Re: Heard an Interesting Interview on SS today....
It'd probably help if we both forgot about any acronyms like 'cola', unless its like pepsi, but then its still coffee time for me as I just got up about an hour and a half ago.
But just before we depart from that, the cola piece is the adjustment AFTER you retire. The wage adjustment is to your contributions BEFORE you retire.
Suffice it to say that like most thing the government creates and 'fine tunes', its far more complicated than it needs to be. Its that way because we have tens of thousands of people who have nothing to do with their lives other than to create and modify and add complexity to legislation. One of Schwarzenneggers drilling points is making californias legislators part time from full time with the key benefit of them not having as much time to screw around with nanny legislation and 'revisiting' old legislation. But I digress, as usual.
Social security is not like an investment. You dont put money in, watch it grow, and then take it out.
You contribute as a percentage of your income over your lifetime. Those contributions go towards paying current retirees benefits. Your benefits are a function of how much you contributed over how many years.
But you're contributing for 40-50 years (usually). So unless you adjust those old contributions (which were a percentage of your wage income), they wont 'weigh' as much as current ones. So they are 'adjusted' by whatever rate wage increases have occurred since you contributed them.
Lets go back to my old example. Lets say a good middle class wage was $30k in 1984. I would have contributed 6.2% of that pay, or $1860, for that year. Lets say a good middle class wage is $60k in 2004. I'm paying $3720 in SS contributions this year on that salary. But those two salaries had the same buying power in 1984 and 2004. Unless I adjust the contributions made in 1984 into 2004 wages, I'm underweighting the earlier contributions and overweighting the later ones. The intent of the wage adjustment was to maintain the weighting of early contributions so they were worth as much as newer ones.
If you went on fixed weightings, a guy who worked his butt off and made great money in his 20's, 30's and 40's would get a smaller benefit than a guy who slacked off until he was 50 and then made a lot of money in his 50's and 60's.
But the way most peoples incomes work is they keep increasing their wage buying power through their lifetimes until sometime in their mid to late 50's when they start to flatten out. So theres usually very little disparity from one wage earner to another.
Unless you're an ER, you burn out, or you're a late bloomer.
By removing this 'weighting adjustment', they're effectively reducing peoples benefits on a sliding scale. Your early contributions will lose weight. With all the other formulas left intact, you will simply get a lower benefit paid.
Which brings us back to the political aspect of it. Its well established that if the politicos simply say "we're cutting all social security benefits by 30% to keep the system solvent", the current retirees and baby boomers will have their head on a stick. Similarly, saying "if you're over 40, you'll have most of your benefits but if you're under 40, dont expect much if anything" will result in younger, faster people wanting their heads on a stick.
But how about we say "we're going to remove the wage adjustment calculation from social security wage contributions to keep the system solvent, which may reduce benefits for some people, predominately those who slow or stop working at middle age, who reduce their earnings voluntarily (or not), or who elect to take an early retirement (before 67)".
Well! You just flew under 90% of the populations radar and for those who were paying attention, you made it sound like it really wont have much of an effect on them.
But wait until todays 20 year olds are 62 and want to retire, to see that they'll be getting half of what they would have had under the old system, and at 67 when they see that they'll only be getting 70% (surprise! And you're too old to go headhunting!).
Of course, you keep the adjustments in you've already made, so the effect is small up front to people close to retirement age and it has a magnifying effect as you towards younger groups. So it'll be a long time before it really starts to show. And the people responsible will be out of office and long dead. Its a win/win!
Of course the next step is to adjust the standard retirement age from 67 to 70 and tweak the benefits downward, for those under 45 or so. But that can wait a couple of years so the blows are well paced out.
With me now?