Cargo Cult of Retirement
Published on 4 Aug 2005 at 12:27 am |
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Filed under The Cargo Cults of Business, Thanks for Playing, Technopolitical, Business and Corporation Related, Government: Federal, State and Local, Economics and the Economy.
Jane Galt blogs about whether the Social Security Trust Fund is real, and has a lively discussion in the comments. It’s clear that she and many of her commenters know a great deal more about how the Social Security system works than I do.
I’m wary of the word "just." It’s so often the preface to a remark of profound, and sometimes willful, ignorance of the issues and realities of a complex situation. As in "the software we have isn’t working all that well, let’s just buy something else… " or "the solution we purchased isn’t fitting our needs, so let’s just write our own." It’s not that there’s anything wrong with the solution being proposed, but the word "just" is an indicator that the speaker probably doesn’t grasp the full implication of what they’re suggesting.
At risk of falling into that trap with slightly different wording, it seems to me that the Social Security problems are fairly straight forward. I don’t know about the solutions, but understanding why this "trust fund" question is moot should be pretty easy.
JUST look at it this way…
For all intents and purposes, the federal government has one real income stream, taxation. The lion’s share of which comes from income taxes and Social Security FICA payments.
The federal government has certain outlays which change over time and always seem to run ahead of its income, in order to fund this debt the government issues bonds, IOUs. It is my understanding that the trust fund of the Social Security system in invested in these instruments. The issuer of these bonds, the government (general fund I guess you’d say), doesn’t have the cash sitting around to pay them, they spent it.
IF the Social Security system’s obligations to an exploding retirement age population cause it to need to tap into those bonds, assuming that they are going pay, one of two things can happen, both of which are pretty much equivalent.
1. In order to prevent the need to cash those bonds, the government can raise the FICA contribution on current workers, thus increasing the Social Security system’s income and ability to meet those obligations.
2. The government can cash the bonds, in order to do that they raise income taxes on current workers to pay that.
So, it doesn’t matter, you pay on the FICA line, or you pay on the regular income tax line, but you still pay. There are some fine points in terms of the regressive nature of FICA, and the different distribution of who pays how much where, but the point remains that the existence or non-existence of this fund is largely academic. It’s a matter of appearance not reality since neither the holder, nor the issuer of the bonds has the ability to pay without recourse to its income stream, which is you and me.
It’s worth noting that there are some other possible actions, but they don’t effect whether the trust fund exists or not. They could cut benefits, or simply default on Social Security altogether. The money could come from an even greater national debt rather than taxation, but that’s a distinction without a difference really.
Well, if it doesn’t matter, then what should we do? Well, like the man said, "Here’s what I think, but I might be wrong."
In my opinion this is a golden opportunity for Social Security reform. At the moment, the real crisis has not yet struck. I don’t know of anyone under the age of 45 who expects or has ever expected to see a dime from Social Security. As that population ages into their 50s we’re going to lose that advantage.
Some ideas, these are off the cuff and not well thought out, but the idea is plain:
1. Immediately begin to sunset Social Security, stop collecting FICA.
2. Build a graduated tapering down of benefits. Perhaps anyone over 60 gets the current standard package. Anyone between 50 and 60 gets 75% with very high means test cap, perhaps no benefits to anyone with over 50 million in assets, or some income figure. Taper it down from there.
3. Break the bad news to those of us who never expected to benefit anyway, we still have half our lives to *not* pay into Social Security and most of us will be happy to trade the already lost payments for not having to pay in the future.
4. Create a means tested safety net so that anyone over a certain age (say 60) or disabled under the old SSI rules can get a minimum standard of living. Never try to claim this is a retirement plan, it’s a minimum standard for those who fall through the cracks.
5. Fund the saftey net out of the general fund, don’t try to claim there’s a Trust Fund, don’t regressively cap the "contribution".
6. Raise the contribution limit on Roth and 401K to extremely high limits. If people take care of themselves the rest of us won’t have to.
-- John
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August 6th, 2005 at 2:56 pm
One of the big misconceptions is that SS has an investment fund earmarked for every member. SS is a pay-as you go system. That is, today’s contributions pay for those currently in receiving benefits. The only reason that the federal government has been able to tap into the excess to fund its ongoing operations is because all those baby-boomers have been paying in a lot more than was needed to pay their parents. Today people live a lot longer and expect to have more ‘golden years’ of relaxation. So, what’s the ‘crisis’. I guess it is that after the net income stream turns around, then when the ‘trust fund’ is exhausted the contributors at that point will be supporting all of the retirees. An additional feature of SS is that it benefits are indexed to inflation.
Point 4 is actually the original intent when conceived in the 30’s there were many more impoverished widows and ‘retired’ workers.
John in correct in pointing out that now is the time to address this issue, but the various constancies tend choke off this option. Those that really need to care (current young to middle age people) tend to be politically inactive and not have much interest in solving a problem that will happen many years down the road. Those that are now receiving SS (retired people) are basically happy, and they are highly politically active. The swing voters are the baby-boomers, and they certainly don’t want to give up anything that they feel they have earned.
So… what should be done? John’s ideas generally cover the spectrum. One point not mentioned is the one currently favored by the Bush administration. That is to ‘privatize’ part of the contributions. (loosely defined here for discussion sake). Does this really solve the problem? I think not. The basic assumption is that if people can invest some of their money in the stock market (historically at better return than the bonds that the trust fund is invested in) then there will be more money available to pay benefits. There have been a number of studies that have shown when people have a variety of investing options (like those that might be offered by a 401k program) they don’t do any better , and in fact some over-trade and do worse. Many people chase fads and get burned, or leave their money in overly conservative investment vehicles like money-market funds.
OK, now to my opinion. I would favor the option in point 6 coupled with a return to the original intent of the SS system (Point 4 is actually close to the original intent when conceived in the 30’s there were many more impoverished widows and ‘retired’ workers.) Point 2 is already in effect. Today people who will retire around 2030 (this author included) won’t get full benefits unless you start benefits at age 70. The big question is: how do you get people to be more rational and take the responsibility for themselves?
August 6th, 2005 at 7:34 pm
Martin,
Great to hear from you.
A couple of clarifying remarks about my post.
First, I’m not suggesting a series of options (though I guess you can treat them that way..) I was suggesting doing *all* of those things.
Second, in regard to the age based benefit reductions I mentioned. I’ve apparently not made my proposal clear. Here’s the gist:
If you retire in: You’d get this percentage of benefits:
2005-2010 100%
2010-2020 75%
2020-2030 50%
2030-2040 25%
2040 > 0 (unless you’re destitute)
or to put it another way, if you’re 60 or older today, you get the full benefit (such as it is) if you’re 40 today you’ll get 25% of the benefit you’re expecting. If you’re under 30, sorry, but you haven’t paid in all that much to begin with.
Of course I’m grabbing numbers out of the air, but I hope the idea is clearer now. One neat trick would be to taper it down so that the zero mark hits with those folks presently about 16 or 17. Then they never pay in, and never receive any payments out.
For what it’s worth.