fiscal drag was needed to fight inflation. Otherwise it would provide only continuing stimulus.

So, there we are,  a simple solution for SS solvency, and an accompanying answer for those who are worried about “how we gonna pay for that?” In both cases, there really is no “problem.” Just a few simple things to do to change a “problem” into an “opportunity!”

Related Articles

Analysis Blog and Opinion Blog articles by Joseph M. Firestone

letsgetitdoneAbout the Author

Joseph M. Firestone, Ph.D., is Managing Director and CEO of and is a frequent blogger on matters economic and world affairs. More of his blogs can be found at Corrente.

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  1. Frank Li (Member) Email says :

    SS is a Ponzi scheme - The longer you keep it as-is, the more you (or the next gen) will hurt. You can't tax the rich to prosperity! The rich are rich for a reason: they work harder, in general. Taking that incentive away from people, you will end up like a communist country - everybody will be poor, dirt poor!

  2. Sigmund Silber Email says :

    I am almost embarassed to comment on such a stupid article. We can solve a problem by creating or borrowing more money. Is this suggestion worth presenting? And the idea of taxing people who make higher incomes for insurance where the payments are capped, also makes no logical sense. Why is it ethical to have a person pay higher premiums if their level of insurance does not increase? This is definitely down a rabbit hole material.

  3. Sigmund Silber Email says :

    Truly silly article. We can solve any problem by creating more money or borrowing it.

    Also the idea that a person who is purchasing insurance should pay a higher premium but not receive higher payouts seems fairly unethical to me.

    With this sort of thinking, no wonder we are in trouble.

  4. Frank Li (Member) Email says :


    > With this sort of thinking, no wonder we are in trouble.

    Freedom of thinking, especially for the academia. It's the action that hurts us - President Obama hired many know-nothing professors to be his advisers and has been turning this kind of thinking into action. That's why we are in trouble!!!



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