Note: Although I practice primarily in Social Security law, none of the following will directly or indirectly benefit me.
The Social Security problem is rapidly reaching a point where a negative impact on the economy will occur. To that end, now is the time to take action before the economy suffers. The facts/figures regarding the health and funding of the Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds comes from the Social Security Trustees Report.
A few important pieces of data to keep in mind:
1) The OSADI is solvent through 2034. This is not the important date however.
2) The OSADI will begin to redeem Trust Fund Assets from the general treasury in 2019. This is the important date.
3) The amount of the 75 year actuarial deficit for OSADI and Disability (where I practice) is 2.68{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} of payroll tax. Rather than looking at dollars and cents this is a better metric to use since payroll tax is where the trust is funded and where any future changes will take place.
4) The 75 year actuarial deficit is slightly misleading since the deficit rises from present to 2038, then declines slightly to 2050, then begins to rise again until the end of the period. This means that a short term solution that solves the problem 2034-2038 actually solves the problem to 2050. In other words, it’s possible to kick the can down the road if the 2019-2038 problem can be adequately addressed.
5) Payroll tax receipts for 2014 were 775,969 million.
When looking at solving the solution, raising the retirement age again isn’t a good option. The age is already 67 years old for the vast majority of the working population. With full retirement so near the end of life for workers, it’s likely to cause a spike in early retirement filings. Raising the age more defeats the purpose of the program.
Also, if possible, the economic impact of fixing the problem needs to be either 1) as low as possible if involuntary or 2) a voluntary action on the part of workers. Now, you may be asking what good does it do if workers choose to take steps that help Social Security, but harm the economy? Economic prudence by households often hurts the economy. If I decide to pay off debt, that prevents me from spending the money on consumer goods. If I decide to increase my emergency fund from 2 months to the advised 6 months consumer goods spending suffers. Other things such as investing in the stock market have a similar effect, though are partially offset by the increased health of the companies whose stock is purchased.
With that having been said, here are some actionable ideas that Congress can address to prevent the upcoming 2019 economic harm.
1) If an individual claims self employment in support of the earned income credit but had no FICA withholdings have the IRS reduce the earned income credit by the amount of FICA that would have been paid on the self employment and distribute to the appropriate agencies. While some legitimate self employed taxpayers will be hurt, there’s a significant amount of fraud with the EIC. The fraud won’t be eliminated, but some of the fraudulent payments will be recaptured. No option is going to be perfect, but this is a narrowly tailored option.
How much will this capture? No one knows for sure, but let’s use the amount of payments made in error as a proxy. The Treasury Inspector General for Tax Administration states that $11.6 billion and $13.6 billion in improper payments were made. Split the difference and multiply by 12.4{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} and that’s 1.56 billion (or 156 million – a 0.02 increase in payroll tax) a year. It’s penny ante, but it’s a start. Plus is recaptures monies paid out via fraud which is reason enough to take this action.
2) Withhold FICA from unemployment. Although unemployment is considered unearned income it is allowed because of earned income (no prior employment means no eligibility for unemployment.) 43 billion in unemployment was paid in 2012. With a 12.4{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} FICA rate that’s 5 billion. It’s a small amount in the grand scheme of things, but every bit helps. The running total is now 6.56 billion a year. ( 0.08 increase in payroll tax.)
3) Allow individuals whose retirement age has been pushed back to 67 to pay an extra 2{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} in payroll tax to return to age 65 full retirement age. Now we’re cooking with grease. Participation won’t be 100{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986}. However, we don’t need to have 100{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} participation since the goal is to a) prevent OSADI from having to redeem from the general treasury and b) cover the shortfall until 2038 which pushes the problem to 2050.
4) For that matter, give the option to workers to pay an additional 3{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} on top of the 2{997ab4c1e65fa660c64e6dfea23d436a73c89d6254ad3ae72f887cf583448986} so their full retirement age is now 62 the early retirement age. Sure, this will cause a spike in filings as workers take advantage of the new retirement age. However, by and large this spike will occur in the 2038-2050 period when the trust fund is improving.
Maybe with all of the above we still don’t get the problem solved. We have, however, kicked the can down the road a significant amount. What’s important is delaying the date the trust fund has to start redeeming assets from the general treasury. I don’t know what the payroll tax actuarial deficit value is for 2034. However, the above steps pushes the insolvency date back a significant amount if Social Security can get participation with 3 and 4 above.