Social Security: Not The Great Deal It Used to Be
Recently it was reported that Social Security will payout less to the average worker than they will collect, for workers retiring now (1). The deal only gets worse going forward, even if the benefits are paid as projected today. In fairness the study should have removed the 1.8% portion of the tax used for the disability insurance, but even then the return is not even as good as long term treasury bonds. The real takeaway from article is that Social Security is a worse deal for each succeeding generation. This raises two questions. The first question is why is Social Security a bad deal? The second is what should be done?
The main answer to the question as to why it is a bad deal is obvious, it is a failing Ponzi scheme. Since the government has the ability to force people to participate in the plan, this scheme could work if the ratio of working to retired remained the same. Unfortunately this ratio is projected to decline for the foreseeable future, due to demographic shifts and increased life span. The ratio will decline fast over the next 15 years as the baby boomers retire. After that the ratio continues to decline but at a much slower pace. A secondary reason is that with each year retirees will have earned more of their money after the last tax increase to “Fix” Social Security back in 1989.
In researching the need for reform of entitlements, I found some not so honest groups trying to use dependency ratios to declare that paying for entitlements will not be a problem. These studies add in children, since people are having less children, the studies presume money that would be spent on things such as education would just be shifted to pay for retired people. Of course this idea is troubled in many ways. First, many states other than Wisconsin, are in deep financial trouble and have huge unfunded pension liabilities. Second, they are using savings that might accrue to state governments to fund a Federal Program.
Now for the more difficult question what should be done? Last year it appeared some Democrats were willing to work with the GOP to pass a Social Security reform bill, since it is the easiest entitlement to reform. Then President Obama made it clear he did not want a deal on Social Security. His plan was to campaign that he is somehow protecting Social Security and Medicare by refusing to deal with the impending bankruptcy of both plans, despite having no reasonable plan for either.
Two things are clear regarding reform, we can’t trust the government to run a trust fund, and that we must not increase Social Security taxes. As a forced retirement plan, Social Security is already making the vast majority of people worse off. Also, increasing the payroll tax would continue the mistake of the past of committing intergenerational theft to solve the problem, thus making each generation worse off than the last. The other usual solution is to increase the upper limit on Social Security. This may be possible to some extent, but with a top rate 43% scheduled to go into effect by current tax law adding another 12.4% tax would be a disaster for the economy. It would also likely reduce total revenues to the government from the loss of growth. There is also the issue of fairness, I do not think the Federal Government should take more than 35% of anyone’s income and the top 10% already pay 72% of all the taxes paid.
The end deal will likely be structured to not effect people in or close to retirement to allow people time to adjust their plans for the reformed plan. It will have to involve pushing the retirement age back and indexing it to life expectancy. It will likely also involve cutting benefits for high income earners. No one will like the plan but there is no magic way to fix a collapsing Ponzi scheme without any pain. Many will say, but I paid in and I was promised this. But, the fact that we were irresponsible to elect people to promise unreasonable things, does not justify stealing from our children to pay ourselves these benefits.
I am willing to accept the even worse deal Social Security will be, to save the plan future generations. I am also willing to accept the worse deal to protect my children from increasing the intergenerational theft and the resulting worse economy, or fiscal collapse.
http://www.sanduskyregister.com/news/o0281bc-us-socialsecurity-gxml?page=1
Luke
4:13 pm on Monday, August 20, 2012
Bryant,
I think it's also time to do means testing for Social Security. Although it will be yet one more broken promise made by government, I think that those that paid into the system but can very easily get by without assistance should be cut off.
Bryant Divelbiss
9:18 pm on Wednesday, August 22, 2012
The math requires broken promises. The likely plan will include means testing with small inceass in age requirement and indexing that to life expectancy. That is what would likely have been done last year if we had any leadership from the President and if he wanted to be responsible about the issue. Medicare is the tougher one. Social Security is not hard with a President that cares about dealing with the issue instead of lying to people claiming to be protecting SS while ensuring failure to get votes.
Randy1949
7:42 pm on Monday, August 20, 2012
"Intergenerational theft" is an interesting term. There was a time when people supported their elderly parents. Now, Social Security allows the elderly to be less financially dependent on their children or perhaps have even a little left for them to inherit. Yet you call it theft.
First it was teachers and other public servants being demonized by the Right. Now it's the elderly. I shudder to think who will be next.
Alfred
8:07 pm on Monday, August 20, 2012
You must enjoy dreaming of a future of finally getting your SS so you can gourge on cat food and gubermint cheese. Even a dullard like you should realize the great rip off of 15 percent ofyour earnings going down the crapper never to be seen again.
Luke
8:20 pm on Monday, August 20, 2012
@Randy
Yeah, we don't want people to support their parents! (Not!)
(Yes, my mother-in-law lives with us.)
Randy1949
8:27 pm on Monday, August 20, 2012
@Luke -- And I'm sure that if she's collecting Social Security that is part of a burden off you.
Luke
9:00 pm on Monday, August 20, 2012
@Randy,
Yes, she has been collecting it since the late 70's because she is a widow. She also collected it from Germany at 60% of her two highest years of income (I believe) until the 90's when Germany would no longer support those that lived outside the country.
Because my mother-in-law had several sources of income (she also rented a room above her home), she did not work 45% of her life, which is acceptable in Germany. Therefore, when Germany cut her off she had no savings. Now, US Social Security is all she has, so when we built our home we had to make an addition with a mother-in-law suite. (So, in a perverse twist, the promise of entitlements were the cause of her not having enough money to live on.)
That said, I think it's odd that you object so much. Bryant's article only says that adjustments have to be made to fix the SS problem. He points out that government is not trustworthy regarding management of the funds, nor its desire to confront the problem. I think all parties agree that we have a problem and that government is not a very good manager, so it seems we have a reasonable point of agreement to start with.
Bryant Divelbiss
9:23 pm on Wednesday, August 22, 2012
Randy your missing the point SS going foward has made people worse off than if the were allowed to have kept that money in even conservative investments like. Treasuries. I am not demononizing ederly and I never demonized teachers, teacher unions yes then they played the demon role.
Jay Sykes
8:04 pm on Monday, August 20, 2012
If one saved for their own retirement, at the same rate as the employer/employee contribution for the retirement portion(segregating the Survivors, Disability and Medicare program contributions),and invested in an identical t-bill/t-bond portfolio as social security, at retirement one would get a SS check that is more than double what one is scheduled to get with the current system.
Randy1949
8:14 pm on Monday, August 20, 2012
But how would the retiree do without the employer contribution? Not so well, I think.
Jay Sykes
8:32 pm on Monday, August 20, 2012
@Randy... That is part of your 'earned' compensation. But, then, here, only because you have insisted... one should never been required to make an employee(worker) contribution (zero), only the employer contribution would be required for the defined benefit actually delivered. The net effect is a paycheck with a 5% raise and an identical retirement checks stream from social security.
It's spelled breach of fiduciary responsibility, we are putting in Twice what is required for the defined benefit, at the very same level of risk.
Lyle Ruble
8:09 pm on Monday, August 20, 2012
A Ponzi scheme?
Luke
8:21 pm on Monday, August 20, 2012
Legalized Ponzi?
GearHead
9:01 pm on Monday, August 20, 2012
@Lyle: What else would you call an investment scheme that promises today's investors (taxpayers) a return tomorrow when it takes those funds and pays off another group (you) today? That money is gone... into YOUR pocket.
But some of us knew about Roosevelt's lie back in the 70's, and the chickens would eventually come home to roost. Were you inhaling then, or now? Surely you saw this mess coming... pig in the python and all of that stuff.
Jay Sykes
9:06 pm on Monday, August 20, 2012
Upon collecting his first Social Security check, Charles Ponzi is known to have remarked, 'if only I could have forced everyone to participate, too(sigh).
Randy1949
9:09 pm on Monday, August 20, 2012
In the late 1970s they did see the 'pig through the python' coming and doubled the FICA tax to save ahead for the Boomers. Social Security has been running at a surplus for years. I think 'some' people got used to using that money for tax cuts and wars and things, and now they don't want to pay it back. So voila -- crisis! Talk of generational theft.
GearHead
9:21 am on Tuesday, August 21, 2012
@Randy: Face it, you might have to go back to work... If the death panels don't get to you first :)
Randy1949
9:55 am on Tuesday, August 21, 2012
@GearHead -- What death panels? The only death panels I'm aware of are the insurance companies who decide to authorize your chemotherapy or not, and of course their bottom line has nothing to do with it. Wanna buy a bridge?
And I'm still working, such as the business is in this lousy economy. You honestly think that people over 60 are going to be the first ones hired for even the cr@p jobs with 8% unemployment?
Bryant Divelbiss
9:30 pm on Wednesday, August 22, 2012
I know it is not exactly a Ponzi scheme. But is very much like one were early investors are paid unsustainable returns from later investors. I saw thi in a fact checker last year and they concluded it was not a Ponzi scheme because they claimed it was not done to scam investors of their money. I disagree politicians were not scamming to keep to the money but they were perpetrating a fraud to get votes. Particularly in the last 30 years.
Alfred
8:14 pm on Monday, August 20, 2012
Call it what you like. But in essence the government is confiscating a percentage of worker’s earnings to pay current retirees. Those of us paying now will never see a single dime in return. With the ratio of paying workers to receiving retirees shrinking at the pace it is, the system will inevitably collapse. Not to mention that with hyper-inflation on the near horizon, the US dollars in the system will soon have no value anyhow.
Bren
8:44 pm on Monday, August 20, 2012
(Holds head in hands)
Tracy Craft
11:35 am on Tuesday, August 21, 2012
I wish I could save for retirement but rent is around half of my take home pay. I have told my sister that I don't think Social Security will be there when I get there. She seems to think otherwise. As for helping my parents, I wish I could but I am just as poor as they are. I suspect I will not be able to retire. I probably just die on the job someday.
Nuitari
3:47 pm on Tuesday, August 21, 2012
I have already accepted that I will work until my death.
dee50
8:02 pm on Tuesday, August 21, 2012
I am in my 50's now and I remember when I was in my late teens hearing about SS not being available much longer and it is still here. This fear mongering by Republicans has been going on since Goldwater days, heck even before that. Easy fix, raise the CAP and stop raiding SS to fund WARS! Randy you are spot!...
Bryant Divelbiss
9:43 pm on Wednesday, August 22, 2012
Since the Goldwater days they have massively increased the tax and raised the caps. Raising caps and collecting more total money is diificult since the top rate is scheuled to be an insane43% and all of Obama's tax increases do not even pay for his increased spending. The solvency issues assume we have the money in the trust fund. So the raids on trust fund by both parties are a separate issue that make the situation worse than the expected fund shortages in 20 years. On that issue the reckless spending under Obama and Bush are a problem, but it should be noted the worst started in 2007 after the democrats took congress.
Randy1949
10:12 pm on Wednesday, August 22, 2012
Are you talking about the FICA? Yes, the FICA tax was doubled in the early 1980s to pay ahead for the Boomer retirement. As for raising the cap, there has been inflation since the Goldwater years. $105,000 just isn't what it used to be. We have people claiming they have a hard time getting by on $250,000 a year.
What are you talking about with a top scheduled rate of 43%?