The Democratic presidential hopefuls will meet for their sixth debate on Thursday, and Ben Ritz is still waiting to hear a discussion about what he says is the biggest issue facing Social Security—how to plug the existing shortfall.

Ritz, the director of the Center for Funding America’s Future at the Progressive Policy Institute, said there is a lot of talk about expanding Social Security benefits, but no talk about filling the current gap in funding.

“There is a reason why when you have a senior living in poverty you would want to expand the benefits and that makes sense, and there are other holes throughout the system that could be patched better,” Ritz said. “But what we have here from (Sen. Elizabeth) Warren and Bernie (Sen. Bernie Sanders) and a couple of other candidates is a broad-based expansion to increase benefits to everybody whether they are living in poverty or whether they are sitting on $10 million.”

To lift the average benefits of retirees, Warren, Sanders and others have floated imposing a payroll tax on income over $250,000 and on income from investments. The payroll tax cap is currently set at $132,900, which means earners are only taxed up to that amount. In other words, someone who earns $132,900 contributes the same amount to Social Security as a billionaire.

Ritz said that when new proposals have come up, the candidates have generally done a reasonable job of saying how they will pay for expansions, but what they haven’t done is say how they are going to pay for the shortfall that’s already there. And the massive expansions would take up all the revenues to fix that problem.

Ritz, who co-authored a proposal called “Funding America’s Future: A Progressive Budget for Equitable Growth,” says it’s crucial to address the deficit because the baby boomer generation is aging. That means the number of workers paying the benefits for each retiree is dropping, leaving the worker/retiree ratio in worse shape.

Back in 2000, he said, there were 3.5 workers paying the benefits for each retiree. Come 2035, that number is going to fall to just over 2 to 1. So a worker currently responsible for financing one-third of the benefits for a beneficiary will eventually be paying half.

Either there has to be a reduction in benefits or the taxes per worker have to be increased, Ritz said.

Social Security has paid out more in benefits than it has raised in revenues since 2010, he said. That’s been possible because Social Security gets credited by the Treasury Department for previous years of surpluses in the trust fund, which still has credit through 2035. “But once that runs out, according to the law Social Security can only pay out the benefit equal to the incoming revenue, so that would equate to an automatic across-the-board 20% cut,” Ritz said.

Plugging the shortfall is basically a math problem requiring lawmakers to take any of a number of drastic steps—decreasing the amount of benefits, raising taxes or reducing the number of years people collect benefits.

Many of the proposals in recent years, Ritz said, have focused on making small changes to the benefits formula, changing the retirement age, raising the payroll tax rate and subjecting more income to the payroll tax.    

Work Credits

But under a new proposal by the Progressive Policy Institute, one employing “work credits,” the benefit structure of Social Security would take on an entirely new look.

Under the current system, benefits are based on a person’s lifetime earnings during the 35 years they earned the most. The higher the income, the higher the benefits.

“The original purpose behind this is right now the program is financed by payroll taxes,” Ritz said. “It’s to create the perception that this is a benefit you have paid for. If you pay more payroll taxes because you make a bigger contribution, you get a bigger benefit out.”

But there are a few issues with that approach, he said. First of all, it’s not true because higher income people get a lower return on the money coming out than lower income people do per dollar paid in.

A bigger issue is that beneficiaries have only been paying sufficient payroll taxes to finance 80% of their benefits, so it’s not a benefit they have fully bought and paid for because their taxes were not high enough.

And furthermore, he said, it’s regressive. “It creates this system where we are providing the greatest benefits to the people who need them the least—and as we are transitioning to being an older society. And given all the challenges that younger workers are facing right now, we believe that it doesn’t make sense to put the entire burden of financing the benefits for wealthier seniors on struggling workers.”

The institute has thus proposed changing the benefits formula, awarding benefits based on how much someone works, not how much they earn. So if you work the equivalent of 40 hours per week at minimum wage for a year, you get credit for a year of work; for each year of work you have done in your career, your benefit is increased by a flat amount, Ritz explained. Workers who don’t earn enough for the full work credit get a fractional credit rounded to the nearest tenth.

Ritz said the benefits increase the same for the number of years you work whether you are the CEO of a Fortune 500 company, a teacher or a janitor.

Essentially, the plan would cut costs by reducing benefits to retirees who have earned high incomes over their lifetime while alleviating poverty among low-income retirees. This system also incentivizes work because the current arrangement only counts for 35 years of work for the benefit formula, Ritz noted.

“For each additional year of work, you get a higher benefit and so that creates a better work incentive, which means people are staying in the workforce longer, collecting benefits for a few years, getting more time to save. So that helps strengthen the system,” Ritz said.

The proposal also calls for allowing caregivers to receive up to five years of work credit for the purpose of benefit calculation.

Others have proposed flattening the benefit structure to give everybody a benefit equal to the poverty level. One of the biggest criticisms of that idea is that it would undermine political support for the program by getting rid of the relationship between what you put in and what you get out. It would no longer seem like an earned benefit, Ritz said.

“And by keeping the benefit tied to work, we say it’s still an earned benefit but it’s based on your work rather than your income, and so we think it makes it more progressive, more affordable and it doesn’t break that critical political link,” he said. “We are trying to make it so that you don’t get a higher benefit just for being wealthier.”

Ritz’s report also calls for a slew of reforms such as adjusting the retirement age to improve simplicity and equity, changing the cost of living adjustments, reducing spousal benefits and reforming survivors’ benefits. 

Another key point of the proposal is that it eliminates the payroll tax entirely. “We don’t just propose changing the benefit structure,” Ritz said. “We proposed changing the revenue system to be less regressive and less punitive of work.”

He calls the payroll tax “a flat tax for lower- and middle-income workers, but once you are higher income, the tax goes away. The only reason we have that regressive structure is to create the perceived link between your contributions and your benefits.

“So once we make that change and we say, OK, we are going to say benefits are earned rather than paid for, then there is no real reason to have that system.”

Ritz said there are other ways of raising revenues to pay for Social Security that don’t discourage work and don’t put as many burdens on workers. In its tax reform proposal, the Progressive Policy Institute calls for a repeal of the 2017 Republican tax reform law, which would reduce taxes on earnings from labor while increasing them on unearned sources of income for the wealthy.

It also proposes specific policies to curb the biggest tax expenditures and encourage policymakers to reduce or eliminate many of the wasteful and discretionary provisions in the tax code. 

Additionally, both Social Security and Medicare payroll taxes will be phased out over five years under the proposal. Congress, the report suggests, could retain the use of trust fund accounting by earmarking a new revenue source to replace the lost payroll tax revenue.