How Megan McArdle gets Social Security profoundly wrong

With even mainstream Democrats coming to embrace the idea of expanding Social Security to help address our looming retirement crisis, it couldn’t be long before the pushback emerged from conservatives and Republicans.

Bloomberg’s libertarian economics columnist Megan McArdle was quick out of the box, with a column published Tuesday titled, “The Left Gets it Wrong About Social Security.” You should read it, because it’s rare to find so much sophistry, misunderstanding and misinformation about Social Security packed into one article. You can count McArdle’s disdain for retired people, seldom expressed so openly, as a dividend.

McArdle’s target is a budget amendment that Sen. Elizabeth Warren (D-Mass.) recently persuaded almost all Senate Democrats to vote for, aimed at increasing Social Security benefits. The implicit plan would resemble one first proposed in 2012 by now-retired Sen. Tom Harkin, D-Iowa, in 2013--eliminate the cap on wages subject to the payroll tax (currently $118,500) and boost benefits especially for low-income retirees. We’ve argued for similar ideas, including here and here.

McArdle treats this as just a progressive sop to the elderly. She seems to prefer a compromise in which “Republicans let some taxes rise and Democrats agree to entitlement cuts,” though it isn’t clear how that would help retirees already fearful of running out of money.

Let’s walk through her column together.

First, consider McArdle’s general picture of retirees and the program. She asserts that previous efforts at reform have failed because “no one, left or right, really wants to take on our vast army of retirees.” She treats “the welfare state” and Social Security as if they’re identical or, at least, related. She thinks Social Security benefits are “generous”--or so she implies when she says Democrats want to make them “more generous still.” By the way, she has no answer to the question of how to shore up Americans’ retirement resources except: “not this.”

Calling Social Security recipients a “vast army” implies not merely that they’re numerous, but powerful and rich. Here are the numbers: some 56 million people receive Social Security benefits, including disabled people, child dependents and spouses. That’s a big number. But their average benefit is about $14,600 a year. The maximum anyone can collect is about $32,000 a year, and for that you have to have earned the maximum taxable wage or more for most of your working life.

Does that sound rich or “generous”? McArdle probably wouldn’t think so if she had to live on it. But for most retirees that sum provides more than half their income, and for more than a fifth of elderly couples and two-fifths of elderly singles, it accounts for 90% of income or more. As a ratio of career earnings, U.S. Social Security benefits are skimpier than those of almost all advanced countries, except for Slovenia, Great Britain and Japan. (See chart.)

In any case, Social Security isn’t the “welfare state.” It’s social insurance, paid for by the beneficiaries; on average, those entering the workforce since 1965 will likely have contributed enough to have funded their lifetime benefits.

McArdle asserts that Social Security effectively is in the red today because the old-age program “already pays out more in benefits than it collects in tax income”--$671.9 billion in payroll taxes and taxes on Social Security benefits coming in, and $716.4 billion in benefits and administration going out. (These are the 2014 figures the program trustees projected for the old-age program in 2013.)

McArdle is playing an old sleight-of-hand trick here by treating a third major source of program income, interest on Social Security’s holdings of government bonds, as special or even doubtful. “The only reason that the system isn’t in the red already,” she writes, “is the net interest the government is paying itself on the bonds in the trust fund.”

That sentence is chock full of error and misconception. To begin with, there’s no reason to treat the interest as a special case. McArdle could easily have said that “the only reason the system isn’t in the red already is the payroll tax collected from workers.” It would have been just as accurate.

As for the assertion that the interest is money “the government is paying itself,” she couldn’t be more wrong. We’ve tried to straighten people out on this repeatedly, but maybe she didn’t get the memo. So here goes.

The source of the money used to buy the bonds is the payroll tax. That’s what the government is paying interest on. Starting in the early 1980s, the payroll tax was increased to create a surplus to cover the baby boomers’ coming retirement. That surplus has to be invested somewhere to protect it from inflation, and by law that somewhere has to be U.S. government bonds.

Bonds pay interest, and there’s not a speck of difference between the bond interest the government pays to, say, billionaires Warren Buffett or Pete Peterson on their portfolios, and the interest it pays to working persons on the money they’ve paid in payroll tax and banked against their own future. Has McArdle ever dismissed the interest on any other U.S. bonds as illegitimate because it has to come from “the United States taxpayer,” as she dismisses the Social Security interest due here?

In essence, the government is paying interest on payroll taxes it has borrowed from workers. It’s not “paying itself.” One chip of the crock McArdle is offering readers is her depiction of the “United States taxpayer” as a single monolithic entity. She’s wrong. The community of payroll tax payers and income tax payers overlap, but they’re not identical. Most Americans pay more in payroll tax than income tax; the ratio doesn’t shift until earnings reach about $200,000, which places those taxpayers in the top 5%. Since the excess payroll taxes, borrowed by the federal government in the form of bond sales, have been used in part to finance income tax cuts for the wealthy, the payroll tax essentially has been flowing upward to help the rich.

That means any argument that the interest shouldn’t be credited to Social Security beneficiaries is just a proxy for the rich saying they shouldn’t have to repay their debt to the working class. So when McArdle grouses that proposals to improve Social Security involve taking money from “the rich,” she’s half right--the process involves taking money back from the rich by holding them to their obligation to repay what they’ve borrowed.

McArdle dismisses proposals to raise or eliminate the payroll tax cap, so that the wealthy will pay the same rate, 12.4% combined from employee and employer, as everyone else. She implies that’s like trying to get blood from a stone.

“This amounts to a 12.4% surtax on all income above $118,500,” she writes. This is a major factual error, and Bloomberg should run a correction. The payroll tax is levied only on wage income, not on unearned income such as capital gains, interest and dividends.

The distinction isn’t trivial. According to the IRS, working-class people earning $75,000-$100,000 receive 75% of their income from wages on average. For those earning just over $1 million, the figure is only 46%; for those earning $5 million-$10 million, it’s less than a third. Everything else is unearned income, which is untaxed from first dollar to last, and would remain so under every proposal on the table to raise the payroll cap.

McArdle’s point is that eliminating the cap would bring the top marginal tax rate to 50%, including state and local levies. “That would pretty much exhaust our fiscal capacity to tax the wealthy,” she says.

There’s no evidence to support that assertion, and plenty to debunk it. In 1986 the top marginal federal rate alone was 50% on couples’ income over $175,250 (that’s $375,000 in buying power today); the economy didn’t crash. In 1956, during a period of unexampled prosperity, the federal rate was 50% or more on income starting at $32,000 (or $276,000 today), topping out at 91% on income over $400,000 (or $3.4 million today). Obviously, we’re nowhere near exhausting our taxing capacity in historical terms.

In short, McArdle’s piece is a screed in favor of paring working people’s benefits to protect the wealth of the rich. Despite her role as an economics columnist, she doesn’t display much awareness of the toll that income inequality, which would be exacerbated by Social Security benefit cuts and alleviated by an expansion, wreaks on the economy’s basic sustainability.

Then again, she’s not addressing a general audience, but a rooting section of the upper crust. She gives this away almost at the top of her piece, where she writes that she’s mystified at any discussion of expanding Social Security: “Weren’t we just talking about entitlement reform,” she writes, “so that we could spend less on the program?”

No, Megan. “We” weren’t talking about anything of the kind. You were. “We” were trying to think about how to make ends meet in retirement, and using Social Security, perhaps the most efficient and effective social program in American history, to do so.

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