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More on Social Security – How I See It
By JLP | January 20, 2007
There were a couple of interesting comments on my last post highlighting another blog’s post on Social Security.
Here’s how I see Social Security:
1. When the program was created, people didn’t normally spend 20+ years collecting social security.
2. During the 60s, the Baby Boomers were just beginning their careers so there was a huge number of workers contributing to the system and a much smaller number of retirees receiving benefits.
3. Now the tables have turned and the Baby Boomers are set to start receiving benefits but the number of workers currently contributing to the program is relatively small. In other words, we are headed for trouble. Especially if Baby Boomers end up taking benefits for 20, 30 or more years.
Our politicians have failed us. AARP with their only interest being their members (retirees receiving benefits), has failed us. The fact of the matter is: nobody wants to really solve this problem because to solve it means to make some very tough decisions:
1. Cut benefits to all or just the “wealthier” retirees
2. Raise the age at which retirees can begin receiving benefits
3. Raise the taxes on those who are currently contributing to the system
Older people are going to overwhelmingly support #3 while younger workers are going to support 1 or 2. This topic scares a lot of older people because they no longer have time to build up retirement asssets in retirement plans.
For those of us in the younger generations, the writing is on the wall: START SAVING MONEY NOW!
Topics: Business News | 14 Comments »
January 20th, 2007 at 4:19 pm
Your idea is right, but your history is a little wrong there. Social Security predates the Baby Boomers by a generation. It was first formed by FDR during the Great Depression. So many old people had lost their life savings and were out on the streets that the government had to do something about it. There were many more workers than retirees at the time, so the program worked. The problem was that there was no time limit on the program; it should have been cut off after WWII (before the Baby Boomers even had a chance to be born). Now, due to ever-longer life spans and ever-fewer children being born, the ratio is much worse.
January 20th, 2007 at 5:08 pm
Wish I had remembered to follow that thread.
Henry Phish pretty much said everything that I would have though. Gaming The Credit System is right about the early days of SS. The baby boomers hadn’t yet been conceived when it began. Oh, and I was a bit off about when benefits begin. Full benefits begin at age 65-67 depending on your date of birth, while partial benefits can begin at 62.
So I’ve been thinking about it a bit more and I think that 70 1/2 is the right age to begin SS benefits. It already has precedence in tax laws since that is when Required Minimum Distributions (RMD) must begin for traditional IRA’s.
Its interesting to note the average life expectancy for Americans. According to Wikipedia it is 77.85 years. I can’t find anything online to support this, but if I remember correctly it was in the mid to low 60′s during the depression. So now, the average person collects benefits for over 10 years, and assuming my recollection is correct, the average person did not collect social security retirement benefits.
As another side note on life expectancy, the US only ranks as 29th among sovereign nations. That is just unacceptable in the richest nation in the world.
January 20th, 2007 at 5:30 pm
Actually, AARP is doing exactly what it should be doing. Unfortunately, there’s little in the way of a counterweight to AARP; its members are old, vote, and are the wealthiest age cohort in the US.
Personally, I like the “Posen plan” which involves various changes, and doesn’t hurt anyone over 50. Personally, I have little problem with changin SS from trying to be a pension plan to a backstop for people who can’t otherwise afford to retire. It would be vastly cheaper, and being generally libertarian, I don’t have much truck with the “generational solidarity” argument.
An aside, there’s something called the “SS trust fund”. Unfortunately, as an actual pool of money, it doesn’t exist; it’s a bunch of government bonds. Unfortunately, government bonds are claims on future taxes, so all the “trust fund” does is carve out chunks of the future tax stream for the government. As long as the “SS trust fund” is “stored” this way, it will never be “solvent”.
(The best analog is if a corporation chose to fund its pension fund with its own bonds. No external auditor would ever allow this sort of thing.)
The consequence of this is that raising taxes today will do absolutely nothing for SS in the future, unless we figure out how to park the surplus outside the government in something that doesn’t require taxes to fund.
January 20th, 2007 at 7:04 pm
Why not consider what Bush proposed? A phased changeover to private accounts. Some Federal employees already enjoy this benefit but what’s good for Washington is not good for the rest of us. If you think about the ROI for your SS “investments” (it’s about 1%), it makes sense to trust you to invest it more wisely than the imnipotent Federal Government (which of course doesnt’t invest it at all)
January 20th, 2007 at 7:11 pm
Paul,
Although I like the idea, I don’t see how it can be done without some major pain. The problem with SS (other than the fact it shouldn’t exist as it does now) is that each retiree’s benefits are paid by current workers. If we divert current contributions to private accounts, it does nothing to solve the funding problem.
January 20th, 2007 at 8:20 pm
An interesting article on diversifying the current trust fund to include stocks as well as government bonds to increase the rate of return that Paul complains about and lessen the danger pointed out by Foobarista.
http://www.socsec.org/publications.asp?pubid=336
Clinton apparently proposed this, but like all things Social Security it went nowhere.
In principal, I’m not opposed to some form of private accounts, but the transfer to such a system would be painful, and frankly, I don’t think people should be able to invest all of this money anyway they like. Social Security should be understood as a pension of last resort, to make sure that the elderly are not destitute and relying on the government for sustinance. Letting people invest this pension of last resort in the stock market like they do now with their 401ks will produce higher on-average returns, but a sizable minority will blow their accounts or so seriously deplete them that they will end up on the street. The growing literature in behavior economics shows that people irrationaly discount the future to a shocking degree, a point that is demonstrated by low-participation rates in workplace 401ks. People should be able to invest the vast majority of their wealth any way they want, but as a society we should force them to keep a small amount in low-risk investments for when they can no longer work.
January 20th, 2007 at 9:11 pm
My biggest concern with any sort of “provident fund” would be that it would quickly have $trillions in it, and would make Congress – or some group of “nonpartisan” appointees – the biggest shareholder in the world by far. For that reason as much as anything, I prefer private accounts.
January 20th, 2007 at 10:18 pm
Re: JLP in #5. As for “how to fix Social security,” the solution is more complicated than any one plan (it incorporates multiple plans) and would actually look more like this:
1) Raise Social Security taxes by 3 percent; all of that increase would go towards the new individual savings accounts (I’ll call it SA for this discussion). Current effective rate for SS remains at 12.4%. (The 3% is just off the top of my head. It could be higher if necessary. Somebody with a lot of data would be able to figure out exactly what the rate should be. In any case, this amount would still be a payroll tax, but it would go into an account, and the individual owner could administer it as they see fit, but not withdraw any monies until reaching benefit age.)
2) The age to receive benefits is raised to 70.
3) Retirement benefits are scaled back yearly based on date of birth. For example, people who are 30 or under now would receive no SS benefits when they retire, other than what’s in their new SA. People aged 30-40 would get 25% of their currently-project SS benefits; aged 40-50, 50%; 50-60, 75%; 60-70, 100%. You could get finer-grained with the years and percentages if you like, but this is just an outline.
4) Gradually, the percentage of retirement taxes going towards SS and SA would reverse; e.g., in 10 years, the SS percentage goes from 12.4% to 10%, while the SA percentage increases from 3% to 5.4%; in 20 years, SS is 7.5% while SA is 7.9%; 30 years, SS is 5.0% and SA is 10.4%; 40 years, SS is 2.5% and SA is 12.9%. Again, these percentages are all just off the top of my head, but it illustrates the point. Gradually the SS portion would diminish to 0 as SS recipients die off and people transition to receiving their SA for retirement.
Again, somebody with a lot of demographic data could run a very accurate simulation and figure out these percentages much more accurately. But the basic idea is very clear. Yes, taxes would have to be raised immediately. But at least all of that increase would only be forced savings; people would be “keeping” that money for their own retirement. This would alleviate a lot of the pain from the increase.
January 21st, 2007 at 2:50 am
Look at the Australian system.
Compulsary ‘Superannuation’. Employers must pay 9% of salary into a retirement account. Government 150% match of $1500 if $1000 is put in (capped to $1500 yearly) for Low income earners.
I’m honestly not too sure how the transition went (I’m a little young) – but we did it. And i *think* it works.. I pretty sure it will work out for me – as I’m adding additional funds of my own.
It also means – that I can confidently expect to have $0 pension when i retire… so i Know I have to think about it and have to do something about it.
January 21st, 2007 at 12:12 pm
I am one of those baby boomers who was forced by the government to “contribute” to social security. Even when I was young everyone know it was just a Ponzi scheme, with the government taking its cut.
I feel badly for younger generations who will have to shell out more and more money to what is essentially a welfare scheme for the elderly.
One thing that AARP does is to try to scare its members into thinking any reform or change will rob them of their pensions. It is a real issue to them, since many rely solely on social security – but it is also bogus, since, as far as I know no proposal has been made to reduce their benfits, although their taxes have been increased.
Personally I think the government will solve the problem by “means testing” potential retirees, raising the retirement age and taxes on social security recipents and continually forcing new “contributions” from the young.
The only way really to solve this mess is through personal retirement accounts such as has been proposed by George Bush.
January 21st, 2007 at 5:41 pm
No matter how retirement is financed, whether through government funds or through private investments, if a large percentage of people retire at once there will be an impact on the economy.
Maybe the poor retirement savings rate of the majority of boomers is a blessing in disguise — they won’t be able to afford to retire and will have to work longer.
January 21st, 2007 at 10:01 pm
[...] AllFinancialMatters shares some beefs with Social Security. [...]
January 22nd, 2007 at 8:54 am
I think we should be weined (sp?) off the current plan and be given our money and do as we see fit.
IMHO, I can invest and manage my money better then the gov’t.
Unfortunately, the gov’ts preconceived notion that they know better, will ultimately lead to the further clusterfcuk called Social Security.
January 22nd, 2007 at 10:36 am
My recommendations have not changed in the 20 years I’ve been in the workforce. Social Security has to be scaled back. Here’s the plan:
1) Current retirees get no cuts. No means testing. No changes at all. It is too late for them to adjust to compensate for it.
2) The same applies to anyone within a few years of retirement.
3) Set a threshold age. For everyone younger than that, 2 changes phase in gradually. They are a higher age to start receiving benefits and greater means testing to receive benefits. By gradually, I mean that the scale will adjust by age monthly. No sudden jumps just because your birthday was two days after a threshold rather than two days before it.
4) Set the goals such that they reduce costs over time.
5) Lower Social Security taxes and raise 401(k)/IRA contribution limits.