How the Social Security Trust Fund was supposed to work.

[Midpack]

By no means am I hoping to start another debate on Social Security or politics. I just thought this was a good Q&A on Social Security, with (IMO) a very well written response by Scott Burns. Not political other than one mention in passing...

How the Social Security Trust Fund Was Supposed To Work - Registered Investment Advisor

 

[Zero]

Thanks, that is a very good explanation and not really political at all.

One thing I find interesting is that the money borrowed from SS was used to fund non-SS related expenditures. But when they talk about raising taxes to pay back the IOUs, it appears to me they want the money to come from new SS taxes.

Is that how others read that?

 

[Brett_Cameron]

Thanks, that is a very good explanation and not really political at all.

One thing I find interesting is that the money borrowed from SS was used to fund non-SS related expenditures. But when they talk about raising taxes to pay back the IOUs, it appears to me they want the money to come from new SS taxes.

Is that how others read that?

Yes, in order to balance revenue against expenses, there will be a need to raise SS taxes and/or reduce future benefits. The huge buildup of the trust fund after 1983 was not big enough to maintain the post-1983 SS tax rates indefinitely AND keep balance.

IF you research the SS Trustee reports each year since the beginning of SS, you will see that it has always been a juggling act trying to balance benefits with revenue and many changes to SS tax rates and benefits have been made.

The current situation is just another result of the smart people using projections and trying to find the best solution.

Overall SS is a wonderful program for the people and it is good that there are people managing it.

 

[youbet]

the money borrowed from SS was used to fund non-SS related expenditures. But when they talk about raising taxes to pay back the IOUs, it appears to me they want the money to come from new SS taxes.

Is that how others read that?

Yep, that's the way it is.

I find it amazing how much more expensive SS has turned out to be than the originators of the concept envisioned. How could they have gotten it so wrong. A few decades after their "careful" planning, it turns out they didn't have a clue........

 

[Zero]

Yep, that's the way it is.

I find it amazing how much more expensive SS has turned out to be than the originators of the concept envisioned. How could they have gotten it so wrong. A few decades after their "careful" planning, it turns out they didn't have a clue........

Again, this is not political because this has occurred during every admin/congress in my life, but it seems the IOUs are only re-payed when needed to replenish the trust fund.

So, if I'm seeing this correctly, any new taxation for SS would create the new money to replenish the SS Trust and diminish the need for the IOUs being paid back.

Gosh, I hope I'm seeing this wrongly.

 

[Midpack]

Yep, that's the way it is.

I find it amazing how much more expensive SS has turned out to be than the originators of the concept envisioned. How could they have gotten it so wrong. A few decades after their "careful" planning, it turns out they didn't have a clue........

The good news, if any, the demographics can't get much worse once the boomers are largely thru - so most of the (reasonable) fixes we've all heard discussed might be "more sustainable" than past SS adjustments. I'll leave it there to avoid a visit from Porky...

 

[Chuckanut]

Yep, that's the way it is.

I find it amazing how much more expensive SS has turned out to be than the originators of the concept envisioned. How could they have gotten it so wrong. A few decades after their "careful" planning, it turns out they didn't have a clue........

I suspect it is largly due to the increased life spans of people today.

The retirement age of 70 was initially set by Otto von Bismarck in 1889, when most people were already dead by the time they reached 70. ?!?!? In 1926 Germany lowered it to 65. The American SS started in 1935 when medical advances such as penicillin were still being worked on. We died earlier and more often from things that can be curred today with a shot or a pill.

Add in age discrimination and we see a lot of people forced to retire earlier than they may want to do so. That, of course, is just my opinion.

 

[MichaelB]

Demographics in one driver. Another is the average wage index that is used to calculate the monthly benefit

When we compute a person's retirement benefit, we use the national average wage indexing series to index that person's earnings. Such indexation ensures that a worker's future benefits reflect the general rise in the standard of living that occurred during his or her working lifetime. National Average Wage Index

The boomers experienced a real, after inflation increase in the wage index of at least 1.5x, which means the earlier wages will pay out a greater benefit than if only adjusted by inflation. There is nothing wrong with this, but it needs to be built into the contribution formula as well, and does not appear to have been considered, at least to this degree.

 

[EvrClrx311]

Add in age discrimination and we see a lot of people forced to retire earlier than they may want to do so. That, of course, is just my opinion.

I read something over the weekend suggesting that we phase out the employer side of the payroll tax for individuals approaching retirement (say drop it by half a percent ever year over 50) while also raising the maximum age at which people can hold off collecting Social Security (while keeping the minimum where it is).

- This would reduce age discrimination... as a 63 year old employee would cost 6.2% less in overhead than a 49 year old.

- People who are fit to work but didn't save enough on their own (90% of the 65-75 group from what I hear) could continue working if they wanted, and you'd assume they'd get a slightly better salary because of the reduced overhead cost they are to their company

- The percentage of people working longer because of the above would offset the reduced payroll taxes received from employers (they'd still be paying their side of the payroll tax).

- People who are sick or unable to work past 62 could just collect early and be no different than today's system.

This system doesn't fit the ER mindset at all, but we would all be unaffected by it. It seems to make more sense for the average mindset in this country... spending the entire salary, and hope for something to help when work isn't possibly anymore.


(I'm sure there are some pitfalls I'm missing... so please feel free to point them out)

 

[Independent]

I read something over the weekend suggesting that we phase out the employer side of the payroll tax for individuals approaching retirement (say drop it by half a percent ever year over 50) while also raising the maximum age at which people can hold off collecting Social Security (while keeping the minimum where it is).

- This would reduce age discrimination... as a 63 year old employee would cost 6.2% less in overhead than a 49 year old.

- People who are fit to work but didn't save enough on their own (90% of the 65-75 group from what I hear) could continue working if they wanted, and you'd assume they'd get a slightly better salary because of the reduced overhead cost they are to their company

- The percentage of people working longer because of the above would offset the reduced payroll taxes received from employers (they'd still be paying their side of the payroll tax).

- People who are sick or unable to work past 62 could just collect early and be no different than today's system.

This system doesn't fit the ER mindset at all, but we would all be unaffected by it. It seems to make more sense for the average mindset in this country... spending the entire salary, and hope for something to help when work isn't possibly anymore.

(I'm sure there are some pitfalls I'm missing... so please feel free to point them out)

I'm three weeks behind the curve here. Interesting idea, but ...

Regarding the bold. The SS system would lose half it's normal revenue on people who are over 62.
That means, to make the numbers work out, we'd need both of:
1) the number working would have to double, and
2) the additional years of work wouldn't increase the workers benefits.

(Some other combinations would work. If the number of workers more than doubled, that would absorb some increase in benefits.)

My guess is we wouldn't see that big an increase in the number of workers.