Social Insecurity

SOCIAL INSECURITY….Megan McArdle has a long TechCentralStation column today about the accounting intricacies of Social Security and Medicare. However, since this is a sure fire way to become completely confused about something that is essentially a simple issue, I’d advise skipping straight to the meat of the argument.

Unless you’re a trustee of the system, here’s the only fact you really need to know: Social Security and Medicare aren’t investment programs, they are pay-as-you-go programs, which means the taxes you pay this year are turned around and immediately sent to recipients. In other words, current taxes and current outlays have to balance. Megan summarizes our options this way:

[The government] can cut benefits so that outlays for Social Security and Medicare don’t exceed what’s collected in payroll taxes; it can raise taxes; it can cut other spending; or it can borrow the money.

I’ll make it even simpler: there isn’t enough other spending to cut to make up for projected increases in Social Security and Medicare, and we can’t keep borrowing forever, no matter what George Bush thinks. So there are only two choices in the long term: cut benefits or raise taxes.

Gradually increasing the income cap on Social Security taxes (currently around $80,000) and applying it to all income would probably do the trick and wouldn’t be too painful. Alternatively, if we don’t want to raise the cap, we would need to cut benefits approximately in half or maybe a bit more.

Take your pick.

POSTSCRIPT: Megan’s got a nice new picture gracing her column too. But wasn’t her hair blonde when I saw her on Media Matters last year? No?

POSTSCRIPT 2: Ah, just backlit, not blonde. OK then.