Tuesday, March 16, 2010

"Hey, Is That an Iceberg?"

The iceberg we knew was coming for the past 40 years, but did nothing to change our course? Yeah, that one? Yeah, it's here.

But do not worry.

You want to know why?

Because Obama will fix it.

A 20 year old philosophy major from the suburbs told me so.


Hot Sam said...

There is not nor can there be any "lock box" for Social Security.

The federal government had no power under the Constitution to institute Social Security, so FDR side-stepped the Constitution by using specified powers.

Social Security uses the taxation powers of the government to raise the money. Ostensibly this tax, shown as FICA on your pay stubs, is "earmarked" for Social Security. It actually goes straight to the Treasury and can be used for any purpose.

FDR used the expenditure powers of the government to provide the payments. Those payments need not bear any relevance to the money which was collected. Social Security has always been an "honor system" with no honor.

So during times of economic prosperity or when the working class population is bulging, SS taxes are pouring in.

What is the government to do with this extra money? Hide it under a giant mattress? Invest in the stock market? Lend it to foreign governments?

Really, the only things they CAN do with it are 1) spend it, or 2) buy back previously issued government bonds.

Social Security is a pay-as-you-go system: current workers pay for current recipients. When there's a bulge in the population which reaches retirement age, then the system becomes insolvent except for the PROMISE of the federal government to pay the benefits.

With people living longer, benefits increasing over the years, and a baby boom, it was inevitable SS would go belly-up. The founders of SS were not oblivious to this possibility - they just ignored it.

To make matters worse, the government granted survivor benefits to spouses married to a recipient for at least 10 years. In theory, if a man got married and divorced at 15, 25, 35, 45, 55, 65 and then retired and died, there could be SIX ex-spouses drawing benefits from his singular contributions.

Congress tacked on disability benefits to drain SS even faster. COLA increases based on the CPI which overstates inflation, so they are better off year after year.

Any of the proposed "fixes" for Social Security break the promise to the workers who contributed into this boondoggle.

If they raise the retirement age, they are cheating current workers out of several years of payments.

If they raise taxes, they are reducing the rate of return on investment for current workers.

If they apply a "means test", then they have not established a retirement system - they've created a redistribution system.

If they cut benefits, they are breaking the promise.

What promise? Social Security was never originally intended to be the sole source of retirement income. Yet millions of people retire with less than $10,000 in savings. Apparently these people didn't get the original message.

If you are unmarried, pay into SS your entire adult life, and die before receiving benefits, ALL of your tax money is transferred to other people. You don't get to bequeath that money to your favorite charity or friend.

The only solution to SS is to completely privatize it. YOU would own your own retirement account. Like Chile's plan, you would have to invest in approved pension funds which rebalances your portfolio as you approach retirement age. When Chile did this, benefits TRIPLED. Of those who had the choice to stay with their SS system or opt out, 95% of them opted out.

With rates of return to investment far higher than SS, we could impose a tax on benefits which could shoulder the transition costs and still yield better results for the current generation of workers. It's unfortunate, but this tax has to be paid - we can't pass the hot potato any further.

Social Security is also redistributive in its benefits structure. The poor get more benefits relative to their contributions than the rich. A person my age and income level can expect to LOSE $200,000 to Social Security.

Help! Police! I've been robbed!

We do not need to "save the system." We need to "preserve the promise."

Anonymous said...

Awww, what a cute problem you Americans have got. Your Social Security funds last only until 2037?

Sorry for the sarcasm, but if you wanna see a real iceberg, come to Germany! Our politicians are so wise that they decided long ago that payroll contributions are not enough (19% on wages). So, now one third of our pensions are paid out of federal tax money. This increases our federal budget deficit by 4% of GDP. Hooray!

CBMTTek said...

Demonstrating exactly why all the Health Care Reformers need to be looking further ahead then their own navels.

What will health care reform cost us in 10, 20, or 50 years?

For that matter, what will the stimulus and jobs bills cost us over the same period of time?