The epic $29 trillion battle for Social Security has begun

By Brett Arends

The future of Social Security affects everyone. Too many people aren't paying attention.

Congress will need to make big changes to the program within the next six years.

The future of Social Security affects everyone in this country, and the program will likely change drastically in the next six years. Yet most people have little or no idea what's involved or why. If they don't get engaged, they will end up as mere spectators - or victims.

Should we raise taxes to fill the $29 trillion funding hole? If so, which taxes should we raise and on whom? If not, should we cut scheduled benefits? And if so, which benefits should we cut and for whom?

And if neither, please explain where you purchased the magic wand you apparently want to use to make the program solvent again.

Among the many disservices President Donald Trump and Elon Musk have done to this country was spreading the lie that there was some third option, besides higher taxes or lower benefits, that would come from eradicating vast amounts of "waste, fraud and abuse." Last year they aggressively pushed the fiction that huge sums were being spent on fraudulent benefits paid to dead people or illegal immigrants. These stories, comforting fairy tales for the simple-minded, were completely untrue.

Those who believed them will cling to their conspiracy theories. When the math proves them wrong, perhaps they will assume that even the people who make calculators are part of the conspiracy.

For everyone else, AARP, the organization and lobbying group representing older Americans, has just weighed in with an important contribution, albeit one that is still far from the last word. AARP argues that one of the biggest reasons Social Security is in a financial mess is not because seniors are living too long or getting too much money, or because Americans have been having too few children, but because the nature of the economy has changed in ways the program's planners did not anticipate.

Back in the early 1980s, when Social Security was put on a sound financial footing by the bipartisan Greenspan Committee, about 41% of U.S. gross domestic product was subject to the 12.4% Social Security payroll tax, AARP reports.

Today, thanks to big changes including automation, rising corporate profits, stagnant wages and increasing income inequality, that figure has tumbled to 34%. And that plunge has had a big effect on Social Security.

Without that decline, AARP calculates that Social Security would have collected $10.8 trillion more in payroll taxes over the years - and it would remain solvent, without any need for cuts or changes, until 2059.

"Together, these changes - the shift, the income shift, from workers to owners of capital, and the growth in wage inequality - have quietly eroded Social Security's revenue stream," says AARP analyst Richard Johnson, author of the latest report. "The fix for Social Security isn't cutting earned benefits, it's rebuilding the revenue behind them."

AARP is not the first to make this argument. Social Security's former chief actuary, Stephen Goss, made the same point in a presentation three years ago, which MarketWatch reported on at the time. Goss targeted rising wage inequality. Social Security taxes are only paid on incomes up to a certain limit - this year it is $184,500. Anything you earn above that level isn't subject to the tax, because it doesn't earn you any program credits. Goss pointed out much of the wage growth in the U.S. since 1983 had been concentrated among the small number of people at the top of the income distribution and therefore escaped the tax. As a result, whereas Social Security taxes had once been levied on 90% of U.S. wages, that figure had declined to 83%.

AARP is campaigning for Social Security's finances to be fixed with higher taxes rather than any cuts to scheduled benefits. Proposals cited by Jenn Jones, a vice president in AARP's office of government affairs, include raising or abolishing the taxable wage limit, applying Social Security taxes to some forms of nonwage income such as dividends or interest for high earners, or a combination of those. The goal would be to restore the share of GDP subject to Social Security taxes to 41%.

These proposals are not the last word, which is why Americans need to get out of their silos and get informed.

The Tax Foundation, a low-tax think tank in Washington, D.C., says the shift in national income from labor to capital has been overstated.

Romina Boccia, analyst at the libertarian Cato Institute, points out that indexing Social Security benefits to future rises in average wages, and not just future rises in prices, has been a big factor in the program's deteriorating finances.

An analysis conducted by Eugene Steuerle and Karen Smith at the liberal-leaning Urban Institute shows the gulf between the taxes that many people have paid in and the benefits they will receive over their lifetime.

Perhaps most important, a number of analysts - such as those at the Committee for a Responsible Federal Budget, a bipartisan deficit-hawk think tank - point out that Social Security's current formula leads to some very generous retirement benefits for the wealthiest retirees. Simply capping benefits at a maximum of $50,000 a year for an individual and $100,000 a year for a couple, with modest increases in subsequent years, would actually go a long way toward making the system more sustainable.

Meanwhile, it is worth remembering that as Social Security payroll taxes are 12.4% (including the half your employer pays, which ultimately comes out of your wages), extending those taxes on higher incomes, or on things such as dividend income or debt interest, would constitute a huge jump in some tax rates. Regardless of how you feel about it politically or socially, raising, say, the top rate of federal income tax from an effective 40.8% to 53.2% will have significant economic consequences as well.

If you want to look at the various options, the CRFB has an online interactive tool that lets you work the numbers yourself. Everyone should try it out.

The only thing that is certain is that there are no easy, painless fixes - no zombies, no vampires, no tens of millions of undocumented immigrants claiming benefits. The first step to fixing Social Security is to tune out anyone who tells you otherwise.

-Brett Arends

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11-13-26 1325ET