Why Social Security Isn't Broke, Why We Think It Is and Where the Money Went

Los Angeles Times business columnist Michael Hiltzik has an essential piece today debunking what he calls “The Myth of the Social Security system’s financial shortfall.” It’s based on the newly-released 2010 report of the Social Security Trustees.

In fact, he argues, Social Security is doing fine, sort of. If there’s a problem, it’s the fact that it has been lending money to the general fund of the federal government for years to cover expenses that used to be covered by income taxes. The payroll tax has been steadily raised to keep Social Security solvent. The income taxes of the wealthiest Americans have been repeatedly, drastically lowered under Ronald Reagan and George W. Bush (Hiltzik leaves out Reagan, as I’ll show), leaving big holes in the general fund, which covers defense, national parks, highways, welfare and all the rest. The impoverished general fund has been borrowing from the flush Social Security trust fund to help cover the deficits.

Here’s the catch: The payroll tax is a regressive tax: the poorest Americans pay the same 7.65% as the richest Americans, and the rich don’t even pay a penny on earnings above $107,000 per year. Lowering income taxes on the rich, and then covering the shortfall by borrowing from a pot that’s mainly funded by the common folk (and mainly relied on by them) amounts to a massive redistribution of income from the poor to the rich. And that’s why the Social Security trust fund looks insolvent: It has been raided to cover money that used to be in the federal budget but is now in the pockets of the rich.

I know, I know: Letting the affluent keep their money (they’re basically the only ones who get to do that under these tax cuts) encourages investment and creates jobs. If anybody here still believes that, I’ve got a lovely oil well to sell you, conveniently located just south of historic New Orleans.

Here’s Hiltzik:

To understand how much money Social Security actually has saved up, you need to understand where it gets its money from. The best-known source is the payroll tax, the number that appears next to the federal income tax on your pay stub but isn’t part of the income tax. It’s a separate tax that goes into a separate fund, the Social Security Trust Fund. The second source is interest on Treasury bonds held by the Social Security trust fund. These are IOUs on money borrowed from the trust fund, which takes in more money than it needs each year, by the federal government’s general fund, which takes in less money than it needs each year.


Hiltzik leaves out two important historical events here, probably for reasons of space (columns have to fit on a page, whereas a blog can go on and on and on and on and…). First, Lyndon Johnson: He decided to combine the balance sheets of the Social Security trust fund and the general government operations into a single budget document, in order to mask the cost of the Vietnam war.

Second, Ronald Reagan: He lowered the top marginal income tax rate paid by the wealthiest Americans from the 70% cap under Nixon (which in turn was lower than the 91% under Eisenhower) to 50%, and then again to 38.5% in 1987. The tax cut blew a massive hole in the federal budget. Borrowing skyrocketed, and the accumulated national debt rose during Reagan’s eight years in office from $900 billion to $2.6 trillion. The growth of the debt slowed a bit under the first George Bush and was reversed under Clinton, but then skyrocketed under George W. Bush, who lowered taxes again while running two unfunded wars.

Hiltzik again:

Written by

J.J. Goldberg

J.J. Goldberg

Jonathan Jeremy “J.J.” Goldberg is editor-at-large of the Forward, where he served as editor in chief for seven years (2000-2007).

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Why Social Security Isn't Broke, Why We Think It Is and Where the Money Went

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