An Action Plan for Social Security

That's Inspired by Modern Monetary Theory (MMT)

In the past month-and-a-half, Political Economy Watch has focused on the alleged "financial crisis" in Social Security. Today we summarize that study and develop an action plan for Social Security.

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The notion that Social Security is "running out of money" is one of the six "deficit myths" which Stephanie Kelton decries in her 2020 book, The Deficit Myth. This myth places an inordinately strong spotlight on one account at the U.S. Treasury, the Old Age and Survivors Insurance Fund, whose balances, held in the form of non-marketable U.S. Treasury securities, are declining as more "baby boomers" retire. When those securities have all been cashed in to pay Social Security benefits, current law will require that benefits be reduced to a level sustained only by inflows into the fund from FICA payroll deductions. The trustees of the trust fund are required by law to report annually to Congress about the state of the trust fund. They currently project that fund to be exhausted in 2033. This is characterized as a "crisis" in Social Security which Congress must ultimately resolve by some combination of higher Social Security taxes (e.g., raising the annual cap on salaries subject to payroll taxes) and cuts in benefits (e.g., raising the standard retirement age from 67 to 70).

Kelton argues that, in order to build support for Social Security at the time of its creation, President Franklin D. Roosevelt structured the program as being financed by a dedicated tax (what we now call FICA payroll deductions) which were nominally kept separate from general tax revenues. Kelton implicitly argues that the flaws in what we'll call the "Roosevelt implementation" now tend to undermine public confidence in Social Security's long-term viability. She argues, however, that:

• Congress can always change the law governing the trust fund.

• The U.S. federal government is monetarily sovereign. It is never financially constrained when it comes to paying Social Security benefits.

• Hence, Congress can always promise to pay benefits out of general revenues (the Treasury General Fund). The level of benefits does not inherently need to be tied to the balance in the trust fund.

Kelton is not alone in arguing that the "crisis" in Social Security is ginned up. Other Modern Monetary Theory (MMT) advocates have been making this point since the turn of the century. What is dismaying, however, is that these arguments have yet to have a significant impact on the larger discourse about Social Security in national politics and in academic and media discussions. The "Overton Window" framing these discussions is open no wider than it was back in 1983 -- the last time Congress reacted to a "crisis" in Social Security by raising payroll taxes and pushing back the retirement age. Witness the media kerfuffle that emerges each year when the trustees of the Social Security program release their projections for the deficits in the Social Security trust fund. Those who would defend Social Security accept the necessity of replenishing the trust funds in ways which, to be sure, would reduce the regressive nature of payroll taxes. No organization whose mission is to "save Social Security" (without raising taxes or cutting benefits) has called for re-thinking the very existence of the trust fund and for paying benefits out of general revenues. As best I can tell, no legislation to that end has ever been introduced into Congress.

So we, MMT advocates, have not yet been very persuasive on this issue. Indeed, we have not yet mounted a major effort to be persuasive on this issue. We have not conducted advocacy on this issue comparable to that which we have conducted on the federal Job Guarantee.¹ If we conduct such advocacy, we may not succeed -- but if we don't even try to conduct such advocacy, we surely will not succeed.

In the balance of this essay we'll take a stab at some ideas with the potential to be turned into draft legislation.

What's Our Minimum Viable Product?

If you've worked in information technology, you're probably familiar with the concept of a "Minimum Viable Product" ("MVP"), defined by Techopedia as:

"... a new product that has just enough features to attract early adopters. The goal of releasing an MVP is to acquire customer feedback that can be used to guide the product’s future development."

What is the minimum viable change in Social Security that reflects the insights of Modern Money Theory? It would be a change in the Social Security Act in which Congress would guarantee the payment of Old Age and Survivors Insurance (OASI) benefits and Disability Insurance (DI) benefits to all who qualify regardless of the balance of the trust funds for each of those two programs. Such a guarantee would shut up the deficit scolds once and for all. Congress would, in effect, be telling the American people -- and Congress itself -- that there is no reason to panic if the accounting balance in one particular Treasury account (the OASI trust fund) goes negative. Because Congress constitutionally has the power of the purse, it can and will pay all Social Security claims as they come due out of general revenues.

The Social Security Pledge

Let's call this congressional guarantee "The Social Security Pledge" -- or just "The Pledge," for short. The current version of The Pledge is (albeit slightly oversimplified):

"We (Congress) will, upon your retirement or disability, pay you all the benefits you have earned over the course of your working life provided that we can cash in enough bonds from the OASI trust fund to cover any shortfall in FICA payroll taxes and interest on those bonds."

The revised version of The Pledge will be:

"We (Congress) will, upon your retirement or disability, pay you all the benefits you have earned over the course of your working life. Period."

Why would we consider this a minimum viable product from the MMT perspective? This proposal does not necessarily require the termination of the Social Security trust funds as legal entities. It simply cuts the umbilical cord linking the balance in the trust funds to the full payment of earned benefits. If at some time in the future FICA payroll deductions once again exceed scheduled benefit payments, that revenue can be used to purchase Treasury bonds and replenish the trust fund.

This proposal does not necessarily require the elimination of the FICA and disability insurance deductions from wage earners' paychecks. Nor does it necessarily prevent the Social Security trustees from making projections of trust fund balances over a long time horizon.

This proposal does not entail any promises of greater federal spending than the U.S. government currently makes.

This proposal could be combined with measures to make payroll taxes less regressive and to boost benefit payments at the lower end of the scale -- but then it would no longer be a minimum viable product. It would then be part of a larger political package. That larger political package might or might not be more politically viable.

Better Versions of "The Pledge"

From the MMT perspective, a better version of The Pledge would start by asking, "If we're not restricting payment of Social Security benefits to the level governed by the trust funds, why would we need to keep the trust funds around at all?" If we were to eliminate those trust funds, we could simply cancel the non-marketable bonds which those funds hold, thereby reducing the total national debt (though not the debt held by the public).

An intellectually more rigorous, but more politically complex version of The Pledge, would ask, "If we're promising to meet all Social Security benefit claims out of general revenues, and if payroll tax deductions no longer have to make a trip into and out of the trust funds, why don't we simply merge the income tax and payroll tax deductions on peoples' paychecks?" Such a proposal would not entail any promises of greater federal spending than the U.S. government currently makes. Nor would it, at least initially, mean any change in someone's net paycheck. It would, however, require that both Congress and the American people understand that though the amounts currently being deducted from one's paycheck for FICA and disability affect the level of one's future benefits payments, the amounts so deducted do not live in any type of savings, pension or deferred income account from which one can make a withdrawal.

Conclusion

These "better" versions of The Pledge are more consistent with the MMT perspective. But until we get out and try to sell the concept of The Pledge to potential allies, we won't know whether that consistency comes at the price of political viability. Who those potential allies are, and how MMT advocates should approach them, will be the subject of future posts on this Substack. Please add your thoughts on what we've discussed so far down in the Comments.

1. See, e.g., Pavlina Tcherneva, The Case for the Job Guarantee, Polity Books, 2020.