Reasons NOT to worry about political risk to SS

[NW-Bound]

... the US economy doesn't have the capacity for what has been promised no matter who gets taxed and how high the rates go. Big changes (for the worse) are coming whether you think so or not. The money to pay for it all just isn't there.

How much tax can we raise on our children's heads, until they cry out "Down with the geezers!"? People keep talking about taxing the rich, which helps some in the short run, but there are simply not enough of them billionaires.

And then, these boomers will need help. Need lots of care givers to change their Depends.

Yeah, Medicare is going to bankrupt the nation, not SS.

Perhaps we can all get our SS, but have to get our own health care.

Maybe more of us will have to go live the rest of our lives in 3rd world countries, where our money buys more, and is also appreciated by the locals.

Don't you like transactions where both sides win?

 

[clifp]

Khufu, I think you are missing some important facts including that I understand how the system works.

Prior to the crisis, the consensus was that SS needed some tweaks in order to pay future benefits. Now I agree that prior to 2008 the cries that SS was going broke were as much political posturing as financial reality. Modest increases in the retirement age and/or sometype of means testing were the standard fixes. Projection were that sometime around 2020 Social Security would be paying out more than it was taking in.

I agree with author that most important thing to keep social security is a good economy. But reality is for the last 4+ years we have somewhere between an awful to a godawful economy. As result for the first time ever Social Security receipts decreased year to year. (if we are lucky 2012 will return to 2008 level) Meanwhile all of the outgo for SS increased as more people "retired," often involuntarily, at 62. This is a double whammy for the system because folks working at 62 are paying into the program while generally their benefit increase very modestly. Instead of having SS benefit payments exceed revenues by the end of the decade this happened at the beginning of the decade aggravating the funding problems. Several things also happened that hadn't occurred to me prior to looking at the CBO's data, first the disability fund is running out of money in just a few years (one more funding requiring Congress to pay for. Second the lower interest rates on US Government bonds means lower income for the SS trust fund. Like any retirement plan the sequence of returns matters, and 4+ years of horrible news at the beginning of the boomers retirement doesn't bode well for the end.

Sadly the CBO's forecast having been very wrong for the last few years, and instead of adjusting them seem to have the bad gamblers habit of saying my luck is going to turn very soon and continue to forecast increasingly rosy scenarios.

I think you ask the right questions about how to fix SS, and most every panel that has looked at SS has proposed some combination of higher taxes, raising retirement age, and means testing.

However the reality is that only thing government has agreed with respect to Social Security is cut payroll taxes. This may or may not be good economic policy, but one thing is damn sure that cutting payroll taxes only make SS problems get worse not better. Essentially no progress has been made at fixing the long term health of SS.

So it baffles me how anybody can look at the recent financial data, the CBO's track record for making projections for the future, and come to any conclusion other than SS financial future looks a worse than it did 5 years, when it wasn't great.

Now you are right and Medicare is in worse shape, but just because a guy has a gunshot wound to the chest, doesn't mean that knife wound in the leg near a major artery isn't something that needs to be addressed.

 

[rayvt]

The IOUs are a class of Treasury bonds. Would you care to guess what happens if Congress in its wisdom decides to default on selected Treasury bonds?

Nothing.
Because the people whose opinion matters (that is, the bond market) know that these aren't real assets or real bonds. That they are just internal memos that the goverment shifted funds from its right-hand pocket to its left-hand packet.

 

[beowulf]

The easiest and fasted way to solve the SS problem (not Medicare or Medicaid) is simply to eliminate the cap on OASDI. That is means testing at the start of the pipeline, not at the end when you get benefits. I don't know where I have seen the exact numbers, but eliminating the cap will insure adequate funding for SS for the next 75 years, if not more. We are not talking about just taxing billionaires more, of whom there are a very limited number, but of everyone who makes more than the current cap (which is $110,100 for 2012). People who make just a bit over the cap will pay a little more, those who make a lot more will pay a lot more. I have no problem with not getting a SS tax holiday every mid-September or so if this will solve the problem. If I could live on what I make with OASDI deducted 9 or 10 months of the year, I am certain that I can do so for the extra few months. There is not cap on the 1.45% Medicare portion.

This does NOT raise OASDI on the working poor and it will affect somewhere between 10 and 15% of Americans - not the lower 85%.

 

[Khufu]

So it baffles me how anybody can look at the recent financial data, the CBO's track record for making projections for the future, and come to any conclusion other than SS financial future looks a worse than it did 5 years, when it wasn't great.

Now you are right and Medicare is in worse shape, but just because a guy has a gunshot wound to the chest, doesn't mean that knife wound in the leg near a major artery isn't something that needs to be addressed.

SS is a problem decades from now, for which a number of solutions are available. US healthcare is a crisis now. I don't have trouble envisioning a resolution to SS when the time comes. However, I cannot see the US reforming its health care system substantially enough to provide adequate health care to the population on a par with other economically advanced countries. The vested interests in the current health care system are sufficiently funded to defend their stake.

So, a normal triage procedure would be to address the more urgent and more serious problem first.

 

[clifp]

The easiest and fasted way to solve the SS problem (not Medicare or Medicaid) is simply to eliminate the cap on OASDI. That is means testing at the start of the pipeline, not at the end when you get benefits. I don't know where I have seen the exact numbers, but eliminating the cap will insure adequate funding for SS for the next 75 years, if not more.

This does NOT raise OASDI on the working poor and it will affect somewhere between 10 and 15% of Americans - not the lower 85%.

I wonder about this, because so much of the top 1% income comes from capital gains and not income. For instance Buffett with 100K salary, nor Jobs with his $1 would be impacted at all by removing the cap. Anyway I'd be interested in seeing some data on this because with a quick Google I couldn't how much total revenue was collected by the current medicare tax.

 

[Khufu]

Nothing.
Because the people whose opinion matters (that is, the bond market) know that these aren't real assets or real bonds. That they are just internal memos that the goverment shifted funds from its right-hand pocket to its left-hand packet.

This is an incoherent opinion. The bond market is willing to buy 10 year Treasuries at an historic low yield of about 2%. It is harder to imagine a stronger endorsement in the language that the bond market speaks.

 

[Khufu]

Perhaps we can all get our SS, but have to get our own health care.

Maybe more of us will have to go live the rest of our lives in 3rd world countries, where our money buys more, and is also appreciated by the locals.

Works for me here in Bangkok.

 

[Khufu]

I wonder about this, because so much of the top 1% income comes from capital gains and not income. For instance Buffett with 100K salary, nor Jobs with his $1 would be impacted at all by removing the cap. Anyway I'd be interested in seeing some data on this because with a quick Google I couldn't how much total revenue was collected by the current medicare tax.

The national conversation should be focused on why investment income, i.e. the income enjoyed almost exclusively by the richest segment of the society, is specially privileged. That's certainly where I would start. Not just capital gains, but dividends, inheritance, the whole apparatus that has enable the US to be the most highly polarized in terms of wealth of any of the advanced economies.

 

[MichaelB]

I wonder about this, because so much of the top 1% income comes from capital gains and not income. For instance Buffett with 100K salary, nor Jobs with his $1 would be impacted at all by removing the cap. Anyway I'd be interested in seeing some data on this because with a quick Google I couldn't how much total revenue was collected by the current medicare tax.

If the executives are bein paid with stock, stock options, restricted stock units or any other type of stock based compensation, it is subject to payroll tax if it is salary. Medicare tax of 1.45% is assessed on the entire amount and Social Security of 6.2% up to the limit for both the employer and the individual. This would clearly make a difference, as the past two decades has seen a decline in the median wage but an increase in average income. It means that much of the real increase in compensationi in the US is above the contribution limit for SS.

 

[clifp]

If the executives are bein paid with stock, stock options, restricted stock units or any other type of stock based compensation, it is subject to payroll tax if it is salary. Medicare tax of 1.45% is assessed on the entire amount and Social Security of 6.2% up to the limit for both the employer and the individual. This would clearly make a difference, as the past two decades has seen a decline in the median wage but an increase in average income. It means that much of the real increase in compensationi in the US is above the contribution limit for SS.

You are correct for non qualified options and restricted stock units.
AFAIK incentive stock options ISO are not treated as ordinary income, and you don't pay any type of payroll tax on them. (At least I didn't back 2000) If held for a couple of years all gains are treated as capital gains. These same rules I believe still apply to ESOPs. Now I don't know what the break down of ISO vs Non Qualified stock options, but I do know that some of the startup I've been involved with just a few years ago were handing out ISOs.

I agree that lifting the cap would make a difference. I am skeptical that would be enough to solve the SS funding problem by itself. If somebody wanted to show me some data that lifting the cap would raise $X of hundred billions dollars over the next ten years, I'd be happy to change my mind, but I'd like to have somebody show me the money.

The one thing I should say about Social Security is that unlike says solving the mess of paying for health care in this country, or even trying to work at "fair" tax system that raise sufficient revenue, Social Security is a relatively simple problem to solve. It just takes higher taxes and/or lower benefits. It is telling to me that even relatively simple problems like fixing SS seem to be beyond the capabilities of our government and the citizens.

 

[MichaelB]

Clifp, not disagreeing with you but qualified stock options are not as common and also not a large part of top exec compensation. Real issues with AMT during the market decline of '01 and '02 have led businesses to prefer restricted stock over ISOs.

On your other points I agree. There is a fairness issue with the cap, but the real 'fix' to SS comes from higher real median wages or more people employed and paying payroll taxes, and unlike health care, SS appears to be much easier to deal with.

 

[scrabbler1]

The easiest and fasted way to solve the SS problem (not Medicare or Medicaid) is simply to eliminate the cap on OASDI. That is means testing at the start of the pipeline, not at the end when you get benefits. I don't know where I have seen the exact numbers, but eliminating the cap will insure adequate funding for SS for the next 75 years, if not more. We are not talking about just taxing billionaires more, of whom there are a very limited number, but of everyone who makes more than the current cap (which is $110,100 for 2012). People who make just a bit over the cap will pay a little more, those who make a lot more will pay a lot more. I have no problem with not getting a SS tax holiday every mid-September or so if this will solve the problem. If I could live on what I make with OASDI deducted 9 or 10 months of the year, I am certain that I can do so for the extra few months. There is not cap on the 1.45% Medicare portion.

This does NOT raise OASDI on the working poor and it will affect somewhere between 10 and 15% of Americans - not the lower 85%.

Raising the cap on income is a phony and unfair solution. It doesn't solve the problem and breaks the tenuous link between earnings and benefits.

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

From the above article:

People also overlook the fact that Social Security taxable earnings lead to Social Security benefits, which are derived by applying a progressive formula to the earnings record on which the tax was levied. While the highest covered earners pay lower Social Security taxes as a proportion of their income, they also receive the lowest return for their tax dollars. Thus, it can be argued that the regressivity of the tax is offset by the progressiveness of the benefits.

Therefore, someone who had $1M of earnings will see those earnings capped at the same cap used to determine OASDI taxes paid as part of the benefit formula before the actual benefit is determined. Otherwise, we would cutting checks to Alex Rodriguez of $1M per month (or some other huge amount). If we lift the tax cap but don't life the benefits cap, then we are turning the program into a welfare program by severing the link between wage income and benefits. ("Thank you for all those extra taxes paid, but sorry, you receive no extra SS benefits based on those same wages.")

More from the article:

"Among the many problems with using actuarial balance as the standard measure of reforms is that it assumes that surpluses generated by the proposals in the early portion of the 75-year period will grow with interest and provide a cushion to cover later deficits. Crediting the new taxes to the trust fund, however, will not in and of itself cause them to be saved. Any new excess Social Security taxes in the early years will flow into the U.S. treasury and help finance other functions of government, as they do now."

This is what Greenspan and company did in the 1980s. Do we want to repeat this flawed idea and be back where we are now?

We would still have annual cash deficits down the road. More from the article:

"The proposal to eliminate the cap and pay no added benefits would still require an additional 13-percent tax increase or 11 percent benefit cut in 2035 to bring the program's tax and spending in line. By 2079, it would require a 23 percent tax increase or a 19 percent benefit cut. The amount of residual deficits would be even larger under the other two proposals."

Raising the cap - it is unfair and won't work. Bad idea.

No cap on the Medicare portion because the benefit is not tied to wages or taxes paid into the program.

 

[scrabbler1]

This is an incoherent opinion. The bond market is willing to buy 10 year Treasuries at an historic low yield of about 2%. It is harder to imagine a stronger endorsement in the language that the bond market speaks.

Rayvt is correct again. The special bonds held by the SS Trust Fund are special issue bonds and are only a bookkeeping entry to reflect money transferred from one arm of the government to another.

From the Social Security Administration's website:

Special-issue securities, Social Security trust funds

Trust funds and types of investments


The Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund comprise the Social Security trust funds. Both funds are managed by the Department of the Treasury through their Bureau of Public Debt. Since the beginning of the Social Security program, all securities held by the trust funds have been issued by the Federal Government. There are two general types of such securities:

• Special issues—available only to the trust funds
• Public issues—marketable Treasury bonds available to the public.

The trust funds now hold only special issues, but they have held public issues in the past.

The "special issues" cannot be sold on the open market to the public, as indicated above.

More on this topic:

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

Social Security's earmarked revenues -- payroll taxes and the taxation of benefits -- flow into the Treasury and any surplus not needed to pay current Social Security benefits or administrative costs goes to pay for other government operations. This surplus is credited to the trust funds in the form of special issue Treasury bonds, which amounts to a promise from one arm of government (Treasury) to repay IOUs to another arm of government (Social Security). The trust funds are also credited with interest on their balances, but as CBO points out, “because that interest represents the government paying itself, it provides no net revenues to the government and has no effect on the total budget.”[3]

The key point is that the same trust fund “assets” are a future liability for the Treasury. So while it may be comforting to think of the trust funds accumulating trillions in federal government bonds over the next twenty years, in reality that just means the government will owe itself a lot of money.

When the government posts one of its own securities to one of its own accounts--whether it's labeled a trust fund or something else--it hasn't purchased anything or established a claim against some other person or entity. It has simply created an IOU from one of its own accounts to another. Thus, when the Trustees say that Social Security is “solvent” until 2042 they are only saying that the program will have sufficient claims on the Treasury (i.e., taxpayers) to pay full benefits until that date. The more important issue is how much paying off the IOUs is going to cost and whether it is affordable. When the time comes for the trust fund balances to be converted into benefit payments, the relevant question will be: where does the money come from?

Khufu, please read up on these things so you can learn more about SS.

 

[scrabbler1]

The national conversation should be focused on why investment income, i.e. the income enjoyed almost exclusively by the richest segment of the society, is specially privileged. That's certainly where I would start. Not just capital gains, but dividends, inheritance, the whole apparatus that has enable the US to be the most highly polarized in terms of wealth of any of the advanced economies.

Social Security is a program which replaces wage income, not investment income. This is why investment income is not FICA taxed. When you stop working (as many of us here have done already ), your investment income does not cease. It does not get replaced by Social Security, either, of course. This is why many of us like to "boast" about how our taxes decrease when we ER due to the elimination of FICA taxes from our expenses.

That being said, I would not have a problem with at least some investment income being subject to the Medicare tax because Medicare is funded in some part by general revenues.

 

[MichaelB]

The creditworthiness of the US is based on meeting all obligations, not just those issued to some. It does not matter what the obligations are called or if they are issued to foreign govt's, pension funds or the SS trust. If the US gov't reneged on it's promise to the trust that would affect all US Treasury borrowing.

 

[Independent]

The easiest and fasted way to solve the SS problem (not Medicare or Medicaid) is simply to eliminate the cap on OASDI. That is means testing at the start of the pipeline, not at the end when you get benefits. I don't know where I have seen the exact numbers, but eliminating the cap will insure adequate funding for SS for the next 75 years, if not more. We are not talking about just taxing billionaires more, of whom there are a very limited number, but of everyone who makes more than the current cap (which is $110,100 for 2012)....

I wonder about this, because so much of the top 1% income comes from capital gains and not income. For instance Buffett with 100K salary, nor Jobs with his $1 would be impacted at all by removing the cap. Anyway I'd be interested in seeing some data on this because with a quick Google I couldn't how much total revenue was collected by the current medicare tax.

The SS actuaries have done calculations on a wide variety of proposals. You can access their results here: Individual Changes Modifying Social Security

This particular one is either E2.1 (if there is no impact on benefits) or one of the remaining E2.x options depending on how you impact benefits.

(Note that the tax would still apply to "earnings" only, which in this context excludes all forms of investment income.)

In the most aggressive case, immediate tax increase, no benefit increase, the projections still show annual deficits starting in 2025. But, they are small relative to the Trust Fund. So this particular fix is significant, but whether it is adequate by itself depends on your view of the Trust Fund.

 

[Texas Proud]

nevermind, someone else already posted what I said...

 

[FinanceDude]

The real problen entitlement, Obamacare notwithstanding, is Medicare. Medicare will bankrupt us way faster than SS, IMHO..............

 

[MasterBlaster]

The national conversation should be focused on why investment income, i.e. the income enjoyed almost exclusively by the richest segment of the society, is specially privileged. That's certainly where I would start. Not just capital gains, but dividends, inheritance, the whole apparatus that has enable the US to be the most highly polarized in terms of wealth of any of the advanced economies.

That gets into the whole capital versus labor taxation issue. The theory goes that capital is incredibbly mobile while labor is not. When capital gets heavily taxed it tends to move on to better venues. Some think that to tax capital heavily is to invite economic suicide.

Taxing capital less ... Fair - well probably not. Smart - yes probably it is.

 

[MasterBlaster]

The real problen entitlement, Obamacare notwithstanding, is Medicare. Medicare will bankrupt us way faster than SS, IMHO..............

So again...

If big downward changes to Medicare are inevitably coming. Why would Social Security remain as it is?

When the changes come Social Security will be "robbed" to help pay for the needed Medicare reductions.

Those that think Social Security (and everything else) will get off unscathed are mistaken.

 

[Independent]

That gets into the whole capital versus labor taxation issue. The theory goes that capital is incredibbly mobile while labor is not. When capital gets heavily taxed it tends to move on to better venues. Some think that to tax capital heavily is to invite economic suicide.

Taxing capital less ... Fair - well probably not. Smart - yes probably it is.

We should tax people, not "capital". Suppose we collect FICA tax on all US citizens' investment income, regardless of where it is earned. Then, there is no incentive to invest elsewhere.

 

[Independent]

Raising the cap on income is a phony and unfair solution. It doesn't solve the problem and breaks the tenuous link between earnings and benefits.

.....

No cap on the Medicare portion because the benefit is not tied to wages or taxes paid into the program.

I'm fine with "breaking the tenuous link" - it's already, well, pretty tenuous.

Medicare benefits don't vary based on the taxes each of us paid. I don't see any reason to continue varying SS benefits by past income, either.

 

[Running_Man]

Social Secuirity included in total debt

 

[MasterBlaster]

We should tax people, not "capital". Suppose we collect FICA tax on all US citizens' investment income, regardless of where it is earned. Then, there is no incentive to invest elsewhere.

So now all you need do is define "investment" income.

The less you know about this stuff the easier it is to solve.