A Semi-Serious Scrutiny of Social Security

Social Security is a lot like Tim Tebow – people just won’t stop talking about either one of them. Everywhere I go I hear conversations resembling the following:

We must maintain a safety net for our seniors!

I hate how everyone in our country expects a handout!

The test of a society is how they treat the old and the sick!

Why do I need to pay for your grandpa?  He’s old and he smells and he doesn’t even work anymore and he’s not even interesting to have a conversation with!

You might be thinking, “Who the hell are you hanging out with?” which is irrelevant and I’d appreciate if you stayed out of my personal affairs.  The bigger question is:  Why is there so much disagreement?

Part of me feels like it’s because a lot of people are assholes.  Another part of me feels like the complexity surrounding the numbers behind Social Security leads to unnecessary disagreement. Maybe if we can all agree on the math surrounding the program we can agree on what to do about it.

We can start by breaking things down with a fairly simple scientific method endorsed by Tracy Morgan:  “What goes in”, “What comes out”, and “So what’s up with all this?”

Does it drive anyone else crazy that Jim Halpert still works at Dunder Mifflin?  How are we supposed to root for a guy who after 8 years of working at a dead end job, at a dead end company, in a dead end industry, and for an idiot boss can’t get himself to boot up Microsoft Word, pump out a resume, and get a new job?  If Jim Halpert was a real person I would try to convince Pam to leave that loser encourage him to seek new employement. Anyway, good morning, but I digress –

Social Security is funded by the payroll tax (separate from the income tax) and breaks down as follows:

YOU pay 6.2%* of your first $106,800 in income, and zero thereafter.
YOUR EMPLOYER pays 6.2% of the first $106,800 they pay you, and zero thereafter.

*Obama and Congress have temporarily cut YOUR contribution to 4.2%, while maintaining the employer’s contribution at 6.2%.  The cut is scheduled to expire at the end of February but they will probably extend it in a bill that will also include an earmark to put Newt Gingrich on the moon, by himself.  

You’re probably thinking three things right now:

  1. Wow that’s a lot!
  2. I really want Indian food tonight but do you think I’ll have gas all day tomorrow?
  3. What’s up with the “And zero after $106,800″ part?”

Let me address each thought:

  1. It is a lot!  If you count the 6.2% from your employer, you are paying 12.4% in payroll taxes on your first $106,800.  This is an enormous source of revenue for the federal government.  In 2008 revenue from the payroll tax was THREE TIMES LARGER than revenue from corporate income taxes. WTF Google?
  2. Yes but it’s worth it.
  3. If you make more than $106,800, every dollar you make past that point pays ZERO in payroll taxes.  I know you thought you had it good when you made $110,000 last year – but did you know you paid the same amount in payroll taxes that Brad Pitt did?

First of all, you look great.

You can’t be mad at Brad Pitt for his paltry payroll tax bill.  It’s not his fault he’s so beautiful his rate is so low.

You’re right to be upset though.  What does Brad Pitt do that’s so important?  “Moneyball” wasn’t even that good – why didn’t Jonah Hill make more jokes?

If it wasn’t for your job at the storage facility, people wouldn’t be able to store all their useless crap that they really should throw away.  You are doing real work in the real economy, just like Mitt Romney.  Why is the payroll tax capped at $106,800?

The short answer is: It’s fucked up.  The long answer is a rationale that makes no sense when you look at how the payroll tax revenue is treated, so let’s take a look at that first.  Actually, before any of that, let’s look at this baby next to this dog because I really want this article go viral:

So now we know what goes into Social Security.  The next question is:

Social Security benefits are so complicated an objective observer might come to the conclusion that the government is just fucking with you.  A tea party observer might come to the conclusion that the government is just fucking you.  Your dog might come the conclusion that he just ate the envelope with all your benefit information and now he’s going to poop all over the floor.

You can start to collect full Social Security benefits when you are 67 (or a little earlier if you were born before 1960). You can elect to collect early at 62 but your benefit will be smaller.  You can also collect early if you become disabled.  The average recipient in 2011 received $1,177 a month in benefits, or $14,124 a year.  Benefits are a factor of how much you paid into Social Security, if you are still collecting income, and when you chose to begin collecting.

So how does all this shake out?  We all understand that Social Security is a “pay as you go” system – the younger people’s contributions pay for the older people’s benefits, like this:

But are there enough payroll taxes coming in to pay for what’s going out in benefits?  Really we need to know:

Below is a graph of Social Security inflows minus outflows going back to to 1957.  The data is from here 

For the 68% of the adult population that cannot read simple charts – this means that we’ve taken in way more in payroll tax revenue than we’ve paid out in benefits, over $2 trillion worth.

This is by design.  In 1983, concerned over the long term solvency of the program, President Reagan appointed Allen Greenspan to lead a commision to reform Social Security.  Unfortunately, this was before everyone realized Allen Greenspan was an idiot.

The logic behind reform was simple:

  1. Social Security is a pay as you go system.
  2. When the Baby Boomers retire, there will be more people collecting benefits than paying into the system.
  3. If we don’t pay their benefits they will be pissed and we can’t handle another decade of drugs and protests and bell bottoms from these people.
  4. Let’s raise the payroll tax substantially so we collect way more now than we pay out.  We’ll put the extra in a “trust fund”.  We’ll also nudge up the retirement age.
  5. When the Boomers retire, we’ll draw down on the trust fund to supplement any deficit we have in inflows vs. outflows.

Sounds good right?  We’ll just take more money than we need for now and we’ll keep it in a trust fund.  Maybe we can even invest it!  Can we buy stocks?  Let’s buy Apple!

Unfortunately things turned out more like this:

The Government borrowed the money in the trust, used it to supplement other spending, and “filled” it back up with IOUs (“Special issue US Government Bonds”  more info here).

Some people claim that this is fine because every dollar we’ve borrowed from social security is a dollar we didn’t have to borrow from foreign creditors.  The underlying assumption here is that government spending exists inside of a vacuum, and the amount of easy money laying around has no effect on it whatsoever.  This is, well, silly.

Imagine you have a ten-year-old son who you plan on someday sending to college.  You’ve saved up $20,000 and you put it in a shoebox on his dresser.   He immediately “borrows” all $20,000 and spends it at the mall.  I mean he just goes absolutely fucking nuts in the mall.

Eight years later when he is about to start college, would you say to yourself, “Well, every dollar he borrowed out of the shoebox is one that he would have borrowed from the rest of the money we have anyway, so really it’s all relative.”

Of course not!  You would never have given him $20,000 to blow at the mall!  You never should have put the shoe box in his room!

The same is true for the Social Security Trust Fund.  It was an easy way for the government to spend over $2 trillion without having to borrow it in the public markets or raise income taxes. The increase in government spending we’ve seen since 1983 is in part a RESULT of the Social Security system.

If you are following this at all,

If anyone else is following this at all, here is what we need to do:

  1. Recognize that this whole thing was probably a bad idea.
  2. Admit that the payroll tax is effectively just a highly regressive form of income tax.
  3. Get rid of the distinction and roll it into the income tax (which effectively gets rid of the $106,800 cap).
  4. Acknowledge that Social Security is not a self funded retirement system, but a form of welfare for the old and sick (which is a good thing and something we should do!  I love you Grandma!)
  5. Stop paying out benefits to those who don’t need it.
  6. Take a look at how the numbers stack out after these changes (they will look a lot better) and then tinker with benefit adjustments if needed.
  7. Read “The Hunger Games” before the movie comes out because the book is always so much better with the possible exception of “The Girl with the Dragon Tattoo”.  I didn’t realize how hot Lisbeth was when I was reading it.

Boom.  We did it guys.



  1. To answer just one of your questions: I think a lot of it has to do with the current job market in Scranton. Central PA has seen better days, to be sure.

  2. Very entertaining and educational, and you were right on with the exception of the shoe box example. There you, like tea-partiers, commit the error of drawing wrong parallels between personal finance economics and public finance economics. A father such as the one in your example would not be able to print money (without going to jail), and neither would the money spent in the mall have a direct impact on the father’s level of income (as money spent in the mall, to borrow from your analogy, results in GDP improvement). Of course, there’s a whole litany of other issues and considerations when considering public spending and fiscal policy, but I just wanted to point out how the shoe box example severely distorts the concept. Finally, if you do away with the maximum taxable limit for social security then you’ll have to do away with the maximum benefit paid out. Would the numbers make sense then?

  3. Tribelle4 says:

    Hilarious. You may want to consider writing for South Park.
    Ps. Nice usage of alliteration!

  4. Tribelle4 says:

    I just assumed you learned it from Schoolhouse Rock…

  5. Tribelle4 says:

    I guess it was your incredibly refined and mature sense of humor that led me to believe you were a much older gentleman…you know, like one who was born in the ’70s.

  6. Tribelle4 says:

    Obviously, the rap version of everything is better. And everything puff daddy (or whatever the artist formerly known as Sean Combs calls himself presently) touches is pure platinum. With the exception of Cameron Diaz.

  7. Actually she has also gone platimum. The $22 L’Oreal kind from CVS. http://www.dailymail.co.uk/tvshowbiz/article-2095471/Cameron-Diaz-pulls-odd-facial-expressions-London.html

  8. I want to make out with this post.

  9. I feel like this post should be taught in schools. I got schooled on SS. Never knew there was a surplus that has been spent. So people living longer isn’t what can/will cause a deficit in SS, it’s the fact that the government spent the money? So do they plan on paying that money back?
    I won’t hold my breath.

  10. 1) Your analogy above regarding the money in the shoebox is wrong. Another poster already noted that.

    2) There’s a problem with limiting the payouts to only those than need them. Once it becomes a welfare program then the benefits will be cut drastically. It already happened to welfare and it’ll happen to social security as well.

    3) The government bonds are only scary if you think the US government isn’t going to make good on those bonds. We’ve never defaulted so why worry about it?

    Without a change to the program Social Security will pay out every penny for the next 27 years. After that, eliminating the cap on the payroll tax will ensure the Social Security is solvent forever.

    Social Security isn’t some scary time bomb. It’s the most effective social insurance program this country has ever had.

    • This was great reading right up until your 6 suggestions:

      1. How could a program that has reduced poverty in the elderly population and gives retirees, the disabled and their survivors economic security in case everything else goes to crap – be a bad idea?
      2 & 3. The reason SS has done so well is that it has been a separate tax and has not had to compete with other federal spending because it’s self funded. BTW, those government bonds must be paid back. That’s our money Congress borrowed and they OWE us.
      4&5 Turning SS into a welfare program will undermine the widespread support the program has had for decades. This is one of the fairest programs around – if you pay in , you get a benefit. The lower income earners get a little more while the upper income earners get a little less.
      6. Many possible tweaks to the program including raising the wage cap would address the future long term funding gap. Whatever happens, changes shouldn’t include benefit cuts like means testing or raising the retirement age.
      7.Thanks for the book recommendation. Really liked “Girl with the Dragon…” and am not sure if I want to see the movie cuz it usually isn’t as good as the book.

  11. You’re ignoring the fact that, for those of us who max out on payroll tax, it is highly unlikely that we will get back more than we pay in. That being true, why would we want to see more of our money taxed? As it is, we pretty much assume we’ll never see any of it anyway.

  12. Oh my god…funny but incredibly misguided.
    I have a much simpler idea and if we turned the clock back we could have just let this program be funded as a real trust with the assets held in segregated accounts with the holdings in treasury bills or cash in your own account that you could bequeath when you pass but not liquidate. You could also choose to invest it in highly rated pooled securities to spread risk. These would have been your funds not some fake number on a statement. We would have 2 trilion more of real savings in the US!! Why is this bogus trust fund that we currently have any different from MF Global. Supposedly segregated funds were borrowed from commodity accounts and loaned to Italy……I know some genius will mention the fact that MF didnt replace the borrowed funds with Treasuries. Well using my logic they (MF Global) could have replaced them with the actual holdings they bought with the borrowed funds. In other words Italian bonds would be put back in their accounts instead of treasuries as with social security. Logically the MF account holder would say that does work because they declined in value. We can look at the decline in the value of the purchasing power of the dollar you put in the social security trust fund. The rate of implied return we receive is generally very low. This rate is way lower than the decline in the purchasing power. So we really did get the equivalent of Italian bonds in return!! Private accounts is the real answer. Let the government nominalize the amount they borrowed from us and pay it back so all the older people who are owed benefits can be paid.
    let’s stop this madness for our young people and let them build their retirement in a true trust fund for their future.

  13. This was fun to read, and I was totally going to help you go viral by forwarding it to my friends who might care, but you lost me with the bit about reading the Hunger Games because I don’t want to go around promoting blatantly plagiarized literature. If you don’t know what I’m talking about, look up the Japanese novel Battle Royale.

  14. My brain just imploded. Lets recap…

    We have a social security system

    Government already charges us more than they pay out just in case we need to cover the non-

    condom wearing generation of drug addled burnouts

    Government pilfered a bunch of cash from said fund

    your solution is charge MORE money to people who are doing well in life AND make it so they get nothing in return.


    Government steals cash.
    Make ME pay for it?

    Here is a much better solution: Make people cover their own retirement needs. If you love your grandma so much why don’t YOU give her some extra cash.

    • government pilfered cash from said fund and….

      spent it on things that should have been paid for by the income tax (with no cap and actually higher rates as you go up)

      so yeah…higher income earners owe that money back

  15. Hilarious and educational, always a pleasure! And i could read the graph.
    I’m just not sure how you would justify your fifth solution, how do you determine who “needs” the money and who doesn’t?

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