“There is no trick. We can’t promise to work less, raise pensions and erase deficits.”
-French Labor Minister Eric Woerth

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The issue of government debt seems to be coming up a lot news lately. Courtesy of the credit collapse and economic recession, Deficits are front page news. Classic balance budget advocates are reiterating their views, joined by hypocritical partisans who, after a decade of spending profligacy, unfunded tax cuts, new entitlement programs and a war of choice, have “suddenly” discovered the evils of borrowing.

Then there are the major entitlement programs: Social Security, Medicare and the Prescription Drug plan. These are, we are told, an even bigger problem then the ordinary budget deficit. As presently configured, the entitlement deficits are set to skyrocket as the boomers retire. Social Security especially is a target of persistent fear-mongering.

This is all unvarnished nonsense. Social Security is at present, financially stable; As it starts to run into increasing deficits, the political classes will be forced to respond.

I am going to hazard the surprising forecast that Social Security will never run out of money. If that sounds like some sort of economic blasphemy, just take a look across the pond for a glimpse of SS’s future. President Sarkozy of France (France!) is showing not only Greece how to get its welfare state in order, but he is also demonstrating to us Americans what the future of entitlement programs look like. Following Sarkozy’s lead, in the US, we should expect to see three major changes to Social Security:

1) Your Retirement Age Will Go Up:   And up and up and up. I expect to see a staggered from 65 (66 and 67 relative to birth date), to 68 then 70 then 72 years old. France just raised their retirement age to (tee hee) 62.

2) Your Taxes Are Going to Go Up:  The Federal Insurance Contributions Act (FICA) is the payroll tax that funds Social Security. These are likely to increase, in one of two ways: Percentage paid, and gross wage amount taxed. I suspect it is the latter that will be targeted first.

Currently, FICA taxes amount to 15.30% (7.65% paid by the employee and 7.65% paid by the employer) of income. That is a big chunk of anyone’s salary, and raising that is going to be met with a fierce pushback. Perhaps a minor increase in total FICA percentage might be enacted.

However, the gross wage amount tops out at $106,800. That cap is very likely to increase — slowly at first, in COLA increments, than in greater amounts. My guess is this will top out at $200k within a decade, and a million dollars the following decade.

More controversial are other taxes that could fund SS.

3) You Will Be Subject to a Means Test: The third way SS will get its house in order will be to stop making payments to people who don’t need the money for retirement.

The political rhetoric will sound like this: Social Security was set up as an insurance fund. Just as if you don’t receive any compensation for Fire Insurance unless you house burns down, you won’t get social security unless your financial house is in ruins.

I cannot give you a timeline, or analyze whether these are good or bad modifications. That is not what I do. I can, however, look at the numbers of this, see where there are options, and estimate the most likely future occurrence based upon the mathematics. The conclusion I draw: Retirement ages are going up, Taxes are going higher, eligibility is going lower, and payments are going lower as well.

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Sources:
Sarkozy Lifts Retirement Age to 62; Unions Protest
Gregory Viscusi and Helene Fouquet
Bloomberg, June 16 2010  
http://www.bloomberg.com/apps/news?pid=20601087&sid=aigMGWBIRZB0&

Social Security Offical Website
http://www.socialsecurity.gov/

Category: Mathematics, Politics, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

77 Responses to ““Saving” Social Security”

  1. xerosum says:

    US media attacks on economic centrism have been almost rabid. Many fail to understand that current US economic orthodoxy is a choice, not the outcome of some immutable economic law. Others have chosen differently, and are quite content with the result:

    “That is as it should be says head of the Berlin stock exchange, Artur Fischer. “I want to live in a country where people have a minimum to live somewhat of a happy life,” he said. “Therefore I am willing to give away, through taxes and through other means, part of my income as a person, and a lot of other people think the same. So, we have a more stable society and we do this consciously.”

    Strains on the social-welfare net are not new and go beyond the current financial crisis. In general, Germans want that social contract maintained and are willing to save to do so — for themselves and future generations.”

    http://english.chosun.com/site/data/html_dir/2010/06/17/2010061700634.html

  2. Dennis says:

    Rational, logic math driven: Son, you have no future in politics.

  3. cswake says:

    “I am going to hazard the surprising forecast that Social Security will never run out of money.”

    No disagreement here. And this is exactly why the force of government changes the structure of these programs from a Ponzi scheme to a government run operation. One way or another they won’t be able to make the guaranteed return, but instead of liquidating, they just change the terms of the original contract and force compliance onto the “investors”.

    Perhaps not coincidentally, it is similar in nature to the U.S. debt- eventually a broken promise. When people borrow money to the government or pay into social security “insurance”, they are receiving an implicit promise from the government to receive a certain real return or standard of living. Altering either will make the promises solvent, but it violates the promise nonetheless to entire nations of citizens for multiple generations.

    This comes as no surprise though, governments are the most immoral and unethical institutions known to man.

  4. Neal says:

    And these changes are going to sit well, especially the needs test? While SS may never “run” out of money, as we will print more, it certainly will not be the cash cow for the Federal Gov’t the way it is now.

    And certainly these changes are NEVER going to happen under a socialist like Obama.

  5. Ahhh, it didn’t take long for the name calling to begin.

    Please try to discuss these things with some degree of intelligence, maturity and non-partisan rhetoric

    Thank you.

  6. Lukey says:

    Sounds like BR is suggesting we make Social Security just another welfare program. I don’t understand how people can expect someone else to fund their leisure. What’s next? Euro-style taxpayer financed vacations for the underprivileged? Why can’t we just make SS a disability only program? Unless you are too enfeebled to work, if you want to retire and goof off – do it on your own dime!

  7. Arturo says:

    What? You didn’t suggest scrapping Social Security?

    This blog is Lib-uh-rel!

  8. grambo033 says:

    If this happens, as you describe, I wonder what the consequences will be. You speak of mathmatics. Someone needs to understand demographics. I’m 45 and would seriously resent not getting what I was promised or what I paid for. I want my money back when I retire. I have paid into something I was promised, and it isn’t a small amount. I will compormise, of course. I’ll even accept a significanly discounted buyout if I can control my accounts privately, but at some point, folks in my generation, with children of our own, our life’s dreams, college expenses, healthcare and paying the debts the baby boomers have left us, will reckon we don’t want our life’s work and what we’ve produced/sacrificed given to someone else, just because they achieved a certain age. In the age of GM bankrupcties being used as an excuse to pay off unions at the expense of bondholders, I’m not naive enough to believe in promises, laws or contracts, but demographics at somepoint will win out.

  9. Transor Z says:

    IMO the scary black hole is in Medicare, not Social Security, especially after Congress allowed Pharma to jack prices.

    ~~~

    BR: I total agree.

    But I don’t know how to “Fix” medicare in 3 easy steps, so I wrote about social security!

  10. dsawy says:

    Small nit: For those who will die before they can collect Social Security, it will have run out of money. As originally designed, 65 was median life expectancy for males in the 1930′s, so fully half of US males were expected to die before they could collect.

    Means testing:

    Once you means-test Social Security, it ceases to be an entitlement program and it becomes nothing but mere welfare for the aged. The Democrats will howl like ruptured ducks at this, because their propaganda for the last 70+ years on Social Security is that “everyone” is in the program. Once it becomes means-tested and devolves into nothing other than a welfare scheme, it loses political support and further cuts will be inevitable.

  11. jjay says:

    In politics, it all comes down to can you produce the votes to make it happen.
    It seems our wonderful Federal Government is rigging elections right out in the open.
    Here is the link.
    http://news.yahoo.com/s/ap/20100615/ap_on_el_st_lo/us_voting_rights_election
    One man, one vote, anyone?

  12. Gnatman- says:

    A fourth option is to terminate the COLA.

    It’s also my assertion that the Europeans seem willing to share in a minimum living standard because they perceive they are in smaller HOMOGENEOUS pools of humanity. Unlike the stars and stripes which abhor lending a hand to someone of a different stripe.

  13. Transor Z says:

    472k initial claims. Yowza.

  14. flipspiceland says:

    Would you who have please stop with the cracks about the aged? This is not welfare for the elderly. They at least paid into the system.

    As much money or more goes to SSI and other welfare programs for young able-bodied men and wimmin. The money they comes out of Social Security funds, paying teens and other parents to have children, paying for those who have some minor condition that with the right doctor’s prescription says they are entitled to collect money they haven’t paid in, and this has been going on for generations.

    The original program was for the elderly, their survivors, and the diabled, not for every fucking person who wants to have kids, doesn’t feel like working or has some hang nail that entitles them to forego working on the books.

    Blame the likes of Teddy Boyo, Rangel, LBJ, and so many other Great Society thieves and their progeny who are stealing money from those who have worked for 30-50 years to pay in to social security taxes and giving it to those who haven’t put in one single goddamned dime for generations.

  15. plantseeds says:

    Gee…. do you really think rates will go up? The original OASDI rate was 2% and now we’re up to 15.3% combined OASDI + HI tax. Therein lies the problem and hence the partisanship since some don’t seem to think there is anything wrong with this picture while others would argue that the 1% rate of return (approximate) is indicative of a flawed system. Running out isn’t the real debate.

    Also… let’s not try to pretend that you don’t love the partisan arguments, they generate the most hits on TBP afterall don’t they?

  16. Niskyboy says:

    I’m 55. For most of my life I’ve thought a retirement age of 65 is too young for many people — lots of folks are still quite vigorous at 65. Then, in 2008/9, I added the thought there’s no way many people would be able financially to retire at 65 anyway. More recently, I was sitting in a diner having breakfast. A young woman at the next table was talking in a loud voice about how difficult it is to find work, and how all the f***ing old people should just get out of the way to make room for younger people who have kids to raise. I didn’t appreciate her mode of expression, but she does have a point. In fact, that’s a main reason why Social Security was started in the first place.

    So while I agree that any Social Security fix will need to include a higher retirement age, perhaps it won’t be quite so easy to implement that politically.

  17. MaciekKolodziejczyk says:

    Yup,

    I’m with Barry, as to the way it’s gonna be. The politicians can try to ignore obvious for some time (years!), but eventually they will have to recognize the facts. Same problems everywhere in developed countries, be it North America, Europe or Japan.

    You cannot possibly expect to work 40% of your life (say, 35 out 85 years), put aside 15% of salary and expect it to pay for the remaining 60 % of your life. Even the 8th Wonder of the World (compounded interest) doesn’t work that way – not at 2-3% long term annual GDP growth.

    Maciek.

  18. Plantseeds —

    Since you asked: They generate random hits from one time visitors of questionable demoraphics (age, education, income, spending habits, portfolio, etc)

    The ad people call them “garbage hits” from a dubiosu demographic cohort.

    The value of this site to marketers is the high end reader — not just income and education, but position, influence, career, etc.

    I could easily pick a contrversial topic (unions?) And double my traffic (Mish?). But that would devalue the site to advertisers.

    More important, I would rather discuss the big issues of the day and get intelligent feedback, rather than silly talking points…

  19. JSchmid says:

    I wish we would audit the FED. When was it last audited…. in the 1960′s if I remember correctly. I fear what they would find since the FED has been buying US bonds hand over fist lately to prevent interest rates from rising. We also need to cut all ties to Fannie and Freddie since they are the cause of the recent downturn. If the politicians didn’t have them to use as puppets, the companies would have not bought all of the junk mortgages and we wouldn’t have a housing bubble.

    Overall, we need smaller government closer to the people. It is about time states take back the power they were originally given.

    ~~~

    BR: Ahh, but the Fed is audited — every year.

    What you want is the public release of that audit!

  20. Transor Z says:

    Where is avg life expectancy 85? 65 – 23 = 42, 47 if you start at 18. Retirement age has already been bumped to 67 and then will be 70. That’s a given.

    The first 25% of your life is, um, pre-adulthood. 65 to 75 is a little less than 15% of a 75-year life expectancy.

    But thanks for your input.

    :-)

  21. Great. They paint people into a corner, THEN they get religion !

  22. The Curmudgeon says:

    A “high end reader” eh? I’m not sure I qualify.

    I don’t disagree that the promises in place today regarding Social Security (and Medicare, for that matter, which Transor Z points out is the more profligate insolvency) will have to change.

    My question is how that’s not effectively a default? Just as devaluing currency is a form of default of sovereign debt, changing the promises of a social welfare program is a breach of its promises, i.e., a default.

    So saying that Social Security won’t run out of money doesn’t really mean much, if to do so it ceases to be what it now is.

  23. Darmah says:

    Another reason to be pissed off at the Bush administration and mealy-mouthed Greenspan. Prior to the 2000 election Greenspan was extolling the virtues of the surplus, how it would help social security, etc., etc. After the election in 2001 Greenie did a 180 and provided an argument for the massive tax cuts.

    If that sounds partisan, so be it. The Dems piss me off for other reasons.

    That said, I agree with your overall assessment and likely fixes — social security ain’t going away.

    @grambo033 — btw, if you’re 45 you are likely part of the baby boom generation which is generally considered to have ended in 1964, some say 1965. And if you could control your accounts privately, it is highly unlikely that you would be any better off.

  24. catman says:

    Dennis – Well said.

  25. Hugh says:

    All countries – but especially the US – need to bring their entitlement liabilities onto their national balance sheets. Only by tracking the change in the liability from year to year can you see whether things are under control. The valuation needs to be done by an independent professional….oh dear, I suppose that makes it a pipe dream.

  26. Dow says:

    Contrary to popular belief, not everyone gets to retire with a multi-million dollar nest egg. The majority of us just make enough to get by and save a little.

    And I don’t see any advantage to pushing off the retirement age in a society that outsources its jobs, replacing them with those of a consumer based economy. There’s a tipping point at which it’s just no longer practical to keeping buying planned obsolescence – it’s just unsustainable.

    It also looks to me like late retirement just takes jobs from the young trying to first enter the work force and just pushes their dependence on to their parents as the elderly pick up low wage jobs. That’s an impractical transfer. There’s also the issue that at age 50, age discrimination typically starts to kick in. So the good jobs that the under 50 once enjoyed start to slip away as managers choose “hungry” applicants.

    I’d rather we create a better safety net – for instance – more local low income housing for the elderly – then looking for ways to punish people for poverty. To those who think that the disabled, etc don’t deserve Social Security – like it or not, you are going to pay for it one way or the other. So rather than looking for reasons you shouldn’t pay taxes, why not put that energy into finding better use of those limited resources?

  27. Chad says:

    I am fine with all of those suggestions. However, if a “Means Test” is implemented I want it to apply to the Baby Boomers currently retiring along with everyone else coming after. You don’t get to f@#% up everything and then eat cake.

  28. philipat says:

    And then, in the final stage, we will reach the point that the retirement age will be raised to the level that nobody can ever expect to receive any SS payments. At which point the “Inconvenience” of the SS “Promise” goes away, leaving only the “Convenience” to Government of the FICA tax revenue, which name will be abandoned and simply rolled into “General Taxation” revenues without inconvenient contingent liabilities?

    Leaving the FICA sub-account in place in these circumstances might be troublesome for Government because the counter to the political rhetoric arguement might be that, OK, in that event I would prefer to “Self-insure” thanks!!

  29. scarlo says:

    I’d like to mention that in the FAQ area of the SS forms there is a question stating something like “will I receive my full SS benefit when I retire?”. The answer starts with “yes.”, but goes on to say that folks of my age (something like 35 years and under) will only be receiving an estimate of 75% payout.

    Adding my employer contribution and the SS contribution is around 15% of my GDI from this employer.

  30. scarlo says:

    Take this amount and invest it with a modest 4%-5% real return for that time period and it’s a ridiculously large sum. If you turned that into a Single Payment Instant Annuity for life w/spouse and receive a large multiple of the forecasted payout. It’s just another tax, in my mind.

    I’m curious to see a spreadsheet with all the “taxes” ranging from my cell phone federal tax (15%) to electricity generation tax, etc – and what percentage of my GDI is REALLY comprised of govt gimmies.

  31. GREYDOG says:

    Let me just say that my generation was ‘asked’ to pay double into Social Security, and we did, because it was not optional. Social Security in NOT an entitlement program. It is a forced retirement savings plan, automatically taken out of our paychecks. It is my money and I want every penny of it back.

    If Congress and Obama are looking for entitlement programs to cut, I suggest they eliminate the LIFETIME MEDICAL BENEFITS that they enjoy at the expense of the taxpayer.

  32. miamiocean says:

    Serious question. Can someone explain why the Social Security Reform Act of 1983 which significantly raised payroll taxes and was designed to prevent insolvency during the critical boomer retirement years did not accomplish that mission ? This was just as I was entering the work force after grad school, so I (and my employer) have been paying much more into Social Security than my parents’ generation.

    What changed between 1983 and present to convince people there is an insolvency crisis ? The change in life expectancy (from the chart I found) says that it changed from 74.6 years in 1983 to 77.8 years in 2005. Did the projections in 1983 fail to account for this increase in life expectancy (doubtful) ? Did the projections in 1983 fail to account for a decreasing work force to support a sharp increase in boomer retirees ? Really ? They were that dumb in 1983 that they could not project for that ? If they looked at birth rates in 1980, they should have been able to account for workforce support of boomer retirees up to age 80-90. I don’t get it, but maybe I am the dumb one.

  33. Ambiance says:

    I agree with your analysis Barry, but I think the premise is a bit off. A lot of the people critical of these programs have specifically suggesting these measures as solutions (David Walker comes to mind). Ultimately though the net effect is that these programs are going to cost a lot more and provide a lot less, it’s a net loss in efficiency and social utility. As a young worker what really bugs me the most about this is that it’s too much of a “political third rail” for anyone to ever dare question to value of these programs to society. The generation I’m in is entering the jobs market during a horrible downturn, has the highest unemployment rate of any age group, is increasingly saddled with debt and receiving lower job benefits on top of it. Having to pay higher taxes to fund a set or poorly structured entitlement programs for a generation that’s had a horrible record of saving money just doesn’t strike me as practical or ethical really.

    This program never was the public savings plan it was made out to be, it’s always been a generational transfer of wealth and the terms have increasingly become weighted against the young of this nation. Given the problems we face as a nation and the mounting debt we’ve been taking on across administrations, we should really be asking ourselves if supplemental income for seniors is really the best use of public money going forward. Government spending on entitlements and the military dwarfs every other program out there, personally I just don’t believe these are the highest priority issues in our nation any more. Partial privatization seems like the easiest way to scale the programs down to a purely anti-poverty role, but I doubt it’ll happen.

  34. dan10400 says:

    WRT means testing. This whole issue came up 20 or so years ago when Social Security was going thru one of its previous soul-searching crisis. The howls (as other commenters pointed out) where loud and clear that they recipients didn’t want to be classified in the same bucket as welfare recipients.

    I don’t recall ever seeing any study that detailed how much in SS payments would be forgone thru means testing at various levels. I also wonder if it would not just lead to shifting assets around, same as medicare does.

    Conversely, means testing will probably only provoke more people to save less for retirement.

  35. ironman says:

    BR:

    It’s not just payroll taxes (FICA) that would be required to increase to support Social Security promised outlays. Regular federal income tax rates would also need to rise thanks to the nature of Social Security’s OASDI (Old Age Survivors and Disability Insurance) trust fund .

    Here, the surplus tax collections that Social Security has collected since 1982 has been loaned out to the federal government, which has, in turn, spent the money to cover the costs of its discretionary spending programs. When the OASDI trust fund needs to cash in the special issue bonds that were issued to account for this intra-governmental transfer to cover the expected future cost of supplying benefits above what it expects to receive annually through its share of FICA tax collections (when the baby boomers retire), that money will need to be pulled from the U.S. Treasury’s general fund. That fund gets its money from the government’s tax collections, the majority of which come from individual income taxes.

    To avoid overly burdening any one tax revenue stream, it’s likely that all these taxes will be increased in relative proportion to cover the anticipated shortfalls between promised Social Security benefit payouts and its FICA tax collections once that happens.

    (Quick side note: the amount of FICA taxes that goes to support Social Security is a flat 12.4% of individual income from wages and salaries – for most people, that’s split equally between them as employees and their employers, so they only see 6.2% of their income going to Social Security from their paychecks – the self-employed see the whole cost, and of course, the employers in that situation do as well.

    That rate applies up to the taxable income cap, which is currently $106,800 and which is likely to be eliminated altogether, with means testing being employed to prevent high income earners from receiving the larger benefits they would be honestly entitled to under the program’s longstanding benefit formula.)

  36. mbelardes says:

    “Social Security especially is a target of persistent fear-mongering.

    This is all unvarnished nonsense. Social Security is at present, financially stable; As it starts to run into increasing deficits, the political classes will be forced to respond.”

    See, this is the problem I have with those downplaying the “fear-mongering.” You insinuate that the true fact that entitlement problems won’t run out of cash that there is no cause for fear or anger. This is varnished nonsense once you start looking at the generational accounting going on that makes Lehman Brothers look like a Saint.

    I’m guessing those posting are an average age of, say, 45?

    So you have benefited from years of low taxes and will benefit from years of entitlement benefits. AND I consistently hear the “well we paid into the system blah blah blah…” Yeah right. Thanks for the contribution to SS, but the last two generations have done everything possible to undermine the financial and economic structure of this country. From unfunded liabilities, to deficit spending, to unfunded wars, to you-name-it from Conservative Fiscal Malfeasance to Liberal Fiscal Malfeasance.

    I’m 26, what does MY generation get other than a hefty bill and a lower earned income. Check the unemployment rates for people 20-30 right now. You think we get to deal with anything other than higher prices, lower wages, higher taxes, higher interest rates, etc in the future?

    The solutions above are insulting because they are going to be implemented against my generation the hardest. Maybe if the prior two generations left us in a better position to deal with them I would be less pissed, but that clearly isn’t the case.

    So, yes, the Partisans just trying to score political points and win votes should go Eff themselves because they brought us here, but many people in our society have every right to be fearful for our future and angry about our situation.

    And save the “oh boo hoo, your generation has to man up” cuz I’m sure that response is coming. Our current problems have been around for decades and have only recently been exacerbated. The next generation gets to call us out if we fail too.

  37. philipat says:

    Means testing? Welcome to socialism!! This was used in the UK for the elderly when entering care homes, whereby the family home had to be sold and all assets consumed down to a very low level, at which point the State assumed all responsibility.

    At that point, the cruise industry appears to have been substantially boosted, especially cruises to BVI, The Caymans etc where cash deposits are welcomed. The problem with socialism is that it destroys family values and personal responsibilty.

  38. “…Unlike the stars and stripes which abhor lending a hand to someone of a different stripe…”
    –Gnatman- Says: June 17th, 2010 at 8:49 am

    G-Dude,

    could you care to cite some Proofs, to support that POV?

    from this end, that is some Epic H********.

  39. Init4good says:

    Most sensible prediction I have ever read – thanks , and I happen to agree w you.

  40. I’ve had this idea for Canada’s version of SS and there is no reason why it wouldn’t work for the US as well. Every time a baby is born in the US the government should put a few thousand dollars away in an interest collecting account (or even the S&P). As long as that person stays a US citizen this money can accumulate over their lifetime instead of over their working years. If they renounce their citizenship then they forfeit the money and that goes back into the general pool. After 65 years of compound growth though you will have a great sum of money that will at least help that person to retire

  41. farmera1 says:

    Barry, way too rational. I agree you have no future in politics.

    I’ve come to the conclusion that this country isn’t governable. Too many irrational people that react only on dogma and emotions. Too few critical thinkers. People react much more on prejudices and hate than they do any kind of rational thinking. This process will not allow any kind of real solutions.

    We are headed straight for renegade leaders that will continue this process of taking the country into the dung heap of history.

    Have a good day.

  42. Ken B says:

    I think the Means test is a great idea. If I successfully build a big enough retirement nest egg ($N million) to live a lifestyle to which I’m accustomed, I won’t need the extra fifteen hundred bucks from Uncle Sam. Do you think Bill Gates needs the fifteen hundred/month? Or all the retired bankster CEOs?

    My goal would be to pass a future Means test so that I wouldn’t need social security.

  43. J Kraus says:

    Since the Baby Boomers are the largest voting block (and the generation still in power), I am sure that Means Testing and Increased Retirement Ages will be phased in such a way as to just barely graze their age group.

    Means Testing may well have the classic unintended consequences. As dan10400 mentioned; if it is based on net worth, it could lead to less retirement saving since, by saving on your own, you would be forfeiting “free” money. This is the situation today whereby many American retirees forgo working even part-time jobs during the first years of drawing SS, as the resulting wages decrease their SS benefits.

    Another possibility: hiding net worth by liquidating financial assets, buying a home safe and going to lots of cash (if one is smart, in a variety of currencies) and overseas bearer bonds prior to the law going into effect.

  44. James says:

    Social Security especially is a target of persistent fear-mongering.

    This is all unvarnished nonsense. Social Security is at present, financially stable; As it starts to run into increasing deficits, the political classes will be forced to respond.

    I can, however, look at the numbers of this, see where there are options, and estimate the most likely future occurrence based upon the mathematics. The conclusion I draw: Retirement ages are going up, Taxes are going higher, eligibility is going lower, and payments are going lower as well.

    ————-

    You call it persistent fear-mongering. In fact, there have been many reasoned observers like David Walker and Andrew Biggs who have been persistently pointing out the risks for years if changes aren’t made to the system. You seem to suggest this is as easy as one, two, three, a mere mathematical fix. If that were the case the problem would have been addressed years ago. It hasn’t been, and the hurdles are largely political. Moreoever, in an era of increasing deficits and government debt as far as the eye can see, fixes to Social Security can’t be treated in isolation from our larger fiscal problems. That complicates the politics of a solution with each passing year.

    I don’t disagree with your final observation above, but let’s not demonize the many reasoned voices that have been speaking out on our looming debt issues for years, to no avail.

  45. plantseeds says:

    not to run totally OT …

    “I could easily pick a contrversial topic (unions?) And double my traffic (Mish?).” …Agreed
    “But that would devalue the site to advertisers. “…. interesting, I would not have thought that.
    “More important, I would rather discuss the big issues of the day and get intelligent feedback, rather than silly talking points…” …agreed again and appreciative

    However I have noticed those issues with strong partisan bias tend to generate triple digit comments where less controversial issues tend not to. Just an observation from which I concluded my earlier comments on traffic…..perhaps too smugly but thaks for informing me on that assumption.

    Back to what I believe is the real issue, the return on those SS contributions. Even with a means test shouldn’t we be more concerned with remodeling to create a system that generates an acceptable return rather than paying old clients with what we collect from new clients (hmmmm sounds familiar).

    It seems like a misuse of funds, especially when the SSA (a branch of the gov.) buys treasuries with any surplus (gov. loans the surplus to itself) and then when it comes time to draw from that surplus the same government will need to tax its people to make good on the bonds.
    Rather than argue about the system going broke lets create a better one…too bad partisanship will undoubtedly get in the way, some will try many will not.

  46. longcat says:

    Can’t wait for marginal tax rates to go to over 65% after the cap on social security is taken off (39.6% top Fed plus 15.3% FICA, plus .9% new healthcare reform medicare surtax, plus 9.3% CA state tax) – and that’s not even taking into account the phase out of itemized deductions at high income levels. But after all that the long term deficit situation is all fixed and taken care of so no need to worry about it going higher…or not

  47. comet52 says:

    A fiat regime cannot go broke (the euro aka faux-gold standard is a different story) and thus by extension neither can ss. Read some mmt at http://moslereconomics.com/ or http://bilbo.economicoutlook.net/blog/ or anything written by Marshall Auerback. We should be cutting taxes to encourage growth, not thinking of new “austerity” measures in the middle of a depression.

  48. MaciekKolodziejczyk says:

    Transor Z:

    “Where is avg life expectancy 85?”

    In Monaco it is 90 years.
    In Macau – 83 years,
    In San Marino, Andorra, Japan, Singapore, Hong Kong and Australia it is 82 years.

    See here:
    https://www.cia.gov/library/publications/the-world-factbook/rankorder/2102rank.html?countryName=Monaco&countryCode=mn&regionCode=eu&rank=1#mn

    I know, the US is in 49th place in the world with 78 years of life expectancy, so one might not have thought 85 is realistic…

    A quick reasearch into changes in life expectancy will yield an increase of ~2 years per decade for the past 100 years. And it is speeding up. So, if you are 35 yo or so, as I am today, an assumption to live to 85 is probably somewhat conservative (and even more likely irresponsible / risky). One of my grandmothers lived to 87, the other is alive and well at 90. My grandfathers lived to 72/77 (they died 20/30 years ago).

    But you are right about the fact that our life was paid for by our parents before we entered workforce, so only the ages since 23/24 till ~85+ should be considered.

    Maciek.

  49. b_thunder says:

    I do have questions regarding points 1 and 3:

    First, if the retirement age keeps going up, so will the proportion of existing workforce, which will result in FEWER open vacancies for new entrants into the workforce. Not only the rate of unemployment will be higher, the number of younger people who are unemployed will grow substantially. Somehow I do not think it can lead to a formation of new middle class families, and as a result to a stable economy, stable society.

    Regarding point #3: Yes, with health care we’ll all may be forced to pay in, but there will be benefit if any person loses insurance coverage. I just do not see how someone can be FORCED to buy into an insurance scheme (yes, a scheme, sort of like Ponzi, that relies on future contributors to pay existing “members”) and then denied payouts. It’s a breach of contract.
    You say Soc. Sec. is technically an “insurance?” Fine, but what about someone who by the age of 35 continues to work, but has already accumulated enough wealth not to need Soc.Sec.? If payouts will be means-tested, there should be a “means test” that would qualify his as wealthy enough that he should have a choice to DROP this (now) unnecessary “insurance” rather than being forced to pay in for another 30+ years! Then it becomes another “stealth” tax that encourages people waste their wealth away rather than accumulate it.

  50. Joe Friday says:

    “I am going to hazard the surprising forecast that Social Security will never run out of money.”

    That’s the current forecast of the present system by the actuaries:

    http://www.ssa.gov/OACT/TR/2009/lr4b3.html

    Fully funded through 2085, which is the limit of the 75-year projection. The “Low-cost” forecast has repeatedly been the most accurate.

    No increases in retirement age or taxes required, and Social Security is already “means tested”, as there is a maximum monthly benefit no matter how much you’ve paid in.

    Social Security doesn’t need “saving”.

  51. Bokolis says:

    Until we’re given the option to decline benefits (and, accordingly, not paying into the fund), there is no discussion. Personally, I have no intention of sticking around once my physical prowess deserts me. If I’m no longer able to slap up people half my age- ok, maybe 2/3- 65 is long enough for me. Since all that life insurance won’t let me, self-checkout, having a heart attack (or drowning) while trying to bang out a triathlon, or wrecking the Harley would be a suitable death.

    The point is that I have NO intention of sticking around long enough (which I figure to be mid-70s, by the time I would get there) to collect…why should I have to pay into it? For you old pricks? If my half of the FICA had been going into, say, even something low-risk/low-return like an insurance company annuity, I’d probably get a higher monthly payout if I started drawing at 50.

    And, Tranzor Z is dead on about Medicare…just returning Pharma’s lobby money.

  52. wrongway says:

    Serious question – Why in the world is there a cap on paying this tax? Seems like it should be the opposite – a progressive tax where the more you make, the higher percentage you pay. It should also be charged on capital gains to keep certain members of society (you know who you are) from gaming the system. Also, it is obvious to any reasonable person that there should be means testing. This system exists to provide people with a decent retirement, not to pay extra income to the rich.

  53. Transor Z says:

    Hey Maciek, kudos for persistence, kid, but I wouldn’t call 85+ an “unrealistic” life expectancy number for the U.S.; I would call it an “incorrect” life expectancy number for the US.

    Here’s the chart you want:
    http://www.ssa.gov/OACT/STATS/table4c6.html

    The life expectancy for someone 65 years old in 2006 was about 82. But there are some complicated actuarial considerations. For example, more than 10% of the cohort born in 1945 is now dead. That includes persons who paid into SS during their working lives but never made it to retirement. You also have to factor in survivor benefits to spouses (usually female), etc. etc.

    The issue here is that nobody treated SS like Al Gore’s famous “lockbox” and Congress got their greasy little fingers in there to play budget games with the FICA (formerly SS) tax revenues. Under ERISA, an employer who commingled employee retirement funds with operating might have some ‘splainin’ to do. But not our dear Congress.

  54. ZedLoch says:

    Saving Social Security sure does look easy. It’s got a huge surplus at the moment, and still climbing. Adjusting the retirement age by a year or two in a staggered manner isn’t hard. Removing the FICA tax cap should be easy.

    But then we run into political reality.

    I call it “fiscal NIMBY-ism.” Cut spending, just not *my* spending.

  55. jack1123 says:

    This article does a great job of confusing people. Social Security did not cause our deficit, much to the contrary, its surplus has generated a $2.5 trillion trust fund which will keep the program solvent until 2037, according to the Congressional Budget Office.

    Then, even if no changes are made (and no one is recommending that), 75% of benefits will still be covered. In response to miamiocean’s question, in 1983 Social Security was adjusted to create this surplus to cover the baby boomer generation. This hand-wringing and doomsday nonsense about the baby boomers retiring en masse and straining the system is just rhetoric touted by deficit hawks to undermine public support for a very popular and successful program that keeps millions of the elderly, disabled, and children out of extreme poverty.

    Minor adjustments to boost solvency beyond 2037 will be necessary but there is no need for drastic changes like means testing, raising the retirement age or privatization. Sure, people may live longer but that doesn’t mean they are physically or mentally capable of working or that jobs will even available

  56. NeutralObserver says:

    For all commenters under 40 years old complaining about how much more they have to pay into Social Security and their ROI on that, I have a couple of observations. You all are inheriting a huge amount of realestate (the USA) that is completely built out with railways, highways, electricity generation and transmission, water infrastructure, communications, waste disposal, educational institutions, housing and commercial buildings. Other than Social Security payments and the national debt, you receive this free of charge – a huge leg up over your competitors in developing countries. You also received a subsidized education through our public school systems and many of you received government education loans and grants. If you think you are getting a raw deal here in the USA you can always emigrate.

    Further, it is quite difficult for a person over 50 to find a job if they become unemployed. Many of the people in this situation for the current economic recession will likely never find a formal work situation again. And if you think they can just take a lower skilled position – think again. The situation is something like having your father ask you if he can mow your lawn for pay. It just seems wrong and you won’t do it. There are other factors at work also, but the bottom line for SS is that people in this situation will find that they have to spend their savings while they wait to be eligible for SS. Extending that period of no income with later retirement ages will aggravate the problem.

    Remember, we are all in this together. If you think you are somehow insulated or separate from the problem you are mistaken.

  57. Tom K says:

    Means testing. It isn’t going to happen. There are still enough people who sacrificed – passed on buying the bigger house, the new boat, the vacation home, lavish vacations, the fancy new car every 3 years, and instead saved for their retirement. Enacting means testing, essentially forcing the prudent to pay for the retirement of those who lived large and saved nothing, and you’ll open a social war like none previously seen.

  58. drey says:

    “Why in the world is there a cap on paying this tax? Seems like it should be the opposite – a progressive tax where the more you make, the higher percentage you pay.”

    Roger that. There is no tax taken on income earned beyond 200K or thereabouts which is the antithesis of a so-called progressive tax system. Crazy stuff…

    Remove this cap and you will avoid some of the more controversial measures, but not all.

  59. [...] What it is going to take to “save” Social Security.  (Big Picture) [...]

  60. madcow6993 says:

    I disagree with the argument that a higher retirement age, thus a larger workforce is going to somehow create more unemployment. If that’s your argument you would also argue that we need population control because there is some magic workforce size. A slow and steady increase in workforce should adjust for itself and in theory increase net economic activity.

  61. foxorrabbit says:

    BR:
    Everyone knows some combination of the solutions you mention is what will happen. Translating your solution to accounting-speak, SS will be fixed by taking the contingent liability and just chopping it in half (or whatever the % chop will be). Voila, problem solved. It’s roughly analogous (in reverse) to a government defaulting via inflation rather than technically defaulting.

    If you don’t have any moral objection to that, then ok, that’s your choice. The government is counting on lots of people like you to pay in full, but then get less than the implied amount promised to you back out, and to not complain about it to boot. Bend over and enjoy.

  62. michaelismoe says:

    The retirement age will rise…..

    And just how mant WalMart greeters do you think we will need in the next few years? It’s easy to raise the retirement age but who is going to hire a 68 year old?

  63. foxorrabbit says:

    I couldn’t agree more with Hugh: “All countries – but especially the US – need to bring their entitlement liabilities onto their national balance sheets.” Every company adhering to FASB must account for contingent liabilities on their balance sheet. Anyone know what GASB has to say about unfunded pension liabilities? Why is it not the same as FASB?

  64. Raised Hand says:

    Barry,

    You’re basically admitting that the fear-mongerers are correct, but are using hyperbole. Your “solutions” are among the same ones that they have proposed. The major one you’ve left out is privitization.

    Your first two points are essentially admitting that the current SS payouts are too high. That means it’s essentially running as a ponzi scheme — investments are not being withdrawn on a pari pasu basis.

    Your third one, as another commenter above points out, makes it into a welfare system subject to a whole different set of politics. It has been defended since its inception as a non-welfare system. You are deluding yourself if you think SS opponents and defenders will let you change the battle lines after all this time.

    Lastly, what is wrong with the Australian system of privitization? It instantly solves all of the problems above, and can be combined with a separate welfare system. It took a while for their transition, but seems to be stable at this point.

  65. AS says:

    Barry,
    You are saying this:
    ….Currently, FICA taxes amount to 15.30% (7.65% paid by the employee and 7.65% paid by the employer) of income. That is a big chunk of anyone’s salary, and raising that is going to be met with a fierce pushback. Perhaps a minor increase in total FICA percentage might be enacted…..

    I may well be wrong, but the way you put it, I am wondering if you have taken a look at the percentage increase in FICA taxes over the past 25 years, as well as the increase in wage base ? It is STAGGERING and an eye opener (see my link with officially published deatails below) . But has there been push-back? None that I have noticed other than talk that has had absolutely no results. I (being self-employed), have been whincing every time. To no avail, of course. This has been the biggest Ponzi ever, and who is crying wolf? A few lonely souls in the blogosphere maybe, while our elected leaders and many who fail to reflect are busy “re-education”” the slaves out there that they better get ready for a later retirement age, as well as lower ss payments, etc.

    There is no outrage, the majority is sound asleep or MANY things would be changing.

    Here is the historic wage level on which soc sec has been based, courtesy of the governmnet’s soc sec website:

    http://www.ssa.gov/OACT/COLA/cbb.html

    Separately, here is the history of the percentage creep:

    http://www.ssa.gov/OACT/ProgData/taxRates.html

    It is all out there. If every person subject to this tax had to personally write and sign a check for those contributions, we would quite possibly not have to discuss this at all. Ah, hope over experience!

    Thanks for at least mentioning this subject. It is important.

  66. Lord says:

    3 is a loser any way you cut it. It costs more to administer than it could ever raise.

  67. bart says:

    “We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power.”

    - Alan Greenspan (Chairman of the Federal Reserve US Central Bank), appearing before the Senate Banking Committee on February 15, 2005, in response to Democratic Senator Jack Reed of Rhode Island on the topic of funding Social Security.

  68. hdoggy says:

    Good post. The system will never go “broke”, it will just suck being in the system because benefits are not all they’re cracked up to be or it will suck paying for the system because because it’s a huge loss on savings potential over the course of a lifetime which relegates you to no other option than sucky benefits in the end.

  69. Kimble says:

    “As presently configured, the entitlement deficits are set to skyrocket as the boomers retire. Social Security especially is a target of persistent fear-mongering.

    This is all unvarnished nonsense. Social Security is at present, financially stable; …”

    Oh good so nothing to worry about.

    “… As it starts to run into increasing deficits, the political classes will be forced to respond.”

    Wait, so there IS something to worry about. Because changes will need to be made.

    So the people who are saying that changes need to be made are correct, and those saying that Social Security as it is right now is safe are wrong, right?

    No. Apparantly its the people you are agreeing with who are wrong. WTF?

  70. Gnatman- says:

    mark e said-

    “G-Dude,

    could you care to cite some Proofs, to support that POV?

    from this end, that is some Epic H********.”
    =========================================
    Might not have understood the context?

    How was slavery, Native American reservations, segregation, residential schools (for Native Americans), internment camps, and affirmative action not a failure to lend assistance to those of a different stripe? Racial stratification has occurred in employment, housing, education and government. Formal racial discrimination was largely banned in the mid-20th century, and it came to be perceived as socially unacceptable and/or morally repugnant as well, yet racial economic treatments continue.

  71. rmatt says:

    Only slightly broken, easily fixed:

    http://www.associatedcontent.com/article/31039/saving_social_security_by_removing.html?cat=9

    A slightly dated but still relevant proposal.

  72. cognos says:

    There is NO “unfunded liability” of social security. This is UTTER NON-SENSE!

    Is there an “unfunded liability” of national defense? Its one of the dumbest ideas ever created.

    At the same time, the reason the math even works is that the fake “future liabilities” of SS are discounted at inflation while the economy/debt grows roughly at the rate of GDP. Any comparisons on this basis show massive future liabilities (bc they fail to account for the massive future income growth at 5-7% nominal).

    Social Security is such an EASY fix.

    A) continue to increase the retirement age at 1 month per year. Yeah thats 3 more years… if you plan to retire 36 years from now. Ooohh… how scary! Even a month every 2 years… totally solves the problem.

    B) CUT the FICA tax to 3% + 3% employer match… but REMOVE the cap (currently at 100k). This is a tax cut below 250k. A tax cut for the largest employers of sub-100k workers and a tax increase for highly paid workers and their firms (Goldman, top law firms, etc).

    Besides improving the tax structure massively (flatter!, non regressive) the removal of the cap solves ALL future funding problems do to income growth. See the “cap” restricts future tax income to a smaller and smaller percentage of GDP as income growth outstrips the cap.

    This is a silly problem. It is no more a problem today than it was in 1980… in fact, we are so much wealthier it is much less of a problem.

  73. Fredex says:

    A means test by the government will end up evaluating people on their usefulness to the state. You aren’t going to like that. It won’t stop after you are done with the inconvenient Boomers.

  74. jeg3 says:

    The attack on Social Security is a oligarch scam that became public in 1983:
    “Talking about conspiracies …

    I was sent a copy of an article that appeared in the Cato Journal Vol 3 No 2, which was published in 1983. The paper is entitled – Achieving a Leninist Strategy – and in case you are wondering is about designing a campaign to privatise the US social security system.

    If you were ever in any doubt that conspiracies exist you might like to read it. It is comical but reflects how dangerous the right-wing FET think tanks are.

    The Cato Institute claim they are committed to “limited government, free markets, individual liberty, and peace”. Which is code for total joke!”
    http://bilbo.economicoutlook.net/blog/?p=10336#more-10336

    For a realistic evaluation:
    http://www.newdeal20.org/2010/06/17/how-social-security-can-gain-without-much-pain-12689/

    I say raise the capital gains tax and apply it to Social Security and Medicare.

    Most of our countries problems come from lack of leadership, and also expensive foreign entanglements that the founders of our country warned against.

  75. jtjt says:

    The Peterson, Alan Simpson et al Deficit Reduction “Catfood for Seniors” Commission is just driven by right wing ideology and very confused economic thinking. Someone up the comment list mentioned mentioned Warren Mosler and Marshall Auerback. They state very clearly why there can be no solvency problem for SS. It’s the reason why Greenspan says there’s no solvency problem, but could be an inflation problem. And it’s also why Dick Cheney said deficits don’t matter.
    Solvency concerns are an artifact of pre 1971 gold standard economic logic.
    Inflation can be controlled with interest rate and tax policy.
    There is no problem for Social Security.

  76. Jason Ruspini says:

    Retirement ages absolutely have to go up, one way or another. It wouldn’t be too difficult to phase this in, aside from the class aspect since delaying retirement would be harder on workers in lower-paying, more physical, jobs. Therefore means-testing is doubly attractive as it can be offered to make a legislative deal to up official retirement ages. Nor can this be held up out of fear that a means-tested program would be a politically weak one. Such talk is nonsense, like having a gunshot wound and being worried about ruining your favorite shirt.