Predicting Social Security's Financial Imbalance

By on December 2, 2014 in Current Events with 40 Comments

One of the most compelling pieces ever written about Social Security was penned by A. J. Altmeyer, and presented to Congress in 1944. The piece makes the man look like Nostradamus.

Voters today should pay close attention to it not only because his predictions came true with stunning accuracy, but more importantly it offers a different prospective on the system’s financial imbalances.

Even after 70 years, the testimony remains one of the most accurate forecasts for the system ever written. Altmeyer foretold of higher taxes, and massive shortfalls. He correctly anticipated the Earned-Income Tax Credit and the Payroll Tax Holiday.  Finally he warned us that inaction in 1944 would lead to levels of cost that would imperil the entire system which is where we are today.

His testimony was part of a battle between the administration and Congress about the future of Social Security.  FDR wanted Social Security to be self-funded while Congress wanted the system to be self-financed.  The difference between the two is who pays the bills.  FDR wanted benefits to be created by the past contributions of the retiree.  Congress wanted to shift the cost of Congressional largesse to non-voters, ie future generations. Congress won.

In his testimony, Altmeyer warned Congress that Social Security was under-charging current workers for the promises that the system was making.

There is no question that the benefits promised under the present Federal old-age and survivors insurance system will cost far more than the 2 percent of payrolls now being collected.

Altmeyer continued to warn Congress that even doubling the payroll tax to 4% was insufficient. He felt that costs might rise as high as 7%.  Basically, he told Congress that Social Security was giving away a dollar for little more than a quarter.

Then he cautioned Congress about the consequences:

It is a mathematical certainty (emphasis added) that the longer the present pay-roll tax rate remains in effect, the higher the future pay-roll tax must be if the insurance system continues to be financed wholly by payroll taxes.

In 1944, Social Security cost 2% of the first $3,000 of a person’s wages, or roughly $40,000 in 2014 $s.  Since that time, the cost of the system has risen to 10.6% of the first $117,000.  That is an increase of as much as 15 fold.

<The tax rate will rise> to a point where future beneficiaries will be obliged to pay more for their benefits than if they obtained this insurance from a private insurance company.

Data from the Urban Institute suggests that average workers will not collect even a return of 2% real on their contributions.  Furthermore, that projection assumes that workers are completely unaffected by the shortfall.

Here is where his testimony gets very problematic for us today.

Retaining the present rate creates a moral obligation on the part of Congress to provide a Government subsidy later on to the extent necessary to avoid levying inequitably high pay-roll tax rates in the future.

His testimony warned us that the costs associated with Social Security would grow to a point where the system would be unaffordable for workers.  The system passed that point in the mid-1970s, at which point the cost level required Congress to pass the Earned-Income Tax Credit as an offset for the high cost of Social Security taxes.

Of course, Congress ignored Altmeyer, over time waiving every one of the payroll tax increases promulgated under the original act.  Payroll taxes did not reach the 6% level prescribed by the original law until the 1960s.  In the meantime, Congress used benefit increases to curry favor with voters.  By 1960, an average retiree expected to collect $8 of benefits for every $1 contributed.

Today we have a struggle between the “moral obligation” to pay benefits, government subsidy, and higher payroll taxes.  We can reduce benefits, increase payroll taxes to 15.3% (higher if you include medicare), or provide government subsidies in the form of higher taxes on high-income workers.  Or in Altmeyer’s words:

If we should .. charge future beneficiaries rates in excess of the <cost of the benefits>, we would be… bound to imperil our social insurance system.

When someone is this right, you are stuck with one of two options.  The man was smart or the man was very lucky.  If the man were that lucky he would have been running Vegas rather than the Social Security Board – which was his day job.

The reader today should be terrified that the Altmeyer was more smart than lucky. His predictions were based on math rather than the usual hobgoblins of the Social Security debate. His predictions were not predicated on changes in demographics.  He did not rant about a raid on the Social Security Trust Fund. Altmeyer, who ran the Social Security Board, connected all of the system’s future financial imbalances to basic math.

Maybe the problem is just math.

© 2016 Brenton Smith. All rights reserved. This article may not be reproduced without express written consent from Brenton Smith.

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About the Author

Brenton Smith (A.K.A. Joe The Economist) is the founder of “Fix Social Security Now” which provides information on all alternatives in the public debate on Social Security through its site www.FixSSNow.Org.

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