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If the Green New Deal Gave Everyone Jobs, What Would Happen to Social Security?

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What would happen if the benefits paid through our current social insurance programs were paid as wages instead?

(Related: Fixed Index Annuities and Variable Annuities Are Good Guys)

Some wages would be income tax-free, due to our progressive system, but all would incur Federal Insurance Contribution Act (FICA) tax obligations. FICA taxes mainly fund Social Security and Medicare.

Interestingly, and most likely unintentionally, the Green New Deal, championed and promoted by populist politicians like Alexandria Ocasio-Cortez, does just that: It turns social insurance program benefits into wages, with a guaranteed public jobs program.

If Benefits Spending Became FICA-Eligible Wages

While this would add a decade of security to the Social Security trusts, the program’s cost makes it unviable. But computing the total cost, including the effects of increased labor participation, reduced benefits from social insurance programs, and increased FICA-eligible wages, unveils a potential savior for those trust funds.

To be clear, this isn’t a commentary on the benefits of the Green New Deal. It’s a commentary on how one side effect of one part of that proposal could create positive cash-flow for the Social Security and Medicare trust funds, and, ultimately, a path to altering the estimated 2035 depletion date.

Here’s what caught my attention: according to Sen. Edward Markey (no relation to the brilliant financial writer with the same last name), the Green New Deal public jobs program is intended to provide “a job with a family-sustaining wage, adequate family and medical leave, paid vacations, and retirement security to all people of the United States.”

To do this, the government would need to add 9.7 million full-time-equivalent jobs, to lower fractional unemployment to 1.5%, according to Center on Budget and Policy Priorities (CBPP) estimates.

The CBPP based its estimates on the U.S. Bureau of Labor Statistics’ U-6 measurement, which includes underemployed and discouraged workers, unlike the commonly reported U-3 figure. The 9.7 million jobs come with a $543 billion price tag.

However, the CBPP and Green New Deal supporters argue that much of this cost is likely to be offset through the reduction of other current government spending, increased income taxes, and increased consumption taxes.

Now, stop for a minute; don’t get lost in the politics.

Think about this: If all Americans have access to guaranteed jobs, that allow them to sufficiently provide for their family (sustaining wages, vacation, health insurance, and retirement) then would we still need:

  • Unemployment Insurance? ($33 billion annually — not adjusted for spike during poor economic periods)
  • Medicaid? ($368 billion annually)
  • A slew of other programs, like the Children’s Health Insurance Program, and Temporary Assistance to Needy Families? ($173 billion annually)

There would still be some people in poor health who wouldn’t be able to work, so we might still need Medicaid. But, with guaranteed access to jobs, why would we need the other programs? If you need financial assistance, then we’d give you a shovel, and you could dig roads, rebuild Manhattan, or help construct a filter for cow farts to improve the environment.

Also, if we can find jobs for the unmotivated, computer-game-addicted, socially awkward millennials, couldn’t we also find work for most of those who have health conditions? This could possibly eliminate Medicaid altogether. That would turn $574 billion in social insurance spending into social wages…

Even so, let’s stick with the CBPP’s measly, paltry, minuscule $543 billion social insurance spending conversion estimate.

Trust Fund Math

Shifting $543 billion per year in social insurance spending into the social wages category would put $67 billion in the Social Security (OASI) and Disability Insurance (DI) trust funds. This would prevent the trust from dipping into its reserves until roughly 2024. That’s about 4 years later than is currently projected.

(For reference, I’ll be using the combined effect of the contributions against the combined balances of the “OASDI” trust funds [technically, they’re separate), and I’m only using the intermediate assumptions provided in the 2019 Social Security Trustees Report, using the 2019 Social Security Trustees Report’s intermediate assumptions.)

Is 9.7 million additional jobs a good number? Wouldn’t guaranteed employment increase the potential labor force? Wouldn’t some who aren’t “wanting” a job, become job wanters? And, not in the least, if a private-sector worker made less than the Green New Deal program minimum, then wouldn’t they consider shifting from private to Green New Deal? Yes, to both, and both increase program costs.

One way to determine how many additional job wanters we might have, is to look at IRS tax returns for lower-income households of retirees, who are more likely to seek employment and are less likely to be currently accounted for under the U-6 measurement.

The 2016 IRS tax return statistics (the most current year available) show that there were nearly 25 million tax returns for filers 65 and older. Of those, nearly 12 million had an adjusted gross income (AGI) of less than $30,000. To maintain the frictional unemployment level, the Green New Deal must create an additional job for each of these filers who seek to re-enter the labor force. If 10% chose to do so, then that’d be an additional 1 million required jobs.

Note: This doesn’t account for younger filers with lower AGIs.

Alternatively, the American Action Forum (AAF), used the prime-age Labor Force Participation Rate (LFPR) when determining the Green New Deal’s potential costs. If we adjust the LFPR back to its peak rate (2007), then we need another 1 million jobs. Given the IRS data above, this might be too conservative.

Additionally, the AAF assumed there’d be another 35 million required jobs if all those making less than the Green New Deal minimum ($25,000 per year) favored a pay increase and became Green New Deal program enrollees. Combine this with the increased LFPR, and we need 47 million new jobs, not 9.7 million. The new price tag come in at $2.6T annually. (Note the T, for Trillions).

This analysis also uses the CBPP’s estimated employee costs, with an average of $32,500 in wages, plus $23,500 in non-wage costs, for a total of $56,000 annually per employee. For the Green New Deal enthusiasts, and to be more optimistic, I’ll adjust these lower for two reasons:

The additional 35 million jobs for those make less than the Green New Deal program minimum would still get increased pay, if the workers were paid less than the Green New Deal average. So, I went with an annual wage of $27,500 for these jobs.

The $20,000-ish of non-wage costs could possibly be reduced with scale and technology, so I reduced it by half. (I’m trying to give this a fair chance).

After making these adjustments, the cost is approx. $1.8 trillion. This assumes the Green New Deal must cover the entire liability of increasing the employment count. Yale professor, Phillip Harvey, estimates about 1.26 full year jobs are created by each government created job. This means 37 million Green New Deal jobs would create the 47 million (assuming this rate stayed constant at higher levels of total employment). Assuming the $27,500 wages jobs are proportionally split between the Green New Deal and private sector, and we get the final Green New Deal annual cost of roughly $1.42 trillion. This is a bit more than half of the AAF’s estimate and just less than three times the CBPP’s estimate.

Depletion Date Effect

This might have seemed tedious, but it was necessary to determine the impact to Social Security. Cumulatively, the 47 million jobs would have around $1.28 trillion of FICA eligible wages each year. This nets the trust funds $158 billion annually. Unlike before, this is enough to prevent the trust from dipping into its reserves for almost another decade (2028).

Now, if we adjust the $158 billion annually, by roughly the same increase the report uses for projected payroll tax increases, then this is enough to prevent the trust from dipping into its reserves until sometime in 2030 or 2031. This is just a few years shy from the reserve’s current expected depletion date. Further, the reserve balance in 2028, using the current trust fund reserve interest rate, would be about $1.9 trillion greater, or almost double the projected balance.

Lastly, what if we assumed, a 15% reduction to net Social Security benefit payments. This would be as a result of increased labor participation among current or soon to be eligible recipients, either through the increased taxation of benefits paid, forced postponement of benefits due to Social Security’s earnings-test, or the later activation of benefits. This effect here would be drastic.

Here, the trust would run an increasing annual surplus, starting at $329 billion in 2020 and reaching $400 billion by 2028. In 2028, the reserve fund would be nearly $6 trillion, which is $3.9 trillion more, or 300% greater than, its current estimated balance at that time. This income would fundamentally change the trust funds’ viability.

The Bottom Line

Yet, even after deducting the additional paid FICA tax, additional tax revenues collected (using an effective rate of 12%), and the total elimination of the social insurance programs previously listed, the Green New Deal jobs program would still cost nearly $500 billion annually.

That’s a 50% increase to our already monstrous annual deficit spending. If simply to save the Social Security trust fund, then it would be cheaper to just allocate $158 billion annually. The real conclusion here, is the path that we must take to solve Social Security’s deficiencies.

We don’t need additional births, since each new birth (future enrollee) is actuarially paying in too little and therefore adding to the funds’ future deficits. Instead, the math here shows our best way to strengthen the Social Security and Medicare trust funds is to develop policies that encourage increased deferment of future benefits by currently eligible, and soon-to-be eligible recipients. While at the same time, develop policies that encourage increased labor participation or increased FICA liabilities on wages of $1.8 trillion annually.

— Read 8 More Dave Ramsey Myths Debunked on ThinkAdvisor.

Michael J. Markey Jr. (Photo: MM)

Michael Jay Markey Jr. is a co-founder and owner of Legacy Financial Network and its associated companies. He has been a member of the Million Dollar Round Table member and a winner of Court of the Table and Top of the Table honors.