Sunday, July 08, 2007

Saving Social Security

Social Security is the 'third rail' of politics, and few changes have been put in place besides increasing the amount of the tax on incomes to fund it. This neat little article talks about its original intent and how it morphed. Seriously, the only changes to the system besides mega-changes like disability benefits, Medicare and prescription drug benefits has been the rate of SS tax. This article talks about its original intent in greater detail, and it a paper more than just a small newspaper article. This wonderful program was intended to replace some of the lost income in retirement for a limited time frame. The life expectancy of Americans was barely beyond 65 in 1937, now American males live to an average of 72. Not everyone knows this program will face a shortfall, and start to pay only 70% of what it should be paying in 2042. Social Security will not pay 0; it will just pay less. Remember that in 2017 it starts to run down the big stored up reserve of cash. Still, no one seems to want to do anything about it. Let me rephrase that, George W. Bush wanted to try to mix it up, but was blocked by the Democrats in Congress. Any changes would have been good. Instead of the issue becoming a debate on some form of change, it was dropped altogether. Way to fight Dubya!

Social Security was a great idea to help lift so many of the elderly and disabled out of poverty, and in its original form of a 2% payroll tax, not a big drain on pocketbooks. Take a look at historical rates. People don't realize that over time this tax has been bumping higher and higher. No one bitches about this one. Nobody bitches either about the cap on the income that is taxable for SS. This cap makes the tax regressive by nature. Fan-fucking-tastic! How come no one suggests a removal of the cap but a reduction in the total tax rate to be tax neutral but make the SS payroll taxes 'fair'? That could be issue number 1 just to make it fair. For those of you that point to Europe and drool over their government programs, those countries and Japan are facing a baby shortage crisis. They do not have enough workers coming on board to properly fund their pograms. At least we have a healthy birth rate and legal immigration. We have a solvency issue due to that big Baby Boomer generation. You can talk about privatization, but that isn't going to do much since it would have to be slowly implemented and may not be a gain at all for someone. When you get right down to it, there are only so many things that can be done to keep SS solvent. It's better to do this now than later, and I wish one '08 prez candidate would mention this.

1. Remove cap for payroll taxes - This would extend the life of the program maybe 7 years. Not a long term fix, but when Bush floated his privatization idea out there, the Grey Panthers mentioned this first. Why had they not mentioned it earlier the old bastards? This is a short term fix, but this should be done to make the tax a 'fair tax' on all citizens.
2. Increase the age of retirement benefit eligiblity - This has to be done as life expectancy has increased for all Americans since the SS plan was instituted in 1937. Men born in that year might live to 63 and women 68, which means a man might have collected a check if he drew early. We need to look at the lif expectancy tables and say "In 1937, we expected people to retire at age X and die at age Y. Today those ages are X+6 and Y+8". Make the age increase graded for year of birth. This seems 'fair' if it just relies on year of birth.
3. Raise the payroll tax - I hate tax increases. I really do. The government has done it before, and if they combined a payroll tax increase with a slight bump in the total payroll tax, it could add a significant amount of time to the life expectancy of SS. The last bump in the payroll tax came at the end of the Reagan Era, when a gradual bump of 1% occurred. Any bump combined with removing the cap could extend the life of SS for 20+ years. An increase to the payroll tax to 14.2% would extend the life of SS for 75 years, and an increase to 15.9% would extend it for about as long as we could expect America to stick around (see here for my rip off of their data.
4. Means testing for benefits - People get pissed off about this. If I had been paying into the system for years and found out I would get squat, I would be ticked too, oh wait, that is me. I'm 27 and won't see a dime from SS by the time I retire. With the Baby Boomers about to retire, could means testing be implemented fast enough? Is it fair? What about my money I put in out of my checks? Here's the truth: SS does not take your money and put it in a safety deposit box with your name on it for later use. It never has been that way. Your money has been taken from you and given to people who never paid into it, paid into it for a few years, or paid into it at the lower payroll tax rates. If it's a child, it will not pay into the system for years. People need to disconnect the idea of calling that SS money their money. SS is a massive redistribution program (or Ponzi Scheme), and means testing is just a more extreme way of exemplifying that.

To appeal to the millions of poor or middle class Americans out there, maybe start phasing out benefits if your mean/median annual income exceeded $70,000 in 2007 dollars with a benefit minimum by $150,000 mean/median income in 2007 dollars. This would be absolutely atrocious for the upper class, as they would be paying payroll taxes for a lifetime and not see a dime. I do not think it would get their support, and well, they fund our political class. This would also place the onus on the individual to save for retirement. Personal responsiblity would come into play because you would have it built into your mind from day one of your work history that SS might be reduced or not there at all for you. This could encourage a flood of IRA/401K savings. This option should be considered a last resort, as it is the ugliest of the options available, and with current tax rates on the upper class, could cause some of them to leave our country, taking their financial and intellectual capital with them.

One thing that I want to consider is life expecctancy projections. I assume Baby Boomers will be in good health come retirement age, but a small factor I would consider is the level of recreational drug/alcohol use and abuse in their younger years. What kind of heart damage has cocaine inflicted on their circulatory systems? Cocaine's explosive '70s and '80s users might find themselves in rough shape. It will probably be evened out by their healthy eating and working out, wait a minute, obesity rates are up for people now. Scratch that.

If I were given the power to control SS and modify it to fit the nation, which I would love, I would combine 3 elements with the fourth as a nuclear option for Baby Boomers and beyond if projections fall short to the model in the first 10 years. I would hate to have to slash someone's SS check in half or reduce it to a minimum benefit if forced to go to idea 4. An ultimate dream would be to remove the payroll tax altogether and tell the people to fend fror themselves in old age or during disability, but we saw how that worked before SS. Did not go so well. In place of abandoning the plan, I would own up to it's need in society and make some moves. I would remove the payroll tax cap first. This is an additional 7 years right off the bat. Starting in 2008, I would raise the payroll tax to 13.3%, to 14.2% in 2011, to 15.1% in 2014 and finally 16% in 2017. If the other features were enacted, we might not need to raise tax rates this much over 10 years. This would most likely set into place a recession if done all at once, so I favor phasing it into place. The people would be thanking me in 35 years when they are getting 100% of expected benefits if it meant slower GDP growth (and a recession somewhere in the middle) for 5 years. I hate doing this but would be for the "good of all". I would make an adjustment to the eligible age for benefits for citizens above the age of 35+/-, who are not already in the twilight phase of work (under age 50). I actually think the retirement age has been adjusted for these workers already, but I would tweak the younger ones a bit more. I would want to wait for life expectancy projections and medical breakthroughs before adjusting it for people under 35 just yet.

This would be a hard change to swallow. This would mess with our consumption for a decade as payroll taxes are put into place. This would tick a lot of people off, but running the show is not about having everyone like you. We, as a nation, would have to sacrifice. I am sure our men and women in the armed forces understand sacrificing for the good of all, but I think average Americans have just forgotten this concept (it's been fading away for 35 years now). The question to ask is would you rather do what is wrong or not face something so that you are liked by everyone, or do what is right and have people hate you? I'd rather do what is right. There are a ton of problems in the nation, a fair amount in the USA, and probably a few behind the doors of every American home. I think if we start with one big problem that threatens us all we can tackle the smaller ones. I recall a phrase meant to mean something was easier to fix than a person thought or to wonder why something cannot be done "if they can put a man on the moon...". I would love for a day when people could say "if they could save Social Security...".

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