Social Security Reader
The third rail of American politics is up next in our look at the policies of Senators McCain and Obama. In short, social security is a government mandated transfer of money from today’s workers to today’s retirees. The program began during the Great Depression with the passage of the Social Security Act on August 14, 1935. There is a very long and detailed, but brief, history on the Social Security Administration’s website which includes such gems as the fact that olive oil was economic security to the ancient Greeks. One of the early justifications for this transfer of money was offered by an economist at Columbia University, Henry Seager, in his 1910 book, Social Insurance, A Program of Social Reform, in which he writes,
As changing economic conditions are rendering the dependence of old people on their descendants for support increasingly precarious, so, on the other hand, new obstacles are arising to providing for old age through voluntary saving. . . The proper method of safeguarding old age is clearly through some plan of insurance. . . for every wage earner to attempt to save enough by himself to provide for his old age is needlessly costly. The intelligent course is for him to combine with other wage earners to accumulate a common fund out of which old-age annuities may be paid to those who live long enough to need it.
Notice the use of “on the other hand.” So begin the reasons for President Truman’s lament, “Give me a one-handed economist!” This excerpt is somewhat pertinent today, only not for the reasons Professor Seager would have imagined. Economic security is becoming more difficult, because Social Security itself is going bankrupt!
According to the Social Security Administration’s fiscal year 2008 budget, the program’s liabilities, what it expects to transfer from workers to retirees, exceed it’s expected revenues by $13.4 trillion. The reason for this lies in the nature of the program. Social security is a transfer of money from workers to retirees. This works well as long as the number of workers exceed the number of retirees by several multiples. This ratio is expected to fall dramatically, since the Baby Boomer generation vastly outnumbers the current number of workers. In 2017 the Social Security administration will start to collect less money than it pays to retirees. This will drain the reserves that the program has built up. By 2040 the reserves will be exhausted, and the program will not be able to pay retirees their promised levels of retirement income.
The question is what to do about it? Both senators have proposals for social security which we will discuss. After we discuss their proposals, I will offer my solution to the candidates. If you’re well-connected, I would appreciate a mention to Messrs McCain or Obama.
1 comment
A recent Brookings monograph by William Gale and Peter Orszag has convinced me that Social Security can be made actuarially sound by one or more of the following actions:
* Increase the monetary reward for delaying retirement;
* Index payments to the average rise in wages, not prices;
* Subject more wages to the FICA tax;
* Make Social Security payments fully taxable for all (this is my favorite action, one Gale and Orszag don’t linger over)
(They say more, but I don’t have their book handy just now.)
I am 56 and my spouse is 53. I have done some calculations in Excel,
estimating the present value of what we will get from SS if we retire
at each of ages 62 through 70. To my surprise, retiring at an age
older than 62 pays trivially or not at all, unless one of us lives past
88 years of age. The rise in monthly payments for each year by which uptake is delayed, is insufficient.
Medicare is a frightful mess, with outlays rising 10-15% annually.
It is a mess despite the fact that all wages are already subject to the 2.9% payroll tax. The problem, I fear, is that most of us shuffle off this mortal coil in a blaze of medical costs. This is, in my opinion, a very bad use of public money. Once one is past one’s 70th birthday, the outcome of many grim medical diagnoses should be “You have X. If you want it to treated, dig into your pocket. Medicare will pay for a
bed in a hospice, and all the morphine you want. ” I have been telling
myself over and over during the course of my adult life that I am found to have cancer in old age, I should do nothing and await the inevitable. I would much prefer that my daughter have the money to enjoy. Or to leave it to my alma mater to fund scholarships.
I am cautiously sympathetic to compulsory savings for old age. Sweden and Australia do this. New Zealand almost does it. But we have to remain cognisant of the very low cost of managing a Social Security account. A large majority of the population has no business investing in anything but stock or bond market index funds.
Few people are not aware of how Social Security Old Age Insurance redistributes income. The important thing is to pay FICA tax for 40 quarters. A quarter is simply any calendar quarter during which you earn $400 of wages or of Schedule C income. Having more earning quarters, or making more per quarter, does increase your
monthly check in old age, but diminishing returns holds with a vengeance. Very roughly, if the average (inflation adjusted) wage per quarter doubles, the monthly check in old age rises only 30%.
I conjecture that Social Security works the way it does because women make up a majority of voters. Few women work full time,
for 40 years, at a job that pays handsomely. Social Security works the way it does to redistribute income from men with higher lifetime earnings men to women with lower earnings.
Are you aware that when a woman buries her husband, she has the
option of taking over his Social Security pension if she gives up her own? This is the main way my father has looked after my mother.
I see no real willingness to tackle these issues. Making Social Security and Medicare actuarilly sound makes no friends. Missteps make you bitter enemies. Is is surprising that most elected officials change the subject?
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