Nam Y. Huh/AP Photo
The payroll tax cap was supposed to allow for 90 percent of payroll income to be taxed by Social Security, but in 2021 that figure plummeted to 81.4 percent.
Social Security has a problem: It’s estimated that in roughly 2035 or so, its trust fund will run out of money and won’t be able to fund all scheduled benefits. There are two basic options for resolving the situation: Either cut benefits, which will happen automatically if nothing is done, or find new sources of money.
For decades, conservatives and a galaxy of pro-austerity groups have been pushing the former option, which has taken form most recently with the TRUST Act, championed primarily by Sen. Mitt Romney (R-UT), but given new life by Sen. Joe Manchin (D-WV) at Davos (where else?) last week. The TRUST Act would create bipartisan committees to draw up “reforms” (read: cuts).
On the latter option, several politicians on the left have proposed finding new tax revenue, by for example removing the payroll tax cap, which currently exempts income over $160,000 from the tax. As the Economic Policy Institute has pointed out, the cap was supposed to allow for 90 percent of payroll income to be taxed by Social Security, but thanks to inequality and soaring incomes at the top, in 2021 that figure plummeted to 81.4 percent. Scrapping the cap would mean that Jamie Dimon (who makes $34.5 million per year) and you would pay the same amount of payroll income as a percentage of salary into the system.
But beyond taxes and cuts, there is a very interesting new proposal from Sens. Bill Cassidy (R-LA) and Angus King (I-ME) to create an investment fund whose profits could fund Social Security benefits. It’s a splendid and long-overdue idea.
Let me first deal with the TRUST Act. This is basically a redux of the Bowles-Simpson commission from 2010, which President Obama set up to find ways to cut the deficit. As the Committee for a Responsible Federal Budget (CRFB) explains, it would “set up rescue committees for lawmakers to seek bipartisan agreement on changes to extend the solvency of and to otherwise improve trust fund programs.” It assures us that the TRUST Act “would not make any direct changes to Social Security or Medicare,” though “cost reductions would be on the table.”
Anyone familiar with Washington knows what is going on here. The CRFB is a fanatically pro-austerity group that has been gunning for the American safety net for decades. The point of committees like this is to launder the blame for hugely unpopular cuts (in a 2019 Pew poll, 74 percent of Americans said there should be no reduction in Social Security benefits) between both parties. For centrist elites, forcing the American people to drink their “tough medicine” by slashing welfare programs is the heart and soul of responsible policymaking—as Alan Simpson of the aforementioned commission once said, Social Security is a “milk cow with 310 million tits.” Not coincidentally, benefit cuts protect the rich from taxation.
Incidentally, it’s important to understand that the deep problem with Social Security is about demographics, not accounting. People often think of the program as a savings account, and that the money is going to “run out” because of irresponsible politicians raiding the trust fund—but it’s really a welfare program, with almost all of the payroll tax collected immediately kicked out again to beneficiaries. Fundamentally, any form of retirement—private investments included—depends on the existence of a working class to provide goods and services for sale. When the population ages thanks to a declining birth rate and reduced immigration, that means fewer workers available to provide for seniors. That, plus payroll income at the top shielded from taxation thanks to the cap, reduces the amount available to fund social insurance.
The deep problem with Social Security is about demographics, not accounting.
So what about the investment idea? Joseph Zeballos-Roig reports in Semafor that Cassidy and King are proposing that the federal government create a new fund, separate from the Social Security Trust Fund, in which borrowed money would be invested in stocks, which typically grant a much higher rate of return than Treasury bonds. In other words, they would harness a small amount of American capital income (returns from stocks, debt, real estate, and so on, which reliably constitutes about 30 percent of national income) on behalf of the public.
This is not just a fair source of funding—the richest top 1 percent of Americans own over a third of American wealth—it’s also just plain common sense. As policy analyst Matt Bruenig points out in a People’s Policy Project paper advocating a broader social wealth fund: “Between 1990 and 2017, the average interest rate for a 1-year treasury bond purchased on the first day of the year was 3.17 percent. During the same time, the average total return of the S&P 500 was 11.3 percent.” Given how often politicians and commentators advocate for running the government like a business, it is remarkable how few have noticed this free 8.13 percent return sitting on the table. Any Wall Street trader would kill for that kind of opportunity—and if we had done so, Social Security would be in far better shape financially than it currently is.
Conservatives will likely object that government would surely bungle its investment. But there are working examples of social wealth funds all over the world, including in America. Norway has accumulated an eye-popping $1.3 trillion in its main social wealth fund, while the Alaska Permanent Fund has accumulated $75 billion (which is used to pay an annual dividend to all Alaskans), and both have extremely good performance with rock-bottom administration costs. Heck, the government could just hire the Alaskan fund managers to run the Social Security fund.
Or it could follow the example of passive index funds, which simply invest in a representative sample of the market. At the Financial Times, Robin Wigglesworth cites research estimating that as of 2020, at least 38 percent of the U.S. stock market was owned by such funds, along with firms and individuals that follow similar inert strategies, and the true figure is almost certainly much more than that.
Alas, the TRUST Act probably has a better political chance of success than Cassidy and King’s more fair and technically competent approach. Official Washington prefers elite politicians making “hard choices” to slash benefits for seniors on fixed incomes. But a social wealth fund is an idea worth underlining. One of the most unfair aspects of capitalism is how it enables rich people—especially ultra-wealthy oligarchs, who get the vast majority of their income from investments—to collect money while sitting around their palatial estates eating peeled grapes. If everyone from pension funds to BlackRock is raking in enormous returns doing literally nothing, there’s every reason for the government to get a piece of the action on behalf of American seniors and disabled folks.
