Fixing the Social Security Mess

The task of fixing Social Security remains a low priority in Washington. Apparently, this problem will not be addressed anytime soon. The longer we wait, the more painful the solution for the American people, but the less pain for the politicians in power now. That government is all about politicians maximizing their power and minimizing their pain should hardly be a surprise to any rational observer. If government were rational, it would identify real problems and fix them in the most rational way, but we have government by evasion most of the time on most of the issues. The operative corollary is that government can fool most of the people most of the time. Sad, but apparently very true.

So what is the problem with Social Security? For decades the Social Security payroll tax has brought in more money than was paid out in Social Security benefits and administrative expenses. But, those doggone people just keep on living longer and longer after retiring and sometimes Americans are born in pulses. One of the biggest such pulses gave rise to the Baby Boomers, who are about to start retiring in large numbers. OK, so all we have to do is trot out the money they paid into the Social Security Fund and slowly give it back to them over the years, right? Well, no. The government has already spent that money for all sorts of other purposes! So, to pay the money to the Baby Boomers that they contributed to the system simply means that increased taxes have to be laid upon the smaller numbers of workers in the succeeding generations.

The American Academy of Actuaries put out an issue brief called "An Actuarial Perspective on the 2008 Social Security Trustee's Report", which is full of interesting points. Some key dates are:

• In 2017, benefits and administrative expenses are expected to exceed tax income. Initially current interest income on trust fund assets will be enough to cover the difference.
• In 2027, benefits and administrative expenses are expected to exceed tax income and interest on assets, requiring the fund to begin drawing down the assets.
• In 2041, the trust fund assets are expected to be completely gone.

It needs to be noted that the trust assets are federal bonds, which additional taxes will have to repay to the Social Security fund. When in 2041, the fund's assets go to zero, the current tax income will only allow the payment of benefits at a 78% level of those promised to retirees.

At the present time, the payroll tax rate is 12.40% and an increase in the rate to 14.10% would provide for long-range actuarial balance. Alternatively, a cut in benefits of 11.5% for all current and future recipients right now would put the program into balance. Mind you, this is a very different thing than saying that the Social Security program could ever be called a good retirement investment, which it is not. It just means that it would meet its very unchallenging (as an investment) commitments.

The cost of Social Security in benefits and administrative expenses expressed in terms of the GDP is an important measure of its cost to the economy. In 2008, it is 4.3%, but it will be much higher at 6.1% in 2035 and then is expected to fall to 5.8% in 2082. The 6.1% figure will be quite a drag on the economy.

The figures discussed above still do not make it fully clear how this will impact our lives. Social Security fund income relative to outgo will decline beginning in 2011. The government, which has grown very accustomed to borrowing the excess income of Social Security to fund its deficits, will have less and less money to borrow from that previously very dependable source of funding. In 2017, the benefit payments and expenses of Social Security will exceed the tax revenues of the fund, so the government will actually have to start paying back the huge sums of money it has borrowed from the Social Security fund. For government, the party is over in 2017! For taxpayers, general taxes will have to go up, or the government will have to cut other programs and expenditures, which it hates to do. But, some government teeth will have to be pulled.

Obama says he will address the problem by adding a tax of 2 to 4% on people with incomes above $250,000 with the tax hike scheduled to start in 10 years. This would now generate all of about $396 billion over the next 10 years, which is a small part of the $7 trillion extra dollars the government will have to pay out in benefits and administrative costs plus the borrowed money it has to repay over the next 75 years.

Of course, these burdens can be reduced by such approaches as delaying the retirement age. It used to be 65, but now it is scheduled to be 66 for some people and 67 years old for others. Since people are living much longer and are much healthier in their late 60s now, the retirement age should be further extended. I plan to work to at least 75 full time and part time beyond that. Others should do the same.

The cost of living formula for calculating benefit increases due to inflation or personal income increases can be changed. There has been considerable debate about such formulas.

On the other hand, taxes can be increased. The tax rate can be increased, or the total income on which taxes are paid might be increased above the $102,000 limit now used, or the Social Security income of retirees could be taxed.

I much prefer approaches with reductions in benefits rather than new taxes. Other than taxing Social Security income, the increased taxes unfairly fall upon the younger generations to make life easier on the older generation, which is always the wealthiest generation. Besides, after decades of supporting this Social Security Ponzi scheme, the Baby Boomers do not deserve to live comfortably on Social Security eating off the fat of the land. Make them all work longer!

If anyone can ever figure out how to defeat their political power anyway. That being what it is, it is much more probable that taxes will go up more than benefits will be cut. The elderly will continue to rob the young.