How to fix Social Security

[ejman]

I agree with most of your post except means testing.

Means testing would penalize those who were/are prudent and saved for retirement and reward those who were/are careless and did not save for retirement. IMO if you have means testing, it would simply further discourage responsible behavior - one might as well spend and enjoy during their working years and SS will bail them out in retirement. Is that what we really want?

I think there should be means testing AFTER the SS recipient has been paid back his contribution + employers contribution + a reasonable investment return say about ~ 7% - the long time equities return. At that point, the recipient has been effectively paid back and monies received after are in fact redistributing income from others and he/she should not be eligible if of sufficient means.

 

[73ss454]

Sufficient means being ..... $

 

[youbet]

Solutions to keep SS viable for today's recipents and near term recipients should not be related to the rates young people pay. They already face difficult challenges to accumulating retirement funds without being burdened with funding new BMW's for geezers. Hey, I don't need some youngster struggling to raise a family, get/keep a job, struggle with today's investment markets, pay for medical care, etc., etc., subsidizing my retirement. Big kids pay their own way.

 

[MichaelB]

Solutions to keep SS viable for today's recipents and near term recipients should not be related to the rates young people pay. They already face difficult challenges to accumulating retirement funds without being burdened with funding new BMW's for geezers. Hey, I don't need some youngster struggling to raise a family, get/keep a job, struggle with today's investment markets, pay for medical care, etc., etc., subsidizing my retirement. Big kids pay their own way.

That's a fair objective and we should make every effort to achieve it. Not sure where to draw the line, though.

 

[youbet]

That's a fair objective and we should make every effort to achieve it. Not sure where to draw the line, though.

That's always difficult, but we attempt it constantly. At what income/wealth level does Medicaid kick in? When does SS get taxed? Where should tax brackets be set? And on and on. This will just be one other line to draw. It's an important one though. Kids don't need to subsidize geezers, even if the geezers have zillions of votes. Kids need to be preparing, over the long haul, for their own retirements which will be a tough task, IMHO.

 

[Independent]

....screw the people who saved diligently and don't really need it.

As close as I can tell, everyone assumes that "means testing" has to be based on assets or income after retirement. I think there is a better way. Consider:

Andy earned minimum wage and saved nothing.
Bob earned $100k per year and saved $1 million.
Chuck earned $100k per year and saved nothing.

Under current law, their benefits at NRA are about:
Andy: $10,000
Bob: $28,000
Chuck: $28,000

"Means Testing" doesn't need to mean cutting Bob's check but not Chuck's. Instead, it could mean cutting both Bob and Chuck by the same amount. Then Bob is not penalized for saving.

If I'm a worker, I don't mind paying taxes so Andy can have $10,000 for his basic living expenses (and avoid M Paquette's solution).
I'm even okay with providing Bob and Chuck $10,000 to avoid a dis-incentive to saving.
But, I'm not sure why I'm okay with paying taxes so Bob and Chuck can get $28,000 each.
That's especially true if I'm working full time and earning $25,000 per year.


(Phew, squeezed that in while the thread was still open.)

 

[Independent]

The numbers people on this board (and I think we've got quite a few) might be interested in looking at the Social Security's actuaries analyses of multiple possible changes to SS.
They post their numbers here:
Individual Changes Modifying Social Security

 

[ejman]

Sufficient means being ..... $

Dunno, say the average for that age/cohort?

 

[btbw2380]

Means testing does turn SS into welfare. We all contributed our hard earned money into this pension; why now would it be ok to not pay it back? If we're going to change this pension payout, why not do means testing for all pensions and redistribute that money as well? How about any pension that exceeds say 20,000 annually is taxed at 50%? Where does the nanny state end?

 

[jimnjana]

Means testing does turn SS into welfare. We all contributed our hard earned money into this pension; why now would it be ok to not pay it back? If we're going to change this pension payout, why not do means testing for all pensions and redistribute that money as well? How about any pension that exceeds say 20,000 annually is taxed at 50%? Where does the nanny state end?

No doubt that everyone deserves to get what they paid in(or their spouse), out. Means testing to me means phasing out the government subsidy or "interest" earned on those in the top 10% of the gross income level. It also means capping annual benefits much like it is today. Yes ss has its roots in a welfare program.

 

[Animorph]

Eventually, though not for us retired folks, means testing would mean a less costly SS. So workers would pay a little less SS tax than without means testing. More for the after-tax savings account for those so inclined. All depends on how much of a hit means testing takes on benefits and how much it saves in taxes. It might not be too bad.

And no way SS gives you investment gains of 7%. It's strictly government bonds. Not something I'd invest in, but it is what it is.

 

[braumeister]

Since I'm asked, my thoughts are these:

The "fixes" implemented by Congress are so gradual that nobody who is currently anywhere near retirement age will be impacted by any changes that are actually made. For example, "full retirement age" was 65 years for decades. In 1983, Congress changed it to 67 years, but made the change gradual over a 23 year period. Ludicrous, but it was the politically possible move.

A similar "fix" made today would probably be something similar, for the same reason.

The hole we are in can only be filled if our economy gets back to a vigorous growth rate, so the most important thing Congress and the administration can do is to promote those policies that enhance our global competitiveness. IMHO, fixing our badly broken educational system would be a good start.

 

[marko]

Why hasn't anyone thought of this: TAX THE RICH!!

Hey, I should get a Nobel Prize for that!

 

[marko]

Where does the nanny state end?

End? The nanny state has only begun.

At least in Greece, the food is better and the weather is nice. Girls go topless at the beach.

If we're going to have a nanny state, that's the model I'd like to follow.

 

[ShortInSeattle]

I think if the fix were easy we would have done it by now.

I see several factors at play:

1) unclear metrics - some say we are at the brink of insolvency, others say it's just a scare tactic that politicians use. I have a hard time understanding what the true scope of the problem is.

2) living beyond our means - it's not just a household issue, it's a governmental one. We've spent too much as a nation and saved too little.

3) demographic challenges - the large size of the boomer generation, which can't be fully supported by contributions from the smaller generations that followed.

I think it would be interesting to define the purpose of social security. Is it like a government mandated retirement account that we pay into? If so that means it would be "unfair" to take my dollars and give them to someone else. Or is it another safety net like food stamps, in which case I contribute even if I get nothing back, because I contribute to the common good?

As a 33 year old, I'm saving as if there will be no SS because I think that is a possibility for us. To be honest I think of SS as the "keeping our elders from starving to death" fund. While I'll appreciate SS as a component of my retirement plan, I'd also rather give my share up than see it go away for everyone. That might not be "fair" but then again life isn't always fair. When my bounty is overflowing, I'm not sure it's right to cry out because the poorer couple next door got something I didn't.

Thanks for the discussion.

 

[ejman]

And no way SS gives you investment gains of 7%. It's strictly government bonds. Not something I'd invest in, but it is what it is.

I know we live in unusual times but if you look up the return on Vanguard's long term treasury fund (VUSTX) you'll see that the 5 year return is 9.1%, the 10 year return is 8.2 % and the 26 year return (since inception in 1986) is 8.3% of course, recent times are no indication but the return for 1 year is 23%. Although I note your comment that it's not something you'd invest in, I wish I was 100% invested in this for the last year since my own personal return for the last year is only 4%. I guess my crystal ball only works when looking backwards in time...

 

[marko]

I think it would be interesting to define the purpose of social security. Is it like a government mandated retirement account that we pay into? If so that means it would be "unfair" to take my dollars and give them to someone else. Or is it another safety net like food stamps, in which case I contribute even if I get nothing back, because I contribute to the common good?

My understanding is that it came out in the FDR days as part of providing a safety net for those with no other savings/pension at retirement; a Depression era idea of 'spreading the wealth around' by paying it forward.

Not much seems to have changed and one could argue that it is as important now as it was 80 years ago.

Of course, the math stopped working and now here we are.

 

[Ronnieboy]

Two suggestions that I would back and that have been mentioned before:

Remove the cap on taxed earnings. This year only the first $110,100 gets taxed. Granted only about 7% of personal income is above that in the US, but it will generate a fair amount of SSI.

Second, slowly raise FRA to 70.

 

[web_diva]

As globalization continues apace, hourly wages in the US can be expected to go down. Some of the jobs that won't be done overseas require physical labor--construction, etc. As a practical matter, people just can't do these jobs until they are 70. So, while we may/should keep sliding the full retirement age to the right, I think we probably need to keep options for people to retire earlier with a somewhat smaller monthly check. Those used-up bodies will still need the money at about 63, and if they can't get their SS retirement check many will just get disability checks instead.

I am so glad you brought that last point up. Analysts are seeing a high number of older folks who have exhausted their unemployment, file for disability. There are so many "globbing on" that it sounds like a major player in the acceleration of the SS insolvency date. So long as age disrimination and the recession/depression march on, we can likely expect that trend to continue.

 

[Independent]

I think if the fix were easy we would have done it by now.

I see several factors at play:

1) unclear metrics - some say we are at the brink of insolvency, others say it's just a scare tactic that politicians use. I have a hard time understanding what the true scope of the problem is.

2) living beyond our means - it's not just a household issue, it's a governmental one. We've spent too much as a nation and saved too little.

3) demographic challenges - the large size of the boomer generation, which can't be fully supported by contributions from the smaller generations that followed.

I think it would be interesting to define the purpose of social security. Is it like a government mandated retirement account that we pay into? If so that means it would be "unfair" to take my dollars and give them to someone else. Or is it another safety net like food stamps, in which case I contribute even if I get nothing back, because I contribute to the common good?

As a 33 year old, I'm saving as if there will be no SS because I think that is a possibility for us. To be honest I think of SS as the "keeping our elders from starving to death" fund. While I'll appreciate SS as a component of my retirement plan, I'd also rather give my share up than see it go away for everyone. That might not be "fair" but then again life isn't always fair. When my bounty is overflowing, I'm not sure it's right to cry out because the poorer couple next door got something I didn't.

Thanks for the discussion.

1. See Table IV.B1 here:IV_B_LRest.html
The numbers are percents of covered payroll. A negative annual balance of -1.00 would mean that it would take an additional tax of 1.00% of covered payroll to cover that year's spending. Some people think these numbers are big, others think they aren't.

2. Okay. Note that SS ran annual surpluses from about 1986 up to the Great Recession. I'll let others comment on the political fallout from that.

3. Yes. The key metric is the worker:beneficiary ratio. See Table IV.B2 at the same link. It's hard to get a big ratio when the typical couple only has two children.

Workers taxes have been overwhelmingly used to pay benefits, they haven't been saved like a 401k, so it's hard for me to claim it's like a private retirement program. I think your "keeping our elders from starving" comment hits it on the head.

 

[Independent]

Two suggestions that I would back and that have been mentioned before:

Remove the cap on taxed earnings. This year only the first $110,100 gets taxed. Granted only about 7% of personal income is above that in the US, but it will generate a fair amount of SSI.

Second, slowly raise FRA to 70.

The 7% is a low estimate.

The Current Taxable Maximum Covers Roughly 84 Percent of Total Earnings

Distributional Effects of Raising the Social Security Taxable Maximum

 

[GrayHare]

Two suggestions that I would back and that have been mentioned before:

Remove the cap on taxed earnings. This year only the first $110,100 gets taxed. Granted only about 7% of personal income is above that in the US, but it will generate a fair amount of SSI.

Second, slowly raise FRA to 70.

That plus decrease the SS COLA til the problem goes away.

 

[samclem]

The 7% is a low estimate.

Distributional Effects of Raising the Social Security Taxable Maximum

Ironically, I think removing the cap on SS taxes (which would hurt high wage earners) would also probably increase pressure to means-test SS benefits (another whack against these same folks when they get older). Right now, because of the cap on taxes, we don't hear stories about how Warren Buffet is getting a SS check for $20,000 per month. The cap on SS taxes effectively puts a cap on benefits for wealthy folks. Once the cap is removed, the news stories will start-- about the "huge, unneeded" SS checks received by wealthy Americans (never mind the paltry "rate of return" the wealthy get from SS due to the progressive payout schedule).

 

[jdw_fire]

Ironically, I think removing the cap on SS taxes (which would hurt high wage earners) would also probably increase pressure to means-test SS benefits (another whack against these same folks when they get older). Right now, because of the cap on taxes, we don't hear stories about how Warren Buffet is getting a SS check for $20,000 per month. The cap on SS taxes effectively puts a cap on benefits for wealthy folks. Once the cap is removed, the news stories will start-- about the "huge, unneeded" SS checks received by wealthy Americans (never mind the paltry "rate of return" the wealthy get from SS due to the progressive payout schedule).

not a problem if, at the same time, another knee(s) is inserted in the PIA calculation formula. something like 5% for income levels over the current max. and that can drop to 0-1% on incomes over $250k for example.

 

[pb4uski]

I think if the fix were easy we would have done it by now. ......

I think it would be interesting to define the purpose of social security. Is it like a government mandated retirement account that we pay into? If so that means it would be "unfair" to take my dollars and give them to someone else. Or is it another safety net like food stamps, in which case I contribute even if I get nothing back, because I contribute to the common good?....

I think it is a combination of disability insurance, life insurance (for survivors) and a deferred payout annuity. If you could bifurcate the elements and ensure that the payout annuity is commensurate with the "premiums" paid and the system retains the premiums paid for disability and life benefits, then that would arguable be "fair".