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Social Security and the 2016 presidential campaign, explained

Win McNamee/Getty Images

In a 2016 campaign that's thus far been dominated by Donald Trump's bombast and Hillary Clinton's email servers, Social Security — which was hardly discussed at all in 2008 or 2012 — is emerging as a real point of policy contention.

Former Maryland Governor Martin O'Malley has released a detailed agenda to increase Social Security benefits for all retirees, and Vermont Sen. Bernie Sanders is pushing Democrats to embrace an expansion of the program, while the establishment-backed Republican candidates are arguing for various forms of benefit cuts. Yet while cutting Social Security is a longtime goal of GOP leaders, it's hardly a consensus position. Anti-establishment figures Donald Trump and Mike Huckabee have argued against cuts — and gained in GOP primary polls for their trouble.

Social Security is one of the largest federal programs, so it's inherently a significant issue. But it's also a bit of an unusual one. There's an unusually strong bipartisan consensus among Washington elites that something "must be done" to reduce the government's projected spending on Social Security. At the same time, compared with other domestic spending programs, practical Republican politicians are unusually hesitant to cut Social Security.

This speaks in part to aspects of the program's technical design, but also to larger questions of value. Social Security heightens the tension between the Republican Party's philosophical role as the party of small government and its practical role as the party of old people. But it also represents a model of policymaking that elites find unusually distasteful — targeted neither at enhancing economic growth nor at narrowly relieving the suffering of the needy — even as the resurgent left wing of the Democratic Party wants to bring it back into style.

These tensions create a messy situation that kept Social Security off the policy agenda for years. But with long-shot presidential candidates leveraging it to get attention for themselves, it's fast emerging as one of the most fascinating policy arguments of 2016. It's a deeply technical issue, touching on the mysteries of trust fund accounting and competing modes of inflation indexing. But it's also a fundamental question of value. Should we, as a society, dedicate economic resources to making it possible for old people to enjoy a nice happy life, or does doing so crowd out more important priorities?

Social Security is an unusual program

Social Security is a federal program that is largely dedicated to sending monthly checks to old people. It also encompasses several other functions, including benefits for orphans and an important income support program for the disabled. But the old age program is the one that impacts by far the largest number of Americans and that costs the most money.

Social Security dates back to Franklin Roosevelt's administration and the New Deal era, making it essentially the oldest thread in the American welfare state.

But it's also in many respects the most ambitious and radical, because Social Security has a number of features that set it apart from the rest of the American welfare state. In a country where social policy is often fragmented through multiple agencies or partnerships, hidden in the tax code, or bifurcated into different approaches for the poor and the middle class, Social Security offers a dramatically simplified and centralized framework. One agency, with a relatively small bureaucracy for the size of the program, sends out checks to almost every elderly person in the country.

And since the program delivers cash, there are no restrictions on what you can do with the benefits. There is no list of officially sanctioned retirement activities. You can spend your Social Security check on cigarettes or beer or heroin or whatever else you want to buy.

Social Security is funded by a special trust fund

Social Security Trust Fund

Committee for a Responsible Federal Budget

While most government programs are subject to an annual appropriations process — meaning that unless Congress enacts new money for them each year, nobody gets anything — Social Security is set up as an entitlement program, where everyone gets money based on a formula until Congress passes a new law that changes that formula. This in some respects strengthens Social Security as a program. The checks keep going out even during a government shutdown, for example. But it also creates a somewhat artificial sense of crisis around the fact that the program's dedicated revenue streams will not suffice to pay its costs over the long term even though most federal initiatives (the military, the EPA, the FBI) have no dedicated funding whatsoever and yet are never said to be on the verge of going bankrupt.

But there are a couple of twists to this.

One is that Social Security was set up in the 1930s to somewhat imitate the operation of a corporate pension plan. It is financed by a special payroll tax that is separate from the rest of the federal tax system and is reported separately on your pay stub. The size of the checks you get from the government when you retire is somewhat proportional to the amount of taxes you pay. So notionally you "pay into" the system while you are working, and then get "paid back" by the government.

Back in the early 1980s, a further complication was added. In advance of the baby boomers retiring and in the face of large budget deficits induced by Ronald Reagan's 1981 tax cuts, Social Security taxes were hiked well above what was needed to cover Social Security benefits. This extra money was "loaned" to the rest of the government (to reduce the Reagan deficits) under the premise that it would be "paid back" in the future when boomer retirement led to a surge in Social Security costs.

Social Security is thus said to have a trust fund that currently "holds" more than $2.7 trillion in assets — specifically federal funds. But since these assets are loans from the federal government to another part of the federal government, the existence of the trust fund does not alter the fact that using that fund to cover Social Security expenses requires offsetting tax increases or spending cuts. In addition, the trust fund is currently projected to run out of money in about 2034, at which point incoming payroll taxes would only cover about 79 percent of benefit costs.

Democrats are talking about expanding Social Security

Bernie Sanders has introduced legislation to make Social Security benefits more generous, and to pay for the expansion with substantially higher taxes on rich people. Currently, Social Security tax is levied on only the first $118,000 or so of wage income. Income above that threshold — or income obtained through dividends and capital gains — is untaxed. Sanders proposes to subject all income above $250,000 to Social Security taxes, which he says would generate enough revenue to make the program solvent over the long term and to finance a benefit expansion.

This is an idea that Elizabeth Warren has been pushing for a couple of years, and for the left wing of the party it serves three purposes:

  1. They think Social Security is a good program, and they'd like to spend money on it.
  2. They would like to roll back special tax breaks for savings and investment that liberals see as benefiting Wall Street and the wealthy, and a more generous Social Security serves as an alternate model of retirement security.
  3. A liberal push to expand Social Security shifts the overall terms of debate, and helps reframe "keep Social Security the same" as a centrist stance rather than a liberal one.

Hillary Clinton has promised to release a more detailed Social Security proposal in the future. So far, on the campaign trail she has suggested a desire to enhance benefits for the lowest-income seniors but has not spoken about how to pay for that.

Traditionally, the dominant centrist wing of the Democratic Party — including Barack Obama and Bill Clinton — has been open to cutting Social Security as long as the cuts are complemented by tax increases.

Republicans are divided about Social Security cuts

Chris Christie attempted to garner energy for his flagging presidential campaign with an April proposal to raise the retirement age and reduce benefits for people who earn more than $80,000 a year — ultimately eliminating them entirely for the tiny number of elderly people with incomes over $200,000.

Jeb Bush and Marco Rubio haven't spoken in as much detail as Christie but have broadly echoed his suggestions about cuts.

By contrast, both Mike Huckabee and Donald Trump have denounced the Republican desire to cut Social Security as a betrayal of America's seniors.

Even pro-cuts Republicans are timid in their cutting

Conservatives are normally eager to slash all kinds of domestic social spending, so it's noteworthy that some GOP politicians oppose cuts. What's in some ways even more noteworthy is that even the Republicans who are most eager to cut Social Security are relatively timid about it. All mainstream GOP proposals promise no cuts in benefits to anyone born before 1961, meaning that exactly zero dollars will be saved over the next 10 years and the savings will be very modest for several years after that.

When Republicans propose cuts to food stamps or Pell Grants or the Export-Import Bank, they want cuts right away.

A key issue here is that Social Security cuts are unpopular with Republican Party voters. Some of that is because Social Security is legally and politically presented as an "earned benefit" that people receive in exchange for taxes paid in the past. This is not particularly accurate, economically speaking, but in the minds of many rank-and-file Republicans it makes it different from a "welfare" program.

A related issue is that the racial politics of Social Security differ from other forms of social assistance. In their book Us Against Them: Ethnocentric Foundations of American Opinion, Donald Kinder and Cindy Kam find that among white voters, "ethnocentric" attitudes generally correlate with reduced support for social welfare spending. But they correlate with increased support for spending on Social Security and Medicare.

Last but by no means least, Social Security money goes to old people, and old people tend to vote Republican. Older Americans are drawn to the GOP's conservative stances on social and cultural issues, but depend on big government for their Social Security checks. Promising to save the elderly from the effects of spending cuts is a way for Republican politicians to stitch together a majority coalition.

Raising the retirement age is bad for poor people

One very common proposal to reduce Social Security spending is to force people to wait until they are older before they can start claiming Social Security benefits. This is doubly appealing because delayed retirement both reduces spending and increases tax revenue. It also seems like common sense to many people, since Americans live a lot longer on average than they did when Social Security was first started.

But there are strong class implications to raising the retirement age.

Economic Policy Institute

Virtually all of the increase in life expectancy over the past 20 years has been concentrated among wealthier Americans. Consequently, a two- or three-year increase in the retirement age could leave lower-class Americans with fewer years of retirement to enjoy than they had a generation ago.

The real-world impact of delayed retirement also varies considerably according to what job you have. Politicians don't tend to retire at age 62, and neither do political pundits or think tank scholars, because people in these jobs tend to enjoy them. Proposals to raise the retirement age tend to be popular with this cohort.

Many people, however, have jobs that force them to stand on their feet for eight or 10 hours a day, doing rote work for a boss they dislike, and they want to retire as soon as they can. These are the people who will be particularly hurt by raising the retirement age.

Obama wanted to cut Social Security by changing how inflation is calculated

Once your initial benefit level is established, Social Security adjusts your checks upward over time to take into account increases in the cost of living. Back during the 2012 budget negotiations, the Obama administration proposed to cut Social Security by changing how these cost of living increases are calculated. The White House has since taken this proposal off the table, but it remains Democratic Party economists' favorite way of cutting Social Security.

At issue is whether the cost of living increases should be tied to the Consumer Price Index (as they currently are) or to a somewhat different, slower-growing "chained" version of the CPI.

The best way to understand the difference between a chained and unchained price index is probably to look at a very simplified example. Here's a made-up story about cheese prices and consumer behavior:

The facts here are stipulated and not in dispute. Cheaper, lower-quality "Parmesan" cheese has gotten more expensive while pricey, higher-quality authentic Parmigiano-Reggiano has gotten cheaper. In response, consumers have shifted their consumption to buy less Parmesan and more Parmigiano.

So how much inflation has there been? Well:

  • The 10-and-2 basket that cost $20 in 2005 costs $26 in 2015 for a very significant 30 percent cheese inflation.
  • On the other hand, the 6-and-6 basket that cost $30 in 2015 would have cost $36 back in 2005, indicating that there's actually been cheese deflation.

The unchained index simply considers the increased price of the 2005 basket. A chained index averages ("chains") the two baskets together. Since consumers almost always shift their consumption patterns to take advantage of price declines, a chained index almost always shows a lower rate of price inflation. A chained index is also pretty clearly more technically accurate, since an unchained index is anchored in an arbitrary way.

But the Social Security question is political, not technical. Should benefits really be cut? Opponents of cuts note that the prices for things retired people are likely to buy — more prescription drugs than the average person and fewer smartphones — have tended to increase at an above-average rate.

Liberals want a big tax increase

Social Security is funded by a flat 12.4 percent tax on wage income. That tax is formally split in half between a 6.2 percent tax paid by employees and a 6.2 percent tax paid by employers. But unlike a true flat tax that would be levied on all wage income, the Social Security tax is only levied on the first $118,000 or so of income (the precise number is adjusted annually for inflation).

This arises out of a conjunction of two principles.

One is the idea that Social Security checks received should be somewhat proportional to the amount of Social Security taxes paid.

The other is the idea that high-income people don't need to be receiving enormous Social Security checks.

Consequently Fortune 500 CEOs and hedge fund managers pay the same amount of Social Security tax as a typical lawyer, airline pilot, or podiatrist and in exchange receive the same Social Security benefit.

To liberals eager to avoid benefit cuts, lifting or modifying this cap is a tempting option that presents itself in a few different ways.

  • The wonkiest proposal is to lift the cap slightly so that it once again covers 90 percent of taxable payroll. That's what the cap did decades ago, but 30 years of growing income inequality has increased the share of overall national income that is above the cap. This would eliminate about 75 percent of the currently projected shortfall.
  • A simpler idea is to eliminate the cap altogether, in which case you close nearly the entire gap.
  • More radically, you could lift the cap entirely and not raise benefits for the people who are now paying higher taxes, which would leave the system fully solvent.
  • All of these proposals, however, violate the 2008 Obama campaign pledge to avoid any tax hikes on anyone earning less than $250,000. Consequently, new plans have begun to emerge (including from Bernie Sanders) to create a somewhat odd tax gap between $118,000 and $250,000 and then start taxing earnings over $250,000 again.

Something to note is that while these proposals are often described as if they are small tweaks to the system, the increase in marginal tax rates involved is quite large. Whether (or to what extent) large increases in marginal tax rates are bad for the larger economy is its own controversial subject, but combined with a top federal income tax rate of 39.6 percent this would leave high-income families facing a combined top rate of over 50 percent in many states.

Social Security is ultimately about values

Something that makes Social Security difficult to talk about in wonky circles is that to a greater extent than most economic policy issue, it is directly about values rather than technical economic issues.

With many government spending programs there is a debate as to whether the useful public services provided — a healthier, better-educated population with access to superior infrastructure — will provide more economic benefit than the cost in taxes. A program that hands out money so that people can enjoy a decent standard of living without working isn't like that. It's unambiguously the case that US GDP would be higher if everyone worked right up until the day of total physical incapacitation. The idea of a public sector retirement program is just that it's nice to have a society where people don't have to do that. That it's better, all things considered, for people to have a bit more happiness in their golden years than for aggregate national income to be that much higher. How nice it is, exactly, and what price is worth paying to make it happen lies well outside the boundaries of trust fund accounting and inflation indexes.

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