"Democrats Deny Social Security’s Red Ink"- Going Deeper

A February 25th, 2011 article on FactCheck.Org titled "Democrats Deny Social Security's Red Ink is right on target, but I would like to dig a bit deeper into the causes of our current budget and debt problems as well as some solutions.  http://www.factcheck.org/2011/02/democrats-deny-social-securitys-red-ink/

As the article states, Social Security Expenditures exceeded Social Security Tax Receipts only in 2009 but the Medicare Spending exceeded its receipts back in 1975, only a few years after getting started as  the graphs below attest.  (Data is based on Congressional Budget Office, 2012 Budget)

Since 70% or more of the Medicare budget is spent on those over 65 as is Social Security, I decided to combine these two programs into a single number since the younger among us are those funding these programs for our forefathers!  The first thing this brought to mind, was the income cap on Social Security which does not exist for Medicare and their corresponding rates, seen below.

It is very clear that rates have remained unchanged since 1990, which is almost half of the time period covered by this graph from 1966 to 2016!  So, what would have happened had Congress continued to increase the payroll tax rates at the same increments as had been done for the previous 23 years.  In the case of Social Security, it would have been about 0.2% every two years (3.85% to 6.20% in 12 increases over 23 years); for Medicare, it would have been about .09% every two years (.35% to 1.4% in 8 increases over 23 years).  In addition to these changes, I also generated non-capped personal income from the Medicare receipts and tax rates which was then used to create the Social Security receipts from non-capped income.  To note, I ignored the tax rate reductions in 1984 - 1989 and for 2011 as these reductions were made up from the General Fund and it was not clear if this transfer was included in receipts.

All of these data were then graphed with all the different scenarios on the same graph.

Medicare / Social Security Spending is the light blue line with the current budget plan from the CBO as the dark blue line.  With the spending combined, these deficits began in 2002.  But the more obvious problem here is that the all the lines begin to diverge around 1992.  One reason this date is important is that the regular payroll tax rate increases that had been taken for the previous 23 years was DUE in 1992 but was not taken and has not been taken since.

So lets look at the different scenarios that I calculated from the CBO Budget Data (in all these cases, I used only receipts and spending, ignoring the effect of trust fund balance and interest):

1. Remove the income cap from Social Security Payroll Tax.  This scenario is the red line in the graph and indicates that issues could have been delayed until 2008.  This would be considered a tax increase even at constant tax rates, but at least it would be focused on the top 20% of wage earners!
2. Increase the payroll tax rates at the pre-1990 increments but keep Social Security income cap in place.  This is the green line in the graph and shows that there would be a dip in receipts coincident with the recession, but then recovers in 2012 to exceed spending.
3. Same as #2, but with uncapped Social Security income.  This is the purple line on the graph and clearly stays ahead of the spending rates.

It is clear, that the politics changed in 1992, the beginning of the Clinton Administration, but this aversion to raising the payroll tax continued through every administration since.  This is just one more example of inaction by our government in leaving the problem for someone else.  If we are not paying more in taxes to prevent these problems and spending is not cut, we will just pay later with financial messes like the housing collapse, recession and equity market shrinkage.  I guess it is easier to blame the bankers than it is the politicians!

But what if the rates were raised next year?  Could this help at all?  Looking at the CBO estimate years of 2011 to 2016, the total Social Security/Medicare spending is projected to be $8.3 trillion.  The current budget shows the receipts over these same 6 years to be $5.8 trillion, a $2.5 trillion shortfall.  If however the Social Security and Medicare rates were increased to 8.2% and 2.35% respectively and increased every two years at .2% and .09% respectively, keeping the SS income cap, the 6 year total would be $8.3 trillion which is the same as spending so no new contribution to the debt would be seen.  If the SS income cap were removed, the 6 year total would be $10.3 trillion and some help to the debt might be realized.

But alas, taxes will likely not be raised or the cap removed, so we can look forward to changes that will even more painful to the citizens, but less painful to the politicians.