Photo by Eric1513 - Getty Images
Money and Social Security
Billionaire Elon Musk has volunteered to recommend ways to “get control of the federal budget.” He calls the operation the Department of Government Efficiency (DOGE), a misleading title that suggests the authority of a government agency.
Their public assertion is that the deficit and debt are too high and threaten the prosperity of the nation. Their unstated objective is to save money by cutting safety net benefits that help middle- and low-income families, and to transfer the resulting savings to high-income families via tax cuts. Among their targets is Social Security, the government's most popular program. However, during their “on-the-job-training,” the DOGE duo will discover that there is no money in this program to be redistributed to the rich.
Be Wary of Consolidated Budgets
It is common to lump Social Security into a consolidated federal budget in order to show that, at $1.35 trillion per year, Social Security spends a whopping 22% of total federal spending. Such huge figures have rich people salivating over the falsely imagined chance for upward redistribution, i.e., that Social Security benefits can be reduced in order to balance the budget or cut taxes. However, such consolidations are a mirage; Social Security is officially “off-budget,” not only because it is too popular to cut but because it has its own funding stream and spending schedules. By the logic of arithmetic, it is separate.
Moreover, it is a “pass-through” system: the money that flows into the system almost immediately flows out to pay the earned benefits of current retirees. Musk cannot get money out of Social Security for the simple reason that there is no money available in Social Security in the first place.
How is Social Security Funded?
To fund Social Security, workers pay the payroll tax of 6.2% of their first $168,600 of earnings, and their employers pay a matching amount. The payroll tax revenue flows into the system and then almost immediately flows out to meet scheduled payments to beneficiaries—retirees and disabled—and to maintain a bond fund.
The bond fund, officially called a trust fund, was designed in 1935 to stabilize the system, smoothing out good years and bad years. In years when payroll tax revenue is greater than needed for retiree benefits, the Social Security Administration uses the surplus cash to buy special bonds from the Treasury Department. In years when payroll tax revenue is insufficient to meet scheduled retiree payments, bonds are sold back to the Treasury in exchange for the needed cash.
|
|
Adjusting the Bond Fund for Boomer Retirement
In the early 1980s the Reagan Administration recognized the looming problem of the Baby Boom retirement bulge that they knew would begin 35 years into the future. Seventy-seven million people were born in the United States during the 18 years between 1946 and 1964. This boom was followed by a bust: during the subsequent 18 years only 47 million people were born. Because of this boom-and-bust sequence, it was easily predicted that if the system continued to rely solely on revenue from the payroll tax the busters would have a tough time paying for the boomers’ retirement benefits.
In a largely forgotten masterstroke of public sector management, the Reagan-appointed Greenspan Commission raised the payroll tax rate in 1985 when the boomers still had most of their working life ahead of them. This higher rate forced boomers to save more for their own retirement. Essentially the boomers paid Social Security to buy bonds while they were working and to sell the bonds as needed to add cash to supplement payroll tax revenue when they retired. Currently those bond sales are paying about 22% of retiree benefits.
Why Can't the DOGE Duo Smash and Grab
Because Social Security relies on passing through both the payroll tax revenue and the revenue from bond sales, there is no money in the system for Musk to redirect to general funds for tax cuts or deficit reduction. If retiree benefits were cut, money could be extracted out of the system only if workers continued to pay the payroll taxes. Presumably this would be short lived as workers figure out that instead of financing retiree benefits, as well as earning the right to their own future benefits, they were financing a wealth transfer from themselves to the richest people in America.
The biggest threat to Social Security is ignorance of how it works.
