It’s budget deficit season again, which is a polite way of saying it’s time to tie Social Security to a tree and beat it like a piñata until candy fiscal solvency comes out.

I’d like to start by clarifying what Social Security is, and what it’s not. Social Security is not a retirement fund. It’s not an investment vehicle. It’s not designed to turn a profit, nor is it supposed to seek the highest returns. Social Security is a program we created in the 1930s because we were tired of watching the elderly die in the streets. It’s a humanitarian program designed to make sure that the less-fortunate among us can spend their last few years in dignity. It’s a hedge against both our own human fallibility and the vicissitudes of fortune, which were on sharp display in 2008-2010. Most of all, it’s an assertion by American society that we can take care of all of our people. If you’re rich enough or callous enough that none of that matters to you, consider it an anti-guillotine fund - like most of our social programs, it exists because if you don’t give the people a fair shake, they’ll take it, often by force. It’s an insurance policy for us and for our society because Shit Happens.

Now, as far as solvency is concerned: As of October 2010, the CBO estimated that the Social Security trust fund would be depleted by around 2050. At that point, benefits would have to drop to around 75% of their current value. Maintaining program solvency for the next 75 years would require a 1.5% increase in Social Security taxes. Putting aside both the difficulty of projecting finances out for 40+ years and the fact that the current projections are being drawn in a particularly adverse climate, the numbers are still not overly pessimistic, and certainly not the harbinger of fiscal doom they’re often made out to be.

How do we restore solvency past 2085? Let’s talk about a policy that won’t work, a policy that will work, and a policy nobody will like.

Increasing the age at which a recipient can start receiving social security is an extremely popular fix. The program was first implemented in the late 1930’s with a retirement age of 65. Retirement age is now 67. But life expectancy as of 1950 was only 68, whereas it’s around 78 now - that’s an increase of 10 years with no corresponding increase in retirement age. The current proposal is to raise retirement age to 69, which sounds reasonable. The problem is, the increase in life expectancy has largely come from lower mortality rates among children under 5 - remember, life expectancy is usually a mean, not a median value.

Pulling numbers from the CDC, we can see life expectancy from birth and from age 65:

Year	Birth	From 65
1920	54.1	76.9
1950	68.2	79.1
1980	73.7	81.5
2007	77.9	83.6

Between 1950 and 2007, overall life expectancy rose by 9.7 years. Life expectancy after 65 rose by 4.5 years. The numbers are even more dramatic if you look at the data from 1920. The overwhelming increase in life expectancy has been a decrease in child mortality. We’re not living a whole lot longer, we’re just dying a whole lot less. Add to that a report from the GAO that suggests increasing the retirement age may increase disability claims, and this policy looks even more like a lemon.

What would work, though, is relaxing the upper limit for taxable income. Social Security is capped at the first $106,000 of income (in 2011). According to the US Census, there are around 23.5M households making over $100k. They comprise the upper 20% of American households, but their share of total income in the US is - and I have to ballpark here a bit, since the IRS only gives 10% & 25% - roughly 50%.

Let’s do some mathemagic: (Note: Some of the income numbers are from 2008 -they’re IRS numbers)

Total Income (AGI): $8.4 Trillion.
Total Income of top 25%: $8.4Tn * ~50% = $4.2Tn
Total Income of top 25% subject to Social Security Tax: $100k * 23.5M households = $2.35Tn
Total Income of top 25% Not subject to Social Security Tax: $4.2Tn - $2.35Tn = $1.85Tn.

Because social security doesn’t tax above $100k, $1.85Tn of income is not subject to Social Security taxes. We can either enact a 1.8% tax increase on the current wage base or we can increase the base - one of these is an extremely regressive tax, the other is a progressive tax.

Finally, let’s look at means-testing for Social Security disbursements - which means if your retirement savings are already “sufficient”, you’re ineligible to collect Social Security. This is attractive because it shifts the benefits of the program onto the group that needs them and away from those who don’t. It’s unattractive and probably untenable for few reasons.

First, it’s not entirely apparent what “sufficient” would mean. “Sufficient” in Nebraska is destitute on the street in California, and “Sufficient” in Riverside, CA is destitute on the street in Orange County, CA. It’s also subject to adverse selection effects, as I’m sure any good economist would point out - if I know that I can’t collect if my retirement savings exceed (say) $5M, I won’t save beyond $5M unless I’m sure I can make up for it. From a technical standpoint, this is an extremely difficult policy to craft properly.

Second, there’s a moral aspect. I’ve stated my beliefs on Social Security, but they’re just that - my beliefs. If we’re asking everyone to pay in, but we’re not paying out to everyone, we’re engaging in blatant income redistribution, instead of a universal safety net. I’ve a hard time taking another person’s money on the sole dint of my beliefs (a hard time, not an inability), and in this case I’d be doing so with little more than intangibles in return.

I’m quite strongly of the opinion that Social Security is valuable and fundamentally solvent. I think some small changes may need to be made for the overall long-term solvency, but they’re not dramatic, and overall the program is well-designed. I know people may disagree, and that’s fine - this is a democracy, after all. What I’m not OK with is bullshit numbers being bandied about by people with a chip on their shoulder. Public policy has a lot of room for dissent, but no place for ignorance or maliciousness.

Numbers presented here are primarily from the CDC, IRS, US Census, and Social Security administration