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Sunday, March 19, 2006

Touching The Third Rail, Part 2

In my post this morning that discussed a little bit about the idea of means testing Social Security, I wasn't horribly clear on what my plan would be for it. It has, however lead to some rather lively debate about the idea, keep the comments coming.

William Saletan discussed the idea of age and Social Security in today's Washington Post, which got me to thinking about a combination of age and retirement income as part of the test for how much you would get in benefits.

Right now there is no incentive to not start collecting Social Security at the minimum age of 62, in fact as the retirement age goes up, it ends up looking better and better to collect early. Why? Well, if you are decent at financial planning, or even basic math it's easy to see that the amount it goes up at your "full benefit" age will never make up for the lost income from 3-6 years of collecting the reduced amount.

So, here's my idea, which I don't believe to be a total solution, but a partial one that would keep the Social Security tax from needing to hit 32% in about 2050!

First off, means testing can come in many forms. If you include "all wealth", then you would look at home value, stocks, bonds, etc. A very cumbersome and probably unmanageable. However, if you just looked at income during retirement, it becomes pretty easy, we all do our taxes. (I hope).

Currently we offset Social Security payments if a recipient receives regular income over a certain threshold while collecting benefits. I would apply that same threshold to retirement income that is currently only counted on "regular income" from a job. But I would make it more painful for folks who retire early.

If you request benefits at 62, and have a combined (retirement+regular) income over $35,000/yr you would for forfeit $1 of Social Security for every $2 over the limit.

If you waited until 65 to retire, you would forfeit $1 for every $3, and at your "normal" social security age $1 for every $4 of income. However, if you waited until 2 years after your Social Security age to retire, you'd forfeit nothing.

What this would do is create an incentive to work longer, therefore pay into Social Security longer, and for those who stayed in the workforce the longest, it would remove any penalty.

It would also have little effect on low income retirees, they wouldn't trigger the penalty anyway. And for those who earn more, by staying in the workforce longer, they'd enjoy the benefits of Social Security, along with their other income.

This is not a total solution, it would only slow the bleeding of the system, but it would be somewhat of a help. To truly fix the system, the Trust Fund needs to have it's surplus leave the government's hands.

A reader of the last post suggested I go to http://ecolanguage.net and see the "truth" about how the system works. Well, that's a 12 minute fantasy presentation. You see, it perpetuates the myth that our Social Security surplus dollars are in some "lock box trust fund", which is a lie.

That trust fund is actually special, non-negotiable treasury bonds sitting in a vault in West Virginia. Actually, a bunch of filing cabinets in the vault. You see, when the receipts for Social Security come in, anything that isn't spent is immediately loaned to the government (by the government??) for current spending. The Treasury issues bonds for that money, with a 2% interest rate.

This year the government will borrow $206 Billion from itself in this scheme, meaning that the true budget deficit for the year is actually close to $600 Billion, not the $390 advertised by OMB and the CBO.

The problem with that is the same treasury that issued the bonds has to pay for them, it's kind of like writing IOU's to your checking account. When you are broke, you can't cash them in and use that money, at least not at any bank I've ever had an account with.

The scare mongers in DC convinced enough Americans over the last 5 years that taking that trust money out of DC, and putting it into actual investments was a bad idea, but in fact, is the best idea for saving the system. Right now the only way to pay the "surplus" back is to tax you for it.

Investing it in municipal bonds, TIF bonds, and other safe investments, are a better way to go. Even the stock market, would be a good choice, since there has never been a 20 year period (the bond period for Social Security) when it lost money. When they are due it wouldn't be the Treasury playing it's 3 card Monte game with your taxes to repay it, it would be the issuing authorities.

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6Comments:

Blogger shoprat said...

Both of your postings are right on the money but you keep making a serious error; you keep appealing to reason and logic. Sadly, the press keeps it up emotionally and will not allow a logical discussion hence no solution will be found, except for more taxes (the only solution the left will accept.)

Of course if people actually knew the facts, the emotions just might be a little different.

6:17 PM  
Blogger Crazy Politico said...

I'm still trying to figure a way to throw "But it's for the children" when I talk about an old age program. I know if I could get that in there we'd get this fixed.

The truth is, it is for the kids, at least their future.

7:22 PM  
Blogger Steven Tucker said...

I think the only way to save social security is to end it.

7:23 PM  
Blogger Gun-Toting Liberal said...

CP, great post again. I like your (Liberal) thinking on this, of course ;-) To me, you are singing to the choir...

As for bringing the kids into it, it's easy. If we were to lose Social Security, it's all about the kids suddenly. Who's going to let Mom and Pop starve, lose their house, and lose their car? Nobody I want to know. But if we axe SS, or let it die a slow death, it will be a huge wakeup call for sure, even to the millions and millions of unhappy conservatives such a disaster will create. Unhappy conservatives? You BET! Unhappy when they are the ones making their own car notes AND they Mom's and Pops' car notes at the same time.

If we take the advice of some of your posters who suggest dropping the hatchet quickly and firmly upon social security, I guarantee you that conservatives and liberals alike will be standing arm in arm in Washington with picket signs to fix SS IMMEDIATELY.

It may come to that before it's over.

9:45 PM  
Blogger Crazy Politico said...

Steven, while it's an interesting idea, I don't see it as a real practical one. We'd still have to replace it with something else.

GTL, I think you are right, other than some hard core folks I don't see many happy if Social Security dies. As for the "liberal thinking", FDR wasn't a 'moonbat' liberal, so some of his thinking isn't too hard to follow. He came up with a necessary program, but over 70 years we've perverted it quite a lot.

3:13 AM  
Blogger Steven Tucker said...

CP - I don't think we would. I just think entitlement programs create more problems than they solve.

5:50 AM  

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