So, IS there a fix for Social Security?

[Nobody]

All of the Social Security threads are focused on GWB’s plan, but this thread will be a little different. It’ll mention him because he’s part of the debate, but this thread is about your opinions.

OK, first, back to the beginning. It doesn’t seem that long ago that I heard predictions that in the very near future Social Security will go bankrupt and we need to start acting now.
Second, senior citizens, and especially senior citizen groups like the AARP basically come out and said, we don’t give a f**k about payments to future generations, just as long as we get ours.
So, you simply just can’t raise taxes, because that leaves the same inefficient system in place and just delays the inevitable, the bankrupting of Social Security. You can’t reduce current payments or revise age charts, at least too much, or else you’ll be voted out of office.
Now, enter George W. Bush. He wants to privatize at least part of it.
This has some people, both young and old, saying it’ll never work, and, in fact, could make things much worse.

So, what do we do? We can’t touch what we give to the old people, we apparently can’t let young people opt out, fully or even partially. We’re going to have to do something, yet what?
Whatever it is, it’s clear that those of us under 65 (or whatever the retirement age is) are going to have to take it in the shorts, so to speak.
Has anybody heard of any good Social Security reform plans that’ll, at least in your mind, work?
Oh, and please, if possible, try to speak in layman’s terms. Not all of us are economists. Thanks.

[yabob]

I would favor simply adjusting up benefits ages gradually, say 1 year for every 3 that passes. It might not entirely fix the situation, but it would help. If nothing else, it would push eventual collapse out further. People are living longer, and this adjustment makes sense anyway. By doing it gradually, you don’t drastically affect people nearing retirement, and younger people have time to adjust.

This is “revising age charts”, but it ought to be able to be made palatable to the electorate:

The only thing that would actually make most younger workers happy is to throw the whole thing out, and quit taking money out of their paychecks. If resigned to the fact that that isn’t going to happen, they may go along with this, since they believe are never going to get a dime out of SS anyway. At least nobody’s suggesting they make larger payments. In fact, they may accept that having to wait until 72 is better than the present situation if there’s a good chance they’ll actually see the money.

The AARP constituency, in particular the ones aged 50+ who are not yet retired but rapidly approaching it, might see it as OK, since they still get their planned payouts delayed by maybe a year or two. It could sell to them if seen as a way of staving off collapse of the system.

[Kimstu]

MC: * It doesn’t seem that long ago that I heard predictions that in the very near future Social Security will go bankrupt and we need to start acting now.*

But as has been pointed out in other SS threads (including the current one about the Bush privatization plan), a lot of the “imminent bankruptcy” rhetoric seems to be overblown for the purpose of scare tactics.

What the current predictions of the SS trustees are saying is that, based on quite pessimistic forecasts for future economic growth, after about the next 35–40 years Social Security will be able to provide only about three-quarters of the expected benefits to retirees, if no changes to SS funding or benefit plans are made.

That’s not a great prospect, but it’s certainly not anything like “going bankrupt in the very near future”. The notion that younger workers, in particular, will “never get a dime” for their Social Security contributions—assiduously encouraged in a lot of the propaganda from SS privatization supporters—is pretty much horseshit. Any plan to “fix” Social Security that uses this “imminent bankruptcy” rhetoric should be viewed with extreme caution.

The root of the problem that actually exists, for the US as for much of the rest of the developed world, is that with lower birthrates and longer life expectancies, our population is aging. As this trend continues, there are fewer current workers contributing payroll taxes to pay SS benefits for each retired workers.

This isn’t necessarily disastrous; after all, the ratio of current workers to retirees has been steadily shrinking pretty much since SS benefits were re-indexed in the early 1960’s, but productivity increases and higher contributions have kept the system solvent (indeed, for the past several years, generating a hefty surplus).

However, it shows the intrinsic theoretical advantage of having a “save-for-yourself” instead of a “pay-as-you-go” social insurance system: if each generation of workers is paying for its own retirement instead of that of the current retirees, then the amount of money will swell or shrink naturally along with the size of the group of workers, and we don’t have to worry so much about the impact of demographic changes. (This is a bit oversimplified because SS is not just a retirement benefits plan, but also a disability and survivors’ insurance plan, as well as being slightly redistributive from rich to poor: there will always have to be some mechanism for transferring a certain amount of money from those who are currently providing it to those who currently need it, even if the bulk of the retirement benefits come from “save-for-yourself” plans.)

So, what do we really need to do about Social Security? Switching from “pay-as-you-go” to “save-for-yourself” has the advantage described above, but also has the big disadvantage that during the transition, at least one generation has to pay twice: impossible without either massive borrowing (not a good idea in our current state of budgetary red ink) or heavy tax increases (very unpopular and ouchy for the economy).

Further productivity increases and economic growth (remember, the current predictions of a future funding shortfall are based on pretty pessimistic forecasts about the economy) might solve the problem without our doing anything at all, but it’s unwise to count on that. The best solution probably comes from some combination of the following:

1) Keep phasing in increases to the retirement age in future generations as and if life expectancies continue to increase. (My mom qualified for her full SS benefits at age 65, I won’t qualify till I’m 67, and I’ll get extra benefits if I don’t retire till 70—I don’t have a problem with that.)

2) Raise the cap on the SS payroll tax. At present, the SS payroll tax applies only to about the first $90,000 of salary—anything earned above that is absolutely tax-free as far as SS is concerned. This is done to make SS less redistributive, so that higher-salary workers don’t end up putting into the system heaps and heaps more than they get out of it in SS benefits. I think the basic idea is fine, but raising the cap a couple dozen K would significantly ease the funding issues without soaking the rich very much.

3) Means-test benefits. At present, everybody who qualifies for SS gets benefits, even if they’ve got scooploads of their own money and the SS check is mere chickenfeed to them. On the one hand, cutting off benefits to the rich who don’t need them would save money; on the other hand, it would weaken the role of SS as a truly universal social insurance scheme, in which everybody who contributes is entitled to get something out of it. I think that’s a very important aspect of SS, so I don’t favor means-testing very much.

4) Raise the payroll tax and/or supplement SS funding with other taxes temporarily. This will probably be part of any realistic funding-crisis solution, but probably can’t bear the whole burden.

5) Boost return on investment by putting some SS funds in the stock market in individual or group accounts. This is what the Administration is currently proposing as the sole fix, and the problems with it are discussed in more detail in the other current thread. Basically, the difficulties are (A) high transition costs (see above), (B) higher overhead costs in managing multiple investment accounts, © greater risk and the need for an additional safety net for unlucky investors, (D) increased vulnerability to antigovernment radicals trying to eliminate SS altogether.

I think it might still be a good idea (I’m still mulling it over) to pursue strategy #5 on a smaller scale as part of a larger, multi-layered solution, for the following reasons:
(1) higher stock market yields could end up providing bigger bang for the retirement-savings buck, if we managed the higher overheads and risk carefully enough;
(2) it might stimulate efforts at individual saving in general, which would be good for our debt-laden finances;
(3) it could be a start to a very long and slow transition to a “save-for-yourself” plan which could avoid the pain of massive short-term transition costs.

So there’s my two cents about the extent to which SS really stands in need of fixing, and the sort of thing that would be most likely to fix it.

[Hentor_the_Barbarian]

I say that we do nothing because there is no problem. Over the past ten years, the date of doomsday for the social security system has been revised outward.

@Kevin Drum at Washington Monthly

Yep. A decade ago the Social Security trustees forecast that the trust fund would be exhausted in 2029. Today they’ve moved the date out to 2042 — you can see the details here. The Congressional Budget Office thinks it’s good until 2053. And if you use slightly less pessimistic economic projections than these guys do — something a lot of economists think we should — it’s good until at least 2060 or 2070.

Washington Monthly January Archive, SOCIAL SECURITY: A CONVERSATION…

[pantom]

Simple compromise: if a well-to-do person allows all his pay to be taken for Social Security, he should then be allowed to contribute an amount limited only as a percentage of pay to his 401k. So, if someone making, say 120k were to allow all of his pay to be taxed, but were also allowed to contribute up to, say, 20% of his pay to a 401k (or IRA) without limit, that person might consider it worth it because it increases, under current law, the amount he can contribute from the current limit of 14k to 24k instead.
I don’t know why no one has thought of this, but it looks to me like something that could solve at least a piece of the problem, assuming there is one. It would allow the well-to-do a de facto transition to a save-for-yourself scheme, while keeping the less fortunate in a system that would do well by them. Everyone would be happy.

[Kimstu]

By golly, pantom, IANAEconomist, but that does sound pretty clever. A sort of limited combination of my options #2 and #5: raise the payroll cap but on a voluntary basis, with the option of contributing more to private savings as incentive. Smart.

Oops, I forgot about the revenue issue. Would we take an unacceptable hit in revenue from the de facto tax cut for the people who’d be paying more payroll tax but less income tax because they get to put more money in the IRA or 401k?

[LouisB]

Isn’t some large percentage of existing retirees totally dependent on SS as it stands? How anyone can expect underpaid hourly workers / single parents / downsized, etc., etd to fund a retirement account beats me. Is there something I’ve overlooked regarding those people?

[asterion]

@Kimstu

That’s not a great prospect, but it’s certainly not anything like “going bankrupt in the very near future”. The notion that younger workers, in particular, will “never get a dime” for their Social Security contributions—assiduously encouraged in a lot of the propaganda from SS privatization supporters—is pretty much horseshit. Any plan to “fix” Social Security that uses this “imminent bankruptcy” rhetoric should be viewed with extreme caution.

I’m not sure whether or not I will never see a dime, but I sure as hell am assuming it. I think this is one of those generation-gap things: no way am I ever going to trust a pension or Social Security for the bulk (or all) of my retirement money. I plan on being well-invested and well-diversified.

[Kimstu]

asterion: no way am I ever going to trust a pension or Social Security for the bulk (or all) of my retirement money. I plan on being well-invested and well-diversified.

That’s certainly a good attitude, and I wish more people were as aware of the need to accumulate their own private retirement savings. I’m not suggesting that people should just relax and assume that SS is going to take care of all their retirement needs all by itself—of course it won’t, and was never intended to.

But there’s no need for younger workers to buy into the pro-privatization propaganda that tells them to go to the other extreme and refuse to believe that they’ll ever see a dime from Social Security. That’s just a PR attempt to soften them up for attempts to make unnecessary cuts and wasteful modifications in the program.

(You can see the illogic of it when you notice that the same twentysomethings who announce that they’re saving lots for retirement, because they don’t expect a dime from Social Security, aren’t worrying about long-term medical care insurance programs or otherwise providing for health insurance in their old age. Realistically, this makes no sense, because the projected funding crisis for Medicare is actually a much more significant and imminent problem than the one for Social Security. But the PR flacks have been drumming it into the kids’ heads that Social Security is on the brink of bankruptcy, so that’s what they focus on. It’s really a pretty impressive marketing achievement, come to think of it.)

The danger is that many lower-income younger workers might buy into the “imminent-bankruptcy” scare tactics and, as yabob suggested, adopt the notion that we should just “throw the whole thing out, and quit taking money out of their paychecks”. This attitude unwisely ignores the increased risks of stocks over Treasury bonds and the certainty that some people are going to lose money on their private retirement investments. There’s simply no way, as LouisB points out, that most low-income young workers are going to be able to save enough out of what used to be their payroll taxes to provide a retirement income equal to what Social Security benefits would have provided. Especially those who are long-lived or who become disabled well before retirement age. Remember, Social Security is a guaranteed lifetime benefit, but when your personal retirement savings are gone, they’re gone.

[DrDeth]

@Kimstu

1) Keep phasing in increases to the retirement age in future generations as and if life expectancies continue to increase. (My mom qualified for her full SS benefits at age 65, I won’t qualify till I’m 67, and I’ll get extra benefits if I don’t retire till 70—I don’t have a problem with that.)

2) Raise the cap on the SS payroll tax. At present, the SS payroll tax applies only to about the first $90,000 of salary—anything earned above that is absolutely tax-free as far as SS is concerned. This is done to make SS less redistributive, so that higher-salary workers don’t end up putting into the system heaps and heaps more than they get out of it in SS benefits. I think the basic idea is fine, but raising the cap a couple dozen K would significantly ease the funding issues without soaking the rich very much.

3) Means-test benefits. At present, everybody who qualifies for SS gets benefits, even if they’ve got scooploads of their own money and the SS check is mere chickenfeed to them. On the one hand, cutting off benefits to the rich who don’t need them would save money; on the other hand, it would weaken the role of SS as a truly universal social insurance scheme, in which everybody who contributes is entitled to get something out of it. I think that’s a very important aspect of SS, so I don’t favor means-testing very much.

4) Raise the payroll tax and/or supplement SS funding with other taxes temporarily. This will probably be part of any realistic funding-crisis solution, but probably can’t bear the whole burden.

5) Boost return on investment by putting some SS funds in the stock market in individual or group accounts. This is what the Administration is currently proposing as the sole fix, and the problems with it are discussed in more detail in the other current thread. Basically, the difficulties are (A) high transition costs (see above), (B) higher overhead costs in managing multiple investment accounts, (C) greater risk and the need for an additional safety net for unlucky investors, (D) increased vulnerability to antigovernment radicals trying to eliminate SS altogether.

.

1. This is really the fix that is badly needed- and the increase needs to speed up a bit.

2. I don’t think there shoudl be a ‘cap’ at all. Earn a billion$- pay SS on a Billion$. Sure, your benefits cap out, but so?

3. Means test. Well, the whole problem here is that SS was sold to the American Public as some sort of “insurance” where “you pay in, and thus you get out". However- it is nothing of the sort. SS is simply welfare for the elderly and others. Far too many who never paid in a nickle get to collect to make it a real "you pay in, and thus you get out”. We have to unsell that portion of SS. For a while it was nessesary as we had a generation or dudes who were too proud to take “handouts”. Pretty well- that concept is gone now. What is needed here is to set the means test very high. Let’s say half a million. Once dudes get used to that, and the yelling from AARP stops, then the test can be re-set at say $100000.

4. Bad idea.

5. Another bad idea.

One other thing that could be done is IF you have a qualified retirement plan at work, the rate collected is slightly lower. Maybe 1%?

[RTFirefly]

It’s kinda silly to discuss a fix, before clearly defining the size of the problem. If it ain’t broke, the ‘fix’ is to don’t fix it.

[Black_Train_Song]

3. Means-test benefits. At present, everybody who qualifies for SS gets benefits, even if they’ve got scooploads of their own money and the SS check is mere chickenfeed to them. On the one hand, cutting off benefits to the rich who don’t need them would save money; on the other hand, it would weaken the role of SS as a truly universal social insurance scheme, in which everybody who contributes is entitled to get something out of it. I think that’s a very important aspect of SS, so I don’t favor means-testing very much.

I don’t think everyone who contributes should be entitled for the program unless they qualified (just like unemployment benifits- I’ve paid these all my life and never got to use it). By qualifying, they should have to fall below a certain income line.

They would still benifit from the other functions SS performs:

It’s a sort of life insurance
It’s a disability insurance
And
It would be a retirement for those who needed it.

They way I’d fix the “bitching and moaning” would be to offer tax breaks on regular IRA withdrawels for those who opt not to use SS benifits at retirement.
I think investing the money into the market is just too big of a riskl because SS is supposed to be the last fail-safe to preventing poor houses from springing back up.

[Civil_Guy]

Okay, I’ll keep this as a short follow-up question: why does everyone assume that any pulled-out funds would be invested in stocks? There are other ‘safer’ investments - CDs and the like - sure, the safety is inverse to the interest rate - but the safer investments would still be good - no?

[Nobody]

@yabob

I would favor simply adjusting up benefits ages gradually, say 1 year for every 3 that passes. It might not entirely fix the situation, but it would help. If nothing else, it would push eventual collapse out further. People are living longer, and this adjustment makes sense anyway. By doing it gradually, you don’t drastically affect people nearing retirement, and younger people have time to adjust.

This is “revising age charts”, but it ought to be able to be made palatable to the electorate:

The only thing that would actually make most younger workers happy is to throw the whole thing out, and quit taking money out of their paychecks. If resigned to the fact that that isn’t going to happen, they may go along with this, since they believe are never going to get a dime out of SS anyway. At least nobody’s suggesting they make larger payments. In fact, they may accept that having to wait until 72 is better than the present situation if there’s a good chance they’ll actually see the money.

The AARP constituency, in particular the ones aged 50+ who are not yet retired but rapidly approaching it, might see it as OK, since they still get their planned payouts delayed by maybe a year or two. It could sell to them if seen as a way of staving off collapse of the system.

That sounds like a good start, but, in my non expert opinion, we should do more.
And I wouldn’t say that someday being able to opt out of the system is impossible, it’s just a very difficult goal that would take a long time should we go that rout.
I’m guessing that we’d have to both, phase out paying for other people’s retirement, while at the same time allowing a system where you could have SSI payments taken out for yourself.
Of course, there would be a need to take money out for SSD (Social Security Disability) for those who couldn’t save up until old age for retirement
But for able bodied individuals, I think shifting to a federal system where money is stored and gains some interest and is returned to the person who paid it out in the first place sounds good to me.

[Nobody]

@Kimstu

1) Keep phasing in increases to the retirement age in future generations as and if life expectancies continue to increase. (My mom qualified for her full SS benefits at age 65, I won’t qualify till I’m 67, and I’ll get extra benefits if I don’t retire till 70—I don’t have a problem with that.)

Sounds resonable.

2) Raise the cap on the SS payroll tax. At present, the SS payroll tax applies only to about the first $90,000 of salary—anything earned above that is absolutely tax-free as far as SS is concerned. This is done to make SS less redistributive, so that higher-salary workers don’t end up putting into the system heaps and heaps more than they get out of it in SS benefits. I think the basic idea is fine, but raising the cap a couple dozen K would significantly ease the funding issues without soaking the rich very much.

Sounds good too. I mean, as the cost of living goes up, slightly increasing the cap doesn’t sound to unreasonable. It would probably go along very well with increasing the retirement age.

3) Means-test benefits. At present, everybody who qualifies for SS gets benefits, even if they’ve got scooploads of their own money and the SS check is mere chickenfeed to them. On the one hand, cutting off benefits to the rich who don’t need them would save money; on the other hand, it would weaken the role of SS as a truly universal social insurance scheme, in which everybody who contributes is entitled to get something out of it. I think that’s a very important aspect of SS, so I don’t favor means-testing very much.

This is one point where I differ. I think that the government should only be helping people who can’t help themselves. So, for example, I believe that my wife who had to retire a couple years ago at about the age of 30 for medical reasons (muscular dystrophy) should get money, and people who saved all of their lives and had their nest egg wiped out somehow should get money, but those who are rich, or can live off of their pension, shouldn’t, in my opinion get social security benefits.

4) Raise the payroll tax and/or supplement SS funding with other taxes temporarily. This will probably be part of any realistic funding-crisis solution, but probably can’t bear the whole burden.

As for raising the tax, well, like raising the cap, I think that if we keep the system as it is, or similar then, as time goes on, I don’t see a problem adjusting for inflation, but I think it should be done gradualy and only enough to keep the system running.

5) Boost return on investment by putting some SS funds in the stock market in individual or group accounts. This is what the Administration is currently proposing as the sole fix, and the problems with it are discussed in more detail in the other current thread. Basically, the difficulties are (A) high transition costs (see above), (B) higher overhead costs in managing multiple investment accounts, (C) greater risk and the need for an additional safety net for unlucky investors, (D) increased vulnerability to antigovernment radicals trying to eliminate SS altogether.

But what about simply investing in low risk stocks or bonds? I’ve seen enough examples of how, if you save, just a little bit, and have it grow at a low to moderate rate, starting in your 20’s, that when you reach retirement age, you’ll have plenty of money to live on.

[Nobody]

@Hentor the Barbarian

I say that we do nothing because there is no problem. Over the past ten years, the date of doomsday for the social security system has been revised outward.

Washington Monthly January Archive, SOCIAL SECURITY: A CONVERSATION…

Interesting, I haven’t heard that before. Although I personally would like to see it changed, I had no idea that the doom and gloom date keeps getting pushed back.

[Nobody]

@LouisB

Isn’t some large percentage of existing retirees totally dependent on SS as it stands? How anyone can expect underpaid hourly workers / single parents / downsized, etc., etd to fund a retirement account beats me. Is there something I’ve overlooked regarding those people?

I think the ideal is that those who can’t save for themselves, or loose thier retirement should get SSI, or SSD, and those who save money themselves, through 401K’s or other pension plans, should get that money and not SSI. At least in my opinion.

[Zsofia]

@Master Control

I think the ideal is that those who can’t save for themselves, or loose thier retirement should get SSI, or SSD, and those who save money themselves, through 401K’s or other pension plans, should get that money and not SSI. At least in my opinion.

So, basically, you’re all for rewarding people who didn’t bother to plan and save with my money? I work hard and do with less so I won’t have to work until I die. They still take plenty of SS out of my paycheck. (State retirement matches the 6% they take out of my paychecks, but they don’t match anything else.) Because I planned ahead and did without, and Mr. X is blowing all his income on beer and babes, when we retire under the plan some of you are proposing I’ll be living only off what I had the wisdom to save, and he’ll be getting the money that I put in. I have no problem with my SS going for disability for others and such, but why punish savers?

[Demorian]

@Zsofia

So, basically, you’re all for rewarding people who didn’t bother to plan and save with my money?

I saw your post coming the second I read Master Control’s. Not to speak for him, but he did state that “people who couldn’t work” and “people who lose their retirements”, not “people who don’t work” or “people who don’t save”. There is an important distinction.

[Nobody]

@Zsofia

So, basically, you’re all for rewarding people who didn’t bother to plan and save with my money? I work hard and do with less so I won’t have to work until I die. They still take plenty of SS out of my paycheck. (State retirement matches the 6% they take out of my paychecks, but they don’t match anything else.) Because I planned ahead and did without, and Mr. X is blowing all his income on beer and babes, when we retire under the plan some of you are proposing I’ll be living only off what I had the wisdom to save, and he’ll be getting the money that I put in. I have no problem with my SS going for disability for others and such, but why punish savers?

I only said that there should be a safety net for those who loose their money, or are unable to save until retirement due to medical reasons