PARALLEL UNIVERSE: Good News for Everybody: Social Security is Not Going Broke

  • By David M. Kinchen
David Cay Johnston

David Cay Johnston

When David Cay Johnston speaks, I listen. Not just because we both worked at the L.A. Times (although I never met him; he was there from 1976 to 1988; I was there from ’76 to 1990). I listen because Johnston writes about economics with common sense, which of course isn’t all that common. He’s trained himself to dig beneath the sound bites that often pass for news, to find the real story. In his piece headlined Social Security Is Not Going broke ( he presents the facts about a program many people depend on for their retirement years — and that tens of millions of Baby Boomers now entering their retirement years will rely on.

I’ve read and reviewed Johnston’s books down through the years and I’ve come to the conclusion that he’s the best non-economist writing about economics . (The best economist, in my view, is Dr. Nouriel Roubini (Dr. Doom) of New York University — no, no, a thousand times NO, not Paul Krugman).

Here are the first few paragraphs (the bolded sentences are my emphasis) of Johnston’s piece (be sure and read the entire column):

“Which federal program took in more than it spent last year, added $95 billion to its surplus and lifted 20 million Americans of all ages out of poverty?

“Why, Social Security, of course, which ended 2011 with a $2.7 trillion surplus.

“That surplus is almost twice the $1.4 trillion collected in personal and corporate income taxes last year. And it is projected to go on growing until 2021, the year the youngest Baby Boomers turn 67 and qualify for full old-age benefits.

“So why all the talk about Social Security “going broke?” That theme filled the news after release of the latest annual report of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, as Social Security is formally called.

“The reason is that the people who want to kill Social Security have for years worked hard to persuade the young that the Social Security taxes they pay to support today’s gray hairs will do nothing for them when their own hair turns gray.

“That narrative has become the conventional wisdom because it is easily reduced to a headline or sound bite. The facts, which require more nuance and detail, show that, with a few fixes, Social Security can be safe for as long as we want.” 

* * *

Since my wife and I are both on Social Security, which counts for the bulk of our retirement income, I’m really glad to hear the good news from David Cay Johnston!

One reason why Social Security isn’t going broke is because of shifting tax burdens (Johnston has written extensively on taxes — see the “About David Cay Johnston” section below for their titles — and knows the subject just about as well as any non-accountant or tax lawyer).

Basically, the burden of taxes has shifted off the pin-striped shoulders of the rich and onto the denim shirted ones of people who do real work, Johnston writes.

“From 1961 through 2011, the year covered in the last Social Security report, Social Security taxes exploded from 3.1 percent of Gross Domestic Product to 5.5 percent,” he writes. Income taxes, he says, went the other way, with personal income tax slipping from 7.8 percent of the economy to 7.3 percent, “with most of the decline enjoyed by people in the top 1 percent of incomes. The big drop was in the corporate income tax, which fell from 4 percent of the economy to 1.2 percent. Notice that the corporate income tax fell by 2.8 percentage points, an amount almost entirely offset by a 2.4 percentage point increase in Social Security taxes.”

The $2.7 trillion Social Security surplus is a product of the Reagan years, Johnston writes: “In 1983, President Ronald Reagan sponsored an increase in Social Security taxes, changing the program from pay-as-you-go to collecting much more taxes than it paid in benefits. The idea was to have the Boomers prepay part of their old age benefits. The extra tax was supposed to pay off the federal debt and then be invested in federal bonds. Instead, Reagan ran huge deficits, violating his 1980 promise to balance the federal budget within three years of taking office.”

Johnston says that building the Social Security surplus has had two major effects:

> One was to finance tax cuts for those at the top, whose highest tax rate fell during the Reagan years from 70 percent to 28 percent, and for corporations, whose rate fell from 50 percent of profits to 35 percent. Those with less subsidized those with more.

> The other effect was a huge increase in consumer debt, as Americans saddled with higher Social Security taxes took out loans to cover other needs. Stagnant wages played a role, but the $2.7 trillion Social Security surplus is also a factor in a $1.5 trillion increase in consumer debt since 1984.

With Social Security expected to pay out more than it takes in by 2021 — according to projections in the latest annual report — Johnston says the shortfall can be made up “through a combination of four policy changes” that would assure the continuation of full benefits for retirees. The four:

> Restore the Reagan standard that 90 percent of wages are covered by the Social Security tax, which now applies to only 83 percent of wages. If we went back to the Reagan standard, the Social Security tax would apply to close to $200,000 of wages this year instead of $110,100.

> Raise the Social Security tax rate by two percentage points. That tax hike could be smaller or even avoided if,

> We need to “reignite” the growth in wages. Median wages have fallen in 2010 back to the level of 1999.

> We need to create millions more jobs, which since 2000 have grown at only a fifth the rate of population increases.

Johnston puts on his Dr. Doom hat at this point, saying that he doubts that Congress will do anything along the lines he presents.

And, on top of this, he says that “national security” or defense spending, contrary to conventional wisdom which applauds the domestic jobs it provides, will be a drag on the economy: “If we continue national security spending at current levels, with no future increases, the total cost would be $63 trillion, based on the figures in President Barack Obama’s latest budget. Unlike spending on Social Security, much of the national security spending goes overseas. And that makes us worse off.”

I’d like to add one suggestion that will keep Social Security solvent: Remove the cap on Social Security taxes, making everybody pay for this benefit. For 2012, according to the Social Security website, the “maximum taxable earnings amount for Social Security (OASDI) taxes is $110,100. There is no limitation on taxable earnings for Medicare’s Hospital Insurance (HI) taxes. The Social Security tax rate for employees is 4.2 percent through the end of the year; The Social Security tax rate for employers is 6.2 percent; The Medicare tax rate is 1.45 percent for employees and employers; The Social Security tax rate for self-employed is 10.4 percent through the end of the year. The Medicare tax rate is 2.9 percent for self-employed.”

About David Cay Johnston

Johnston was born in San Francisco in 1948. In 1968, at age 19, Johnston began his career at the San Jose Mercury News. In 1973, he left the Mercury News to study at the University of Chicago under a five-month fellowship. He then took a position as an investigative reporter at the Detroit Free Press in its Lansing bureau from 1973 to 1976 and later worked as a reporter for the Los Angeles Times from 1976 to 1988. Johnston then worked as a reporter at The Philadelphia Inquirer from 1988 to 1995. He joined The New York Times in February 1995. From February 1995 to April 2008, he was the tax reporter with The New York Times. For the next three years, until joining Reuters, he wrote “Johnston’s Take,” a column on tax policy for the nonprofit journal Tax Notes and its sister website, published by Tax Analysts. In 2009 he briefly wrote, “By The Numbers,” a column for The Nation. 

Johnston received the 2001 Pulitzer Prize for Beat Reporting “for his penetrating and enterprising reporting that exposed loopholes and inequities in the U.S. tax code, which was instrumental in bringing about reforms. “Johnston described how corporations were paying less in taxes, even as individuals were paying more, with even well-known companies like Colgate-Palmolive, Compaq Computer and United Parcel Service engaging in “what the courts called shams.” A court found that Merrill Lynch saved AlliedSignal (now Honeywell) $180 million in “sham” money transfers among foreign companies. However, the I.R.S. is more likely to audit the poor than the rich, Johnston reported.

In 2001, Johnston investigated the claim that estate taxes, which Republicans call “death taxes,” were so high that farm families were being forced to sell their family farms in order to pay the taxes. This claim was presented to prove the need to eliminate the inheritance tax. Johnston challenged those who made that claim, such as the American Farm Bureau Federation, to cite an example of a farm that was lost because of estate taxes, and they were unable to do so. Economists told Johnston that it was a myth. An Internal Revenue Service analysis of 1999 returns found that almost no working farmers owe estate taxes. Estate taxes are not assessed on the first $1.35 million net worth, and then rise from 43% to 55% after $3 million. But most wealthy people use legal ways to reduce their estate taxes to 25% for the largest estates.

Johnston is the author of best-selling books on tax and economic policy, the most recently of which is “Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense and Stick You With The Bill”, about hidden subsidies, rigged markets, and corporate socialism. It follows his earlier book “Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich—and Cheat Everybody Else”, a New York Times bestseller on the U.S. tax system that won the Investigative Reporters and Editors 2003 Book of the Year award.

Johnston’s first book, the 1992 “Temples of Chance: How America Inc. Bought Out Murder Inc. to Win Control of the Casino Business” is an account of how thejunk-bond kings usurped mob control of the casino industry in the 1980s. The book discusses corruption in the industry and the role of the federal and state governments in that corruption.


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