by Bill Johnston
1) The Supreme Court has twice decided Social Security payments are taxes, not contributions.
In Fleming V. Nestor, the Court held “to engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever changing conditions which it demands.”
In Helvering V. Davis, the Court held “The proceeds of both the employee and the employer taxes are to be paid into the Treasury like any other internal revenue generally and are not earmarked in any way.”
2) In their annual reports, the Social Security trustees calculate a 75-year actuarial outlook for the program to stress test and ascertain the long- term financial viability.
Back in 1983, the Trustees report showed a 75-year actuarial surplus compared to a 3.54% deficit now. What went wrong in just 40 years?
They assumed the Baby Boomers would have the same number of kids as their parents. All working and paying into the system—but the Boomers had fewer kids than their parents.
In 1964, for instance, families averaged 3.2 children. Just 10 years later, that figure had declined to 1.8 children. Over time, the ratio of workers paying into Social Security to retirees receiving benefits has dropped even more.
Between now and 2033, annual interest payments on the overall public debt will triple, from $475 billion to $1.4 trillion, and double as a share of GDP. Because a substantial portion of this debt is held by foreign entities, including the Chinese government, the U.S. will be transferring more of its income and wealth overseas.
3) Sweden faced the same problem in the early 1990s. The old pay-as you-go pension system had promised too much. With fewer births and longer lives, projections showed the system would be insolvent a decade later.
Sweden’s politicians chose to directly inform the voters of the situation. The center-left Social Democrats acknowledged the system “would not withstand the stresses that can be foreseen.” In 1994 the Social Democrats agreed with the four center-right parties to create an entirely new system.
The reforms were designed to make it impossible to run a deficit and pass the costs to future generations. Crucially, the agreement introduced a balancing mechanism nicknamed “the brake.” When the economy is doing worse than expected, pension benefits are automatically reduced, and when the economy picks up again, the brake is released.
Sweden also introduced partial privatization of the system. The Swedish government withholds roughly 2.3% of wages and puts it into individual pension accounts.
The returns from the public income pension is around 2% per year, but from the private accounts the average Swede has made an impressive average return of roughly 10% a year since its inception in 1995.
Swedish social security isn’t perfect and doesn’t satisfy everyone, but it actually works and is sustainable in the long run. Sweden’s pension system was recently described as the world’s best by the insurance group Allianz, based on a combination of sustainability and adequacy.
The Swedish far left and far right never accepted the reform and have demanded and sometimes won higher payouts. But most of the system remains intact after almost 30 years. No doubt, part of the explanation is Swedish politicians prepared their citizens with an adult conversation about costs, benefits and what was possible, instead of merely rehashing slogans and ignoring the inevitable crash.
4) Social Security funding is always open to challenge from the left and the right.
On May 13, Biden chose to nominate Andrew Biggs, a fellow at the right-wing American Enterprise Institute think tank, for a Republican seat on the bipartisan Social Security Advisory Board, which was created in 1994 to consult the president and Congress about the Social Security system.
Mr. Biggs, to reduce Social Security spending, has espoused viewing Social Security as just a safety net against poverty in old age. As such, he would limit every Senior’s maximum benefit to the Federal poverty threshold. In 2022, that was $14,000 for a single person and $17,600 for couples.
The Democratic Senate and President Biden can block this but will be under tremendous pressure to make concessions during debt ceiling and budget negotiations.
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