As usual, jshore is right about the fact that the main “fix” is from indexing SS benefits to inflation, rather than wages.
The way I’ve heard it sold is as follows:
If Social Security benefits aren’t modestly scaled back, the system will begin paying more money in benefits than are coming in through taxes. Thus, Social Security benefits must be modestly scaled back.
One way to scale back the benefits is just to cut the growth of those benefits. If we index the benefits to inflation, rather than wages, then we can guarantee that future seniors will receive a stipend for retirement roughly equivalent in buying power to the stipend currently being received by retired seniors.
Rather than force future retirees to just accept less benefits, we should give them the option of making up the difference by investing a small portion of their Social Security taxes in areas that will return a higher rate of interest – like the stock market.
Here, by the way, is that CBO analysis of Plan 2 of the President’s Commission. I don’t know if this is exactly what the President’s plan will be, but I think it is likely to be close.
Note Table 1B which shows the effect of the various provisions on social security’s finances. For example, in 2065, the estimated effect of the private accounts + offsets is a +0.11% (percentages in terms of GDP) improvement in social security’s finances, whereas the effect of the change in indexing is a +2.33% improvement.
Also, note Table 4 which compares the present value of lifetime benefits under the various plans for various groups. (Under current law, “scheduled benefits” means something is done to continue paying full scheduled benefits once the trust fund runs out of money; “trust-fund financed benefits” means that the benefits are paid at the reduced rate of simply the yearly amount that S.S. is taking in once the trust fund runs dry. Under CSSS Plan 2, “IA” stands for individual accounts.)
Of course, noone can predict the future, but by the CBO’s estimate is that these private accounts won’t generally be making up the difference, especially when compared to the “scheduled benefits” although even in comparison to the “trust-fund financed benefits” under the current law.
Further, as people have been noting, it appears that Bush uses one set of numbers (positive) to estimate economic growth when making projections about his privatization plan, and a second set of numbers (poor) to estimate the future of social security.
Kevin Drum at www.washingtonmonthly.com has a quick and dirty estimate. If you use Bush’s positive numbers in estimating the future of social security, you get a 0.5% surplus.
We start by removing the cap.
If 12.4% of the poor mans wages if fair then 12.4 % of wages (total) is fair for the rich.
Folks, back in the 60s we knew for sure that there wasn’t going to be any SS for us when we reach retirement. Well there is. Whats necessary to do is tweek it gradually as time passes.
If you allow some doomsdayer to hack it up it will not be there.
The present (Bush) plan if I heard him correctly is to allow money to be taken out of the system and put it into the stock market. Well that won’t work. You need the whole 12.4 % to make the system work. You probably will need to increase the %.
I’ve got to grin at the attitudes of the young folks .When I was 20 I was sure I would have a large retirement fund at my disposal. Heck all you have to do is work hard. Right??? Well guys it ain’t quite that easy.
Why don’t we sell the WMDs we found in Iraq and use that money to fund SS? And don’t tell me that there are no WMDs, because the people who say that SS is going bankrupt are the ones that told us there were WMDs.
Unless, of course, they are downsized at an advanced age as a result of their industry being mostly outsourced. And unless they suffer some major medical expenses after being downsized and have no medical insurance to cover that expense. And unless their retirement income is paltry but still exceeds the limit imposed on those who need SSI and/or Medicaid. There are people out here who fall through the cracks for whatever reason. What happens to them?
I strained my eyes and my brain doing some research on just exactly what goes on with Social Security indexing. Results are as follows:
1 - Benefits that you receive, once you retire, are indexed to inflation, using the CPI-W, the CPI indexed for all urban and clerical workers.
2 - However, your initial payout level, known in Social Security parlance as your Primary Insurance Amount (PIA for short - take careful note of that word, insurance) is calculated by means of using an index that as far as I can tell is calculated only by the SS for the purpose of figuring both the PIA and adjusting the limit on how much higher the limit on what they tax your wages for is, which is 90,000 this year: the Average Wage Index (AWI for short).
As an exercise, I compared what the CPI-W has been since 1982, which appears to be the year this adjustment went into effect, and the AWI. Results here:
As you can see, there’s a rather substantial premium already built in as a result of this indexing method. Therefore, the erroneous assumption that the “return” on Social Security is some crazily low amount is, quite simply, wrong. I’d have to do a lot more work to figure out what it would be for a typical worker, but it’s already above inflation, and therefore would provide pretty stiff competition to any return on a stock/bond portfolio, except those weighted towards the greatest risk, which most people simply aren’t going to do anyway.
I’m sure most people don’t realize this, and I’m equally sure you’ll never hear this simple truth uttered by any advocate of this lamebrained Social Security reform scheme.
Raising the retirement age: this gets to be problematic, since a lot of jobs involve physical labor, and even those that don’t appear to involve much, like, for instance, cashier at the local Wal-Mart, might involve standing for long periods, which could be tough for an older person. There’s a limit to how far we can go in raising the retirement age.
Urgh! Please note that the lefthand series of numbers is the CPI-W, and the righthand my calculation of what the implicit AWI is, from the yearly adjustments made to the limit on SS taxation. Any errors in that righthand series originate with Your Humble Poster, of course.
Short answer. I don’t believe there is ever a permanent answer to any sociological situation. Those who are living through whatever it is just have to make things work as best they can and let those who follow do the same.
G.W. and supporters say they want to “fix the problem” once and for all giving the impression that we can brush our hads and say, “There, that’s done. Now forget about it.” I don’t think that is politically possible and I also think it just can’t be done. We cannot predict with certainty what will happen in the next second, let alone fashioning a system that will handle the conditions that might arise 30 years down stream.
One thing that might stop people from falling for a con game is for the media to keep fresh in everyone’s mind that Social Security taxes are now being used to support quite a bit of the federal government. Without it the deficit this year would probably be $500 billion instead of a mere $400 billion. In return for that the Social Secsurity system gets an IOU.
It also wouldn’t hurt of the media would regularly point out that if the stock market were such a sure bet as some would have us believe, everyone would be well-to-do if not rich.
And it would help if the Administration muckey-mucks, starting from the top, would stop saying the sky is falling. It isn’t. Maybe adjustments are needed but I don’t think anyone. including G.W. and Greenspan, can say with certainty that this or that is the only way to go.
We come up with a formula now, involving some combination of raising the ceiling on income subject to Social Security, and gradually raising the retirement age for future beneficiaries, in order to reduce and smooth out the drop in benefits when the Trust Fund is emptied.
But we don’t have the formula take effect until we’re within 20 years of the Trust Fund’s expiration, according to the Trustees’ projections.
That means that if the economy plays out like the Trustees think it will, we start raising the ceiling and the retirement age in 2022. But if by 2022, the Trustees have put off the day of reckoning to 2056, then we do nothing in 2022.
And if by 2036, the day of reckoning is still 2056, we start raising the ceiling and the retirement age. But if meanwhile they’ve changed the projection to 2068, then we check back again in 2048. And so forth.
It’s clear that, at least for the time being, the day of reckoning is moving away faster than we’re moving towards it. So why not have a ‘fix’ that takes a wait-and-see approach, and does nothing until we actually gain some nontrivial ground on the day the Trust Fund is expected to empty out?