Wednesday, June 18, 2008

Saving Social Security

Social Security has been a great system since the 1930's. Although I'm a conservative, what I'd like to conserve includes most of the social "safety net" created in the New Deal. However, the system is terribly broken. The problem is not political, it's mathematical. When FDR and his Brain Trust invented the plan over 70 years ago, our demographics were a lot different--life expectancy was much lower, and the ratio of workers to retirees was much higher. As the "Baby Boom" generation born between 1945-1960 retires, that ratio is getting turned upside down.

Many people mistakenly think they are saving their own money in Social Security. That's not true. The 6.1% of your income that is deducted for FICA, plus an additional 6.1% your employer provides (which is really a camoflauged tax... your employer could pay that same money to you if it were not required by the government, and the self-employed pay both sides) are immediately paid out to the retired and disabled of today. There is a generational understanding that part of my generation's income will help take care of today's elderly, and my students and my children will one day do the same for me. Unfortunately, that math goes awry in the year 2047... the inflow won't cover the outflow. And it's worse than that. Supposedly there has been a "surplus" accumulating in the years where inflow exceeded pay-outs. We should start drawing down that surplus in the year 2018. Sadly, the government has been spending the surplus for years--all that's in the "trust fund" is IOU's from the government to itself. If your business did that, you'd be guilty of fraud.

There are only two possible solutions to this problem within the current framework, either alone or in combination. Either take in more or pay out less. These can be camoflauged. Raising the retirement age or slowing the rate of annual increases are both just sneaky ways of paying out less. So is means-testing. And raising the current cap ($102,000) on which FICA tax is paid while maintaining the same 12.2% rate is simply a hidden tax increase. Both are likely necessary. The problems are largely political--any attempt to slow or limit benefits is opposed by the AARP, whose demographic is the largest bloc of likely voters. And raising the limit on which tax is paid opens its own can of worms. Right now, what your benefits are is linked to how much tax you paid in. Since benefits are capped, so is maximum tax. Even though the "rate of return" on your "investment" in Social Security is awful, at least it is theoretically fair. If we raise the cap on the tax, should we also raise the benefits of those who pay the most (and likely need the help the least)? If not, we're just admitting that what once was a safety net is now yet another wealth-transfer program from those who earn to those who do not.

Another option often floated is private accounts... taking some portion of the 12.2% tax and investing it (maybe in t-bonds, or an index fund) in the taxpayer's name. The rest would fund the current system, but that part would become "your" money, and even be able to be left to your heirs. I find this a very attractive option, as those who die youngest pay tax their whole life and never collect. This is especially true of African-American men, whose average life expectancy is about the same as the retirement age... this means that the average black man pays a huge tax his whole life that will once day be spent by an elderly white woman (who have the longest life expectancy).

Personally, I don't think Social Security will ever "fail." The politicians won't allow that to happen. They'll nibble around the edges, hiding the tax increases and benefit cuts as best they can, constantly kicking the issue down the curb. Sadly, many Americans (especially those at the bottom of the income scale) pay more in FICA tax than they do in income taxes. My family does. We'll gradually pay more and more, and tomorrow's retirees will receive less and less by comparison to today. Some high earners will subsidize the system and will possibly receive nothing... but we'll call that "fair." Don't like it? Tough. Entitlements are here to stay.


bekster said...

That's yet another reason to take retirement into your own hands. Other than the "nibbling around the edges" that you speak of, probably the only thing that will really "save" the system (or, more specifically, continue to help the people who really need help) is the sacrifice of responsible people who save up their own money so as not to need Social Security money. No, it is not fair, but at least it feels a little nicer to be someone who says, "Go ahead and take my piece of pie; I prepared my own pie," than to be someone who says, "Hey! Why are you taking my piece of pie?"

Rather than try to "fix" government systems, I think it makes more sense to put effort into educating the populous about finances. Of course, not everyone is going to listen, but, in general, the common man has more influence over the other common man than he does over the government.

Pete said...

The problem with government run programs meant to insure our well-being: they're all built on campaign promises that have a shelf life of 8 years max.

When are the people going to figure out that the government officials only promise enough to get elected... once elected, they half-heartedly push their pet programs and a few other programs until they retire or leave office.

When will people realize that they are responsible for THEIR choices? I will voluntarily never ask the government for more than a strong military and maintained roads... heck, i'll even say we should privatize the Education and postal systems! I won't ask for a single dime. I'd even let them keep the amt of social security they've collected from me... but in return... I don't want them to ask me for another dime beyond a consumption tax to pay for some official's salaries, military and infrastructure. I don't want to pay for programs I don't plan on benefiting from.

If i could get the government out of my pocket and out of my life... I'll promise to take responsibility for MY LIFE and MY CHOICES... and educate my children to do the same.

bekster said...

The problem isn't politicians and their lousy programs. The problem is that most Americans these days are just stupid. To reiterate what I already said, I think change needs to come from the inside out (or, to say it another way, the bottom up). Several generations now are already "lost" for the most part, but we may still be able to educate the young. Unfortunately, most schools are run by the government. *Sigh* Oh well...

Goode Design said...

Becky, you've hit it right on the head! I'll drink to that

Bottoms up! oh, wait.