Rationing Retirement

[Tekward]

Thought provoking piece on the macro future of retirement. Shock line:

The government must simply means-test public benefits, increase taxes to fund more retirement welfare, ration healthcare resources, and pursue a regime of low interest rates and higher inflation to erode the assets of retirees with large savings balances.

The Risk of Government Policies and the Rationing of Retirement

 

[timo2]

Based on the article, most of the presenters were first wave boomers. Nothing irritates me more than people older than myself (60)- wanting to mess with my life including cutting my benefits. It's called pulling up the ladder behind you, and the first wave boomers have been doing it to the rest of the boomer generation for years.

If people younger than me want to cut their benefits, go for it.

 

[daylatedollarshort]

I think there are places where people retire okay without robots or innovation. Maybe they just have tiny houses, don't have cable TV, grow vegetable gardens, use herbal remedies for minor illnesses, borrow books and DVDs from the library, walk or take mass transit and utilize hundreds of other simple living ideas. Then it doesn't cost that much to live, retired or not.

 

[Independent]

Thought provoking piece on the macro future of retirement. Shock line:

The government must simply means-test public benefits, increase taxes to fund more retirement welfare, ration healthcare resources, and pursue a regime of low interest rates and higher inflation to erode the assets of retirees with large savings balances.

The Risk of Government Policies and the Rationing of Retirement

The section titled "Economics Has Its Own Laws of Conservation" is better than much of what I see on retirement from private investment firms.

However, the quote that begins "The government must simply means-test ...." is flat wrong because it has an "and" instead of an "or". The gov't has many options for dealing with a higher ratio of old people. Simply putting a cap on SS benefits (without means-testing) would solve SS without starving any old people. Putting a limit on how much Medicare will pay for, without limiting what people can buy on their own (call that rationing if you must), will solve Medicare.

 

[JoeWras]

I got a little lost with the Aliens, Robots and Terminators talk.

Talk of "inflating away" our hard earned savings is sobering. But that last odd bit has me discounting this whole article.

If I need robots to wipe my butt, just give me the injection.

 

[sheehs1]

But that last odd bit has me discounting this whole article.

My thoughts exactly when I read that part. Almost like it had no place in this article. Inconsistent to the say the least.

 

[Gatordoc50]

The trick is to means test the retired wealthy without letting the younger generation find out.

 

[Animorph]

Thought provoking piece on the macro future of retirement. Shock line:

The government must simply means-test public benefits, increase taxes to fund more retirement welfare, ration healthcare resources, and pursue a regime of low interest rates and higher inflation to erode the assets of retirees with large savings balances.

The Risk of Government Policies and the Rationing of Retirement

Good luck trying to keep interest rates low and inflation high.

 

[2B]

Social security and medicare are already means tested in a sense. The more you made while employed the lower your percentage of benefits you receive versus your contributions. A low wage worker has a much higher amount of their working pay replaced with social security than someone paying the max. To add to the "reduction" for the "wealthy," up to 85% of social security benefits are included in taxable income for those that have "significant" other income. That "significant" income is a mighty $34,000. Remember that we have all paid income tax on our income that was withdrawn as FICA. None of this is a direct "means test" but it certainly reduces the net income for the recipients.

Medicare benefits are the same for the "rich" and "poor." However, higher incomes can result in higher premiums. This income hurdle is fairly high but it again serves as a way of reducing the benefits for those deemed to be too affluent.

 

[Chuckanut]

The government must simply means-test public benefits, increase taxes to fund more retirement welfare, ration healthcare resources, and pursue a regime of low interest rates and higher inflation to erode the assets of retirees with large savings balances.

These boys need to learn about the Law of Unintended Consequences.

 

[foxfirev5]

Social security and medicare are already means tested in a sense. The more you made while employed the lower your percentage of benefits you receive versus your contributions. A low wage worker has a much higher amount of their working pay replaced with social security than someone paying the max. To add to the "reduction" for the "wealthy," up to 85% of social security benefits are included in taxable income for those that have "significant" other income. That "significant" income is a mighty $34,000. Remember that we have all paid income tax on our income that was withdrawn as FICA. None of this is a direct "means test" but it certainly reduces the net income for the recipients.

Medicare benefits are the same for the "rich" and "poor." However, higher incomes can result in higher premiums. This income hurdle is fairly high but it again serves as a way of reducing the benefits for those deemed to be too affluent.

Great observation. Far too often we observe the current situation and pick apart one aspect. The big picture is that it's going to cost you one way or another.

 

[Khufu]

Means-testing will not solve the eventual funding problem with Social Security unless the cut-off level cuts off a lot of middle-class people along with the rich. The reason is that 75% of the Social Security PIA benefits go to retirees who have less than $20,000 in non-SS income as described in this paper from economist Dean Baker:

The Potential Savings to Social Security from Means Testing | Reports

If you want to save 10% of the total amount that the SSA pays out in retirement benefits you have to cut off every individual with a non-SS income of $50,000 per year or more. Is $50k plus SS benefits what is means to be rich in America?

Moreover, if we are discussing denying payments to workers who paid their payroll taxes throughout their working years and were promised benefits, then we are talking about the expropriation of income by the govt. If expropriation has become morally acceptable then curely better candidates can be found than SS recipients. US Treasury Bonds are overwhelmingly held by wealthy people, many of whom do not "need" the interest on the bonds. Why is means-testing of US Treasury Bond interest not discussed as a solution to the SS funding issue or, indeed, for any other govt funding problem?

An alternative would be to raise or remove the cap on the payroll tax, a solution that does not involve expropriation by the govt.

 

[NanoSour]

Means-testing will not solve the eventual funding problem with Social Security unless the cut-off level cuts off a lot of middle-class people along with the rich. The reason is that 75% of the Social Security PIA benefits go to retirees who have less than $20,000 in non-SS income as described in this paper from economist Dean Baker:

The Potential Savings to Social Security from Means Testing | Reports

If you want to save 10% of the total amount that the SSA pays out in retirement benefits you have to cut off every individual with a non-SS income of $50,000 per year or more. Is $50k plus SS benefits what is means to be rich in America?

Moreover, if we are discussing denying payments to workers who paid their payroll taxes throughout their working years and were promised benefits, then we are talking about the expropriation of income by the govt. If expropriation has become morally acceptable then curely better candidates can be found than SS recipients. US Treasury Bonds are overwhelmingly held by wealthy people, many of whom do not "need" the interest on the bonds. Why is means-testing of US Treasury Bond interest not discussed as a solution to the SS funding issue or, indeed, for any other govt funding problem?

An alternative would be to raise or remove the cap on the payroll tax, a solution that does not involve expropriation by the govt.

That just about covers it. This SS discussion has been going on since the program was enacted. It simply sells advertisements. Mission accomplished by those that reap the benefits.

 

[Independent]

Means-testing will not solve the eventual funding problem with Social Security unless the cut-off level cuts off a lot of middle-class people along with the rich. The reason is that 75% of the Social Security PIA benefits go to retirees who have less than $20,000 in non-SS income as described in this paper from economist Dean Baker:

The Potential Savings to Social Security from Means Testing | Reports

If you want to save 10% of the total amount that the SSA pays out in retirement benefits you have to cut off every individual with a non-SS income of $50,000 per year or more. Is $50k plus SS benefits what is means to be rich in America?

Moreover, if we are discussing denying payments to workers who paid their payroll taxes throughout their working years and were promised benefits, then we are talking about the expropriation of income by the govt. If expropriation has become morally acceptable then curely better candidates can be found than SS recipients. US Treasury Bonds are overwhelmingly held by wealthy people, many of whom do not "need" the interest on the bonds. Why is means-testing of US Treasury Bond interest not discussed as a solution to the SS funding issue or, indeed, for any other govt funding problem?

An alternative would be to raise or remove the cap on the payroll tax, a solution that does not involve expropriation by the govt.

I agree that means-testing, based on after retirement assets or income, is a bad idea. Baker has good information here regarding how far we would have to take means-testing to fully close the gap.

However, "removing the cap on the payroll tax" does not fully close the gap either. The SS actuaries have run numbers on many ideas. Removing the cap entirely would close about 60% of the gap if we don't give benefit credit for the additional taxes, and somewhat less if we do give benefit credit. See proposals E2.1 and E2.2 here: Individual Changes Modifying Social Security

I suppose that whether cutting benefits is "expropriation" depends on definitions. I know people who would claim that any tax is an immoral "expropriation". So those people would object strongly to raising taxes. I would avoid the word entirely since it seems to add more heat than light.

 

[Khufu]

However, "removing the cap on the payroll tax" does not fully close the gap either. The SS actuaries have run numbers on many ideas. Removing the cap entirely would close about 60% of the gap if we don't give benefit credit for the additional taxes, and somewhat less if we do give benefit credit. See proposals E2.1 and E2.2 here: Individual Changes Modifying Social Security

I suppose that whether cutting benefits is "expropriation" depends on definitions. I know people who would claim that any tax is an immoral "expropriation". So those people would object strongly to raising taxes. I would avoid the word entirely since it seems to add more heat than light.

You misread the SSA graphs. In fact, they make my point that removing the payroll tax cap would completely solve the SS funding problem, except in one, very narrow sense.

Under the E2 funding proposal that you cited, the payroll tax cap is removed and there is no benefit credit above the current cut-off. This proposal would affect the Trust Fund in this way:

The Trust Fund would not be exhausted for the next 63 years while the SSA not only continued to pay full benefits, but also increased the real benefits as planned, over and above the COLAs. It is true that the incoming payroll tax collections alone would not match the outgoing benefit payments, but since the Trust Fund would still be available to make up the shortfall (as it does now and was designed to do) the funding problem would be put off for the next 63 years. It is hard to see by what reasonable standard of funding govt programs this is not effectively a solution to the problem.

Although you and I may not agree with every opinion as to the morality of govt policy choices, that can hardly mean that ignoring the moral implications is therefore justified. The current funding problem with SS is about 50% due to the fact that increases in income over the past 20 years have escaped the payroll tax because they are above the payroll tax cut-off. That to me is profoundly unfair, but then to turn around and threaten to cut benefits to "fix" the problem of diminished payroll taxes to the benefit of the rich and at the expense of the lower income majority is unconscionable.

Morally neutral language for policy discussions is, in fact, not morally neutral. At least not always.

 

[sheehs1]

These boys need to learn about the Law of Unintended Consequences.

+1
There are arguments for what is "morally correct" on both sides of this fence.

Even the so called Rich who chose to LBYM for decades paying into the system most if not all of their lives, and understood they had a so called "promise" to receive some of it back under the SSN program used it as a part of their retirement planning. To means test it now, possibly even a second time if one considers it was already means tested when they paid into it, ,and EVEN if those same people have a net worth north of a million or more just doesn't seem right. I don't care what the reason is. Whether or not a person "deserved" it at the end of their life and after decades of accumulation was never part of the rhetoric until the last what..10 years or so?? To this way of thinking then SSN is nothing but a "tax".

Once again, I am bothered by the message our government will possibly send to it's citizens if they do this, which is "it doesn't really pay to work" when "you will be taken care of otherwise". Just so darn contradictory to what most of grew up with.

I agree increases the income cap again on wages may help. In the very least it is a start.

 

[Gatordoc50]

You misread the SSA graphs. In fact, they make my point that removing the payroll tax cap would completely solve the SS funding problem, except in one, very narrow sense.

Under the E2 funding proposal that you cited, the payroll tax cap is removed and there is no benefit credit above the current cut-off. This proposal would affect the Trust Fund in this way:

The Trust Fund would not be exhausted for the next 63 years while the SSA not only continued to pay full benefits, but also increased the real benefits as planned, over and above the COLAs. It is true that the incoming payroll tax collections alone would not match the outgoing benefit payments, but since the Trust Fund would still be available to make up the shortfall (as it does now and was designed to do) the funding problem would be put off for the next 63 years. It is hard to see by what reasonable standard of funding govt programs this is not effectively a solution to the problem.

Although you and I may not agree with every opinion as to the morality of govt policy choices, that can hardly mean that ignoring the moral implications is therefore justified. The current funding problem with SS is about 50% due to the fact that increases in income over the past 20 years have escaped the payroll tax because they are above the payroll tax cut-off. That to me is profoundly unfair, but then to turn around and threaten to cut benefits to "fix" the problem of diminished payroll taxes to the benefit of the rich and at the expense of the lower income majority is unconscionable.

Morally neutral language for policy discussions is, in fact, not morally neutral. At least not always.

I agree that increasing the contributions for some while holding their benefits to current levels should raise revenue. Of course, to be fair we would have to find a way to include all benefits as income. Health insurance, employer retirement contributions, vacation and sick pay, maternity leave, auto and meal allowances, etc. The biggest hurdle would be to figure out the value of DB benefits in the year they were earned.

 

[Independent]

You misread the SSA graphs. In fact, they make my point that removing the payroll tax cap would completely solve the SS funding problem, except in one, very narrow sense.

Under the E2 funding proposal that you cited, the payroll tax cap is removed and there is no benefit credit above the current cut-off. This proposal would affect the Trust Fund in this way:

The Trust Fund would not be exhausted for the next 63 years while the SSA not only continued to pay full benefits, but also increased the real benefits as planned, over and above the COLAs. It is true that the incoming payroll tax collections alone would not match the outgoing benefit payments, but since the Trust Fund would still be available to make up the shortfall (as it does now and was designed to do) the funding problem would be put off for the next 63 years. It is hard to see by what reasonable standard of funding govt programs this is not effectively a solution to the problem.

Although you and I may not agree with every opinion as to the morality of govt policy choices, that can hardly mean that ignoring the moral implications is therefore justified. The current funding problem with SS is about 50% due to the fact that increases in income over the past 20 years have escaped the payroll tax because they are above the payroll tax cut-off. That to me is profoundly unfair, but then to turn around and threaten to cut benefits to "fix" the problem of diminished payroll taxes to the benefit of the rich and at the expense of the lower income majority is unconscionable.

Morally neutral language for policy discussions is, in fact, not morally neutral. At least not always.

I can see that we differ on the "trust fund". Those extra taxes that would be collected this year, that are supposed to pay benefits 20 years from now, aren't going to be used to buy private stocks and bonds. They will simply disappear somewhere in federal spending. 20 years from now we'll be back to arguing about whether to cut benefits or raise taxes again.

I think SS is only "self funding" when annual taxes = annual benefits.

Table 4 here gives the ratio of taxable earnings to total earnings over time The Evolution of Social Security's Taxable Maximum
Some people seem to think that 1983 had the "right" proportion, and all the others are "wrong". I'm not that sure.

There are people who think that taxing some people to provide "charity" to others is morally unfair. I'm not one of them, but if you want to get into a moral argument you need to recognize their views. I can accept such taxes if the needy are actually going to starve without the transfer. But, I don't see why we should increase taxes on current workers just so someone like me can get a benefit that is clearly more than I need to provide the necessities of life.

(If I could fine-tune the program, I'd remove the tax cap so that we can lower the tax rate on lower income workers, not so we can continue high benefits to high income workers.)

 

[Gatordoc50]

I can see that we differ on the "trust fund". Those extra taxes that would be collected this year, that are supposed to pay benefits 20 years from now, aren't going to be used to buy private stocks and bonds. They will simply disappear somewhere in federal spending. 20 years from now we'll be back to arguing about whether to cut benefits or raise taxes again.

I think SS is only "self funding" when annual taxes = annual benefits.

Table 4 here gives the ratio of taxable earnings to total earnings over time The Evolution of Social Security's Taxable Maximum
Some people seem to think that 1983 had the "right" proportion, and all the others are "wrong". I'm not that sure.

There are people who think that taxing some people to provide "charity" to others is morally unfair. I'm not one of them, but if you want to get into a moral argument you need to recognize their views. I can accept such taxes if the needy are actually going to starve without the transfer. But, I don't see why we should increase taxes on current workers just so someone like me can get a benefit that is clearly more than I need to provide the necessities of life.

(If I could fine-tune the program, I'd remove the tax cap so that we can lower the tax rate on lower income workers, not so we can continue high benefits to high income workers.)

Why lower the tax rate on lower income workers rather than just eliminate it?

 

[Animorph]

I can see that we differ on the "trust fund". Those extra taxes that would be collected this year, that are supposed to pay benefits 20 years from now, aren't going to be used to buy private stocks and bonds. They will simply disappear somewhere in federal spending. 20 years from now we'll be back to arguing about whether to cut benefits or raise taxes again.

I think SS is only "self funding" when annual taxes = annual benefits.

Table 4 here gives the ratio of taxable earnings to total earnings over time The Evolution of Social Security's Taxable Maximum
Some people seem to think that 1983 had the "right" proportion, and all the others are "wrong". I'm not that sure.

There are people who think that taxing some people to provide "charity" to others is morally unfair. I'm not one of them, but if you want to get into a moral argument you need to recognize their views. I can accept such taxes if the needy are actually going to starve without the transfer. But, I don't see why we should increase taxes on current workers just so someone like me can get a benefit that is clearly more than I need to provide the necessities of life.

(If I could fine-tune the program, I'd remove the tax cap so that we can lower the tax rate on lower income workers, not so we can continue high benefits to high income workers.)

There are specific bonds SS buys, all fully accounted for. The only real problem with them is that SS needs to start cashing them in instead of buying more.

 

[Khufu]

I can see that we differ on the "trust fund". Those extra taxes that would be collected this year, that are supposed to pay benefits 20 years from now, aren't going to be used to buy private stocks and bonds. They will simply disappear somewhere in federal spending. 20 years from now we'll be back to arguing about whether to cut benefits or raise taxes again.

I think SS is only "self funding" when annual taxes = annual benefits.

That's an unrealistic standard. A perfect balance between revenue and payout can't work where one cohort, e.g. the Baby Boomers, is larger than the cohort that follows it. That is why the Greenspan Commission created the Trust Fund in 1983 to build up reserves to pay the increased claims that were certain to occur when the Boomers retired.

The idea that the Trust Fund has disappeared somehow is another bit of naivete. If the Trust Fund were not invested in US Treasuries (which are regarded by the global bond market as the safest securities in the world), the Treasury would simply have sold more bonds on the open market. The Treasury is paying interest on the entire $2.7 trillion to the Trust Fund now and will continue to do so. When Trust Fund bonds mature they will be rolled over into new bonds just like all the other Treasury bonds.

It is not even certain that the Trust Fund will ever be depleted as was intended from its creation. If the US GDP manages to grow in the future at the average post-war rate, payroll tax increases will be sufficient that the Trust Fund will not be depleted in the 75 year look-ahead window that is common used.

 

[scrabbler1]

Whenever I hear about an idea to "save" SS by raising the income cap of wages subject to the SS tax, my reply is that the cap also applies to benefits. So when someone complains about a lower percentage of wages being subject to the SS tax, I say, "Big deal!" That means a lower percentage of wages will be subject to the benefit formula, too. It does not matter if that percentage is 80% or 85% or 90%, the cap applies to both wages and benefits. There is nothing magic about any specific percent.

If the wage cap is raised but the benefit cap is not raised along with it, then all you are doing is turning SS into another welfare program, severing the tenuous link between wages subject to the SS tax and wages subject to income replacement in the SS benefit formula.

And increasing SS revenues today will only result in those excess revenues being spent today so the cashless SS trust fund will be just as cashless in 25 or 30 years as it would be without the increase.

More about the SS cap:

Social Security Series-Raising the Social Security Taxable Earnings Cap: Real Reform or Another Placebo? | The Concord Coalition


The Social Security Trust Fund is a nothing more than an accounting gimmick which indicates what one part of the government owes another.

Social Security Series-Social Security's Trust Funds Mask the Problem | The Concord Coalition

From the above link:

No nest egg in the trust funds

The argument that Social Security is on sound footing for decades to come rests on the proposition that its trust funds constitute a nest egg of savings from which future benefits can be paid. They don't. They are simply a matter of intergovernmental bookkeeping. As explained by the Congressional Budget Office (CBO):

Trust funds have no particular economic significance. They do not hold separate cash balances; instead they function primarily as accounting mechanisms to track receipts and spending for programs that have specific taxes or other revenues earmarked for their use.
​

 

[Independent]

That's an unrealistic standard. A perfect balance between revenue and payout can't work where one cohort, e.g. the Baby Boomers, is larger than the cohort that follows it. That is why the Greenspan Commission created the Trust Fund in 1983 to build up reserves to pay the increased claims that were certain to occur when the Boomers retired.

The idea that the Trust Fund has disappeared somehow is another bit of naivete. If the Trust Fund were not invested in US Treasuries (which are regarded by the global bond market as the safest securities in the world), the Treasury would simply have sold more bonds on the open market. The Treasury is paying interest on the entire $2.7 trillion to the Trust Fund now and will continue to do so. When Trust Fund bonds mature they will be rolled over into new bonds just like all the other Treasury bonds.

It is not even certain that the Trust Fund will ever be depleted as was intended from its creation. If the US GDP manages to grow in the future at the average post-war rate, payroll tax increases will be sufficient that the Trust Fund will not be depleted in the 75 year look-ahead window that is common used.

Sure it can work - we just adjust the benefits or taxes to make it work.

The WWII generation had 3 children per couple. Their children, the Boomers, had 2. The Boomers' kids will have more trouble paying for the Boomers retirement than the Boomers had paying for the WWII generation's retirement. Something needs to give.

What can't work is the idea that an entire economy the size of the US can "save" for retirement spending. Goods and services consumed by retirees are mostly produced in the year they are consumed. That was one of the good comments in the OP article. One individual can save more than another, and end up with a relatively better retirement. But, the entire economy can't save (at least if retirement income is indexed). The retirement puzzle is how to allocate economic goods between active workers who produce them and former workers who are no longer productive.

Re the trust fund "disappearing", I'd say that since the federal gov't reports on a "unified" budget, the past surpluses of SS taxes over SS benefits gave politicians and voters the sense that they could have lower Federal Income Taxes and/or higher general fund spending. In practice, the SS surpluses didn't reduce borrowing, they reduced general fund taxes and/or increased general fund spending.