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“Saving” Social Security

Posted By Barry Ritholtz On June 17, 2010 @ 7:25 am In Mathematics,Politics,Taxes and Policy | Comments Disabled

“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, [1] 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 [1]
Gregory Viscusi and Helene Fouquet
Bloomberg, June 16 2010  
http://www.bloomberg.com/apps/news?pid=20601087&sid=aigMGWBIRZB0&

Social Security Offical Website [2]
http://www.socialsecurity.gov/


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2010/06/saving-social-security/

URLs in this post:

[1] how to get its welfare state in order,: http://www.bloomberg.com/apps/news?pid=20601087&sid=aigMGWBIRZB0&

[2] Social Security Offical Website: http://www.socialsecurity.gov/

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