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Sunday, March 19, 2006

We Need To Touch The Third Rail

Today's Sunday Outlook in the Post has a great article on Social Security, "Curse of the Young Old" which describes the drag on the Social Security system caused by our ever increasing population of older Americans.

The author rolls out a line from the original documents setting up the system, a line that was long ago forgotten, when Social Security became a vote grabbing system, not a security system.

The point of Social Security was to subsidize those who couldn't work, not those who could. The program's founding document said it would support old people who were "dependent," "beyond the productive period" and "without means of self-support."

While he concentrated on the first parts of the statement, I'd like to look at the third "without means of self-support", which is where the system has really changed since 1935.

One of the first solutions we always hear to "fixing" Social Security is raising the capped income where taxes are collected. The reason for that cap is there is a maximum benefit that is paid out. It doesn't matter if you made $90,000, the current limit on being taxed for Social Security or $900,000 the benefit you'd get would be the same. Raising the tax limit increases the benefit, but for the folks least likely to need to collect anyway.

A part of the true solution for Social Security is a real means test, do you need the money? We've had somewhat of a means test on the program for earnings while collecting if you were still working. But once you stopped working, and were only collecting other retirement benefits, that went out the window.

For instance, by the time I reach retirement age, wishfully thinking to average 2.5% a year in COLA on my military retirement, I should be making in the area of $3,000 a month from that. So I'll have about $36,000 a year of income. But my social security check would be the same as someone else with similar lifetime earnings but no other retirement. Why?

The first reason folks spit out is "I paid into it, so I'm entitled to it", which is hooey! You pay taxes (which is, according to the courts what FICA is) for all kinds of stuff you don't use. Tons of people without children pay property taxes to support school districts.

By devising a level where Social Security payments are reduced based on retirement income, we'd have a more solvent system, that went back to it's original purpose, supporting those without the means to support themselves.

It would have to be phased in, though. Because truthfully the "gray haired old ladies" vote in too big a block to ever have such an idea make it through congress and be an immediate change. But by putting a starting time on it, say 2015, it gives folks who are nearing retirement a chance to adjust their plans accordingly, and wouldn't hit current retirees.

The American Academy of Actuaries has a quick 4 page PDF that describes some of the ways in which such testing could be applied, and covers more of the problems that could arise, and some basic history of the program.

This also wouldn't be a complete solution to the problems with the program, but it would be a start. The complete solution would include Congress leaving the excess funds alone every year, and invest them somewhere that paid interest out of someone elses checkbook, not the treasury.

Adventures in Perpetuity has a different take on this than I do.

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Blogger LargeBill said...

Your argument spells out my beef with means testing. It encourages irresponsibility and discourages the savings habits we should desire from folks. Say my brother spends his money as he earns it (and he does) while I save and invest (I do). My investment earnings would put me in a no social security group while his irresponsibility would leave him in the full coverage group. This isn't being thrown out as just a "fairness" issue but rather a behavior modification issue. You get the behavior you reward.

The other half of your idea (ie: screwing military retirees) would be a major disincentive for making a career out of the military.

Biggest problem with Social Security is that politicians realized they could use it to bribe one group of voters with the money of another group of voters. A security net for peoples last days became a massive vote buying scheme.

6:08 AM  
Blogger Robosquirrel said...

How about the opposite, then? Matching funds for those below a certain income? It encourages people to save and still penalizes wealthier Americans for being successful. Everybody gets what they want. Ah, the spirit of compromise.

I don't like any of it, of course, because you're giving money to people who didn't earn it. I'd be happier if the whole system was abolished and everybody was responsible for their own retirement.

7:40 AM  
Blogger Crazy Politico said...

Bill, there will be a followup to this tonight, and I'll explain some methods that could be used to encourage the savings you mention. Right now the system is definitely set up to discourage it. Why bother saving when you know Social Security is there.

Robo, in theory I'd love to see it go away. Reality is we actually require low wage workers for some jobs, who aren't going to have a retirement associated with it. So while I don't like the idea of the program, in concept, I accept that it's necessary.

9:24 AM  
Blogger Patrick Joubert Conlon said...

Very thought provoking. I have always thought that SS should be like unemployment insurance. If you don't need it, you don't collect it. The upside to that would be lower payments (premiums.) The downside is exactly what Largebill pointed out about means testing.

10:22 AM  
Blogger Tim said...

What IS the answer? It's such a tough nut to crack! I think we should just raise the age at which you can draw it to about 72. We are living decades in retirement now, instead of just several years, as was the case when the program was first put in place. No matter what we do, some people are going to get the shitty end of the stick, no doubt!

11:36 AM  
Blogger Mike said...

Hi Bill....There isn't an easy answer to this problem. It is indeed not serving the purpose it was set up and designed to. I believe though, that intelligent and reasonable people could work this out to the satisfaction of most.
I enjoy your stuff. Keep it up. Oh yeah, where's Maddie? Is she ok?

12:11 PM  
Blogger Lee A. Arnold said...

This article by Mr. Saletan omits a lot of information. For a bigger look at it, see "Social Security: The Real Connections" at http://ecolanguage.net

1:08 PM  
Blogger MDConservative said...

"Matching funds for those below a certain income? It encourages people to save and still penalizes wealthier Americans for being successful. Everybody gets what they want. Ah, the spirit of compromise." -robo

Yeah, I think the reason you don't like it is because it is pretty damn like communism, socialism. Is that something out of "The Daily Worker"?

1:09 PM  
Blogger Gun-Toting Liberal said...

CP; what a liberal idea! Of course, you can guess, I thoroughly loved it and 100% agree with you on this post and the opinions you've expressed thus far. I've always thought that this type of a setup, along with the CHOICE/OPTION for people to utilize the money market to increase (or decrease) their benefits come retirement time would be a healthy idea.

Good show, Sir!

2:28 PM  
Blogger Crazy Politico said...

Lee, it's a neat presentation that ignores basic economics. You see, right now the Social Security Surplus is spent every year, and repaid with an IOU from one government checking account to another. So when the shortfalls do begin to occur, "the trust fund" will be cashing checks from the same treasury that the "surplus" resides in.

Try it with your bank. Take your budget, spend it, take what's left over, and write an IOU to yourself from it, and then when you are broke, see if the bank will take your IOU.

Tim, I'll have the answer posted later tonight :)

Mike, I'm Bob, not Bill, but that's okay. Maddie is fine, just says she has nothing to blog right now.

Patrick, your idea is how the program was supposed to run when it was designed. It's been tweaked beyond belief.

MDCon, Robo was being faceious with his comment. He's as anti-tax as they come, and despises the idea of wealth transfer.

2:29 PM  
Blogger Crazy Politico said...

Thanks GTL, we must have been posting comments at the same time.

I'd just like to see the system back to what it was meant to be.

2:45 PM  
Blogger MDConservative said...

I assumed so, but it is just tough not to fire from the hip when I read things like that.

4:40 PM  
Blogger shoprat said...

Believe it or not, I agree with tim (in principle but not necessarily the same numbers). Part of the solution should be raising the age at which people become eligible. (Though it cannot be the whole solution.)

6:20 PM  
Blogger Crazy Politico said...

Weirder things have happened Shoprat, I mean hell, Poser agreed with me this week :)

7:21 PM  
Blogger Gayle said...

I left my comments on the HaloScan link. I just came in here to read others thoughts.

8:03 PM  

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