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Bull Trader USA

Brett Arends’s ROI: The (secret) way we could save Social Security

So it looks like Joe Biden and the Democrats are finally going to pass their nearly $2 trillion “Build Back Better” tax and infrastructure bill. I confess I’ve found this the most boring saga since the Kardashians. Now it seems to be over, I’ve got one question for all the solons in Washington.

If we can find $2 trillion in extra taxpayers’ money for these new spending plans, can we perhaps find an extra $20 trillion to plug the hole in Social Security? 

Like most Americans, my retirement plans rest to a significant degree on the assumption that the giant pension plan that I’ve been required to pay into year in, year out throughout my working career would, in return, meet its obligations to me. Social Security is going to be vital to all but the very richest retirees—not only because of the size of the checks, but because they constitute an inflation-protected lifetime annuity, which at this point you can’t really get anywhere else.

The plan may hit technical insolvency in as little as 10 years, depending on whether you believe the trustees or the independent Congressional Budget Office. The most recent numbers say Uncle Sam needs to find $20 trillion to plug the gap—at least to cover the next 75 years.

Some may argue the latest budget deal has nothing to do with Social Security, that these are completely separate issues. After all, it’s not even clear if the latest deal will increase deficits or reduce them.

The Biden administration says the deal will lower future deficits, by raising taxes (OK, “closing loopholes”) more than spending. Rating agency Moody’s seems to think the deal will at least pay for itself. So, too, does Congress’ Joint Committee on Taxation.

The independent think-tank the Center for a Responsible Federal Budget isn’t so sure. In a recent statement president Maya MacGuineas warned that various budget “gimmicks” may be understating the cost, and she feared that over the next decade the actual spending could end up costing an extra $2 trillion on top of what’s agreed.

Meanwhile the University of Pennsylvania’s Wharton School sees a $300 billion net cost over the next 10 years, and estimates the latest deal will add 2% to national debt by 2050.

A simple plan

Call me a cynic, but I will be pleasantly surprised—actually, I will be stunned—if this burst of new government spending comes in below forecasts, or even anywhere near them.

But even if this latest deal doesn’t add to the deficit, we’re still in trouble. According to the Congressional Budget Office’s most recent forecasts—already several months out of date—we were already looking at nearly $13 trillion in extra federal deficits over the next 10 years, on top of the $6 trillion racked up during the past two years, meaning that by 2031 we’re looking at national debt of $36 trillion, or about 106% of annual gross domestic product.

Where are we going to find another $20 trillion?

Money raised through extra taxes to pay for one thing, like infrastructure, obviously cannot be used to pay for something else, like Social Security.

But let me end on a slightly more optimistic note. One of the features of the deal is a big increase in IRS enforcement, to crack down on tax cheats. This isn’t a trivial issue, least of all at a time when the nation’s main retirement system is in crisis.

The best estimates in Washington are that tax cheats—known euphemistically as “the tax gap”—are evading about 16% of all the federal tax money owed each year. Even after accounting for enforcement results, it still comes to about 12%, or one dollar for every $8 people are supposed to pay.

Oh, and those numbers relate to about 10 years ago, before the government slashed the IRS enforcement staff by 36% (yes, really). So you have to figure cheats are getting away with way more today.

Why does this matter? Well, it’s simple math. If tax cheats are evading 12% of the taxes they owe, and this year taxes are expected to be about 18% of GDP, then by my math tax evasion works out about 2.2% of gross domestic product.

The funding gap for Social Security? Under the trustees’ midrange forecast, over the next 75 years that will average about 1.7% of GDP. In other words, the entire hole in the Social Security budget could — in theory — be paid for without cutting benefits, means-testing them, raising taxes or raising the retirement age, but simply by catching the people cheating on their taxes. If we can find a way to do it.

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