The latest report from the Social Security Administration trustees says the fund is now $20 trillion in the hole and will be empty by 2034. The Congressional Budget Office puts the date even earlier, at 2032. Saving America’s retirement plan is one of the biggest issues we’re facing.
Amid all the misinformation and misunderstanding, here are five things that could help.
1. Make the self-employed pay their taxes. We can fill some of the funding hole just by making sure all the self-employed pay their share. Those who work for themselves, for example in “gig” economy jobs, are supposed to pay 15.3% a year toward Social Security and Medicare, like everybody else. Many don’t know it. Others know, but don’t pay. A recent Treasury Inspector-General report estimated the underpayment was about $69 billion a year. And that was using data from a decade years ago, before the boom in online platforms like Uber, Lyft, Airbnb, Etsy and Handy. “The gig economy has grown considerably” since then, the report adds. (No kidding.) How much money are we talking about? Nobody knows. But the inspector general found that during a sample of years nearly 40% of those with self-employed income had failed to pay the tax. And it estimated self-employment taxes account for about 15% of the total “tax gap,” or underpayment of federal taxes. Back of the envelope numbers suggest Social Security and Medicare are losing more than $80 billion a year. Simple solution: Beefing up enforcement.
2. Try investments that might actually make money. There would be no funding gap at all if Social Security was just run like every other pension fund in America and most of those around the world. The typical pension plan invests in stocks, real estate, forestry, agricultural land, precious metals and the like as well as bonds. Social Security? Just U.S. Treasury bonds, and nothing else. It’s nuts. Over the past 40 years, the S&P 500 has outperformed the bonds in the Social Security trust fund by 600%. And for those who say the obstacles to letting Social Security invest in stocks are insuperable: It’s amazing how so many other governmental and quasigovernmental pension funds manage to do it, from Norway’s national wealth fund to the pension funds run by all 50 American states.
3. Try a wealth tax. Even if Social Security did not directly invest in stocks there are simple ways America’s retirement fund could participate in the performance of assets like stocks and real estate. The trustees calculate that the funding gap over the next 75 years is equal to about 1% of annual gross domestic product. The Federal Reserve, meanwhile, estimates that all U.S. households’ financial assets are valued at $110 trillion, or around five times annual GDP. So a flat 0.2% annual wealth tax on everybody’s assets—rich and poor—fills the gap completely. Before anyone gets too exercised: That’s a lot less than people waste each year on fund management fees (and on this, incidentally, the rich are usually the most foolish).
4. Welcome more immigrants. More legal immigration can help solve the problem without cuts to anyone. That’s because immigrants tend to come when they’re young, and pay in for decades before claiming. According to the trustees’ own calculations, half a million additional legal immigrants a year would cut the deficit by about 12%, and would cut Social Security’s costs by the equivalent of 0.5% of taxable payroll a year. Yes, illegal immigration and unskilled immigration are hot political topics. But what on earth is the beef against skilled immigration? What is the argument—that we have too many scientists, doctors, nurses, software engineers, and other people with valuable skills? That we have too many productive members of society? Really?
5. Raise the tax cap. Currently, Social Security tax is only levied on incomes below $142,800. It is not true—media please note—that those earning more than that don’t pay the tax at all. But they don’t pay the tax on everything they earn over that. One problem Social Security’s had is that people earning more than that have seen their incomes rise faster in recent decades than everyone else. President Biden wants to change that, but only on incomes over $400,000. He may have politically boxed himself in on this thanks to a campaign pledge. The Social Security Administration’s Office of the Chief Actuary estimates that even a modest change to this limit would eliminate 20% of the funding gap, and eliminating it completely would, on its own, make Social Security solvent for another 40 years.