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December 18, 2004

Social Security Brouhaha

Social Security appears to be the topic of the day. The WSJ weighs in. What started out as a good idea has fallen victim to rising life expectancy and falling birth rates: the pool of workers available to pay into the system is simply going to be insufficient to support the bubble of retirees collecting from it several years from now:

Over the next 20 years, as the Baby Boomers start retiring, the number of retirees will jump to around 77 million from 47 million today. The worker-to-retiree ratio will drop to two to one, and real returns for some could be negative.
The Social Security system will start running a deficit by 2016 when benefits exceed annual payroll tax revenue. The "Trust Fund" surplus will be totally eaten up by 2042 (or a decade later, depending on economic and demographic assumptions). Then Social Security will have to rely solely on revenue from the payroll tax that will not be sufficient to pay benefits.
The immediate problem is that payroll taxes during the surplus period that began in the 1980s were not saved in the mythical Trust Fund; instead the taxes were used to finance other government spending. The Fund is merely the repository for special-issue bonds that are a liability to the federal Treasury. In order to redeem these bonds, the government must increase taxes or borrow (thus making concrete, or recognizing, the debt the bonds do in fact represent). And we're talking about huge amounts: Bonds credited to the Trust Fund now exceed $1.5 trillion. By 2016, when the shortfall begins, that figure will have grown to over $3.2 trillion in today's dollars.
This isn't just an accounting crisis. According to figures from the Congressional Budget Office, Social Security is running at about 4.4% of GDP and revenue at about 5%. While revenue is expected to stay fairly constant, outlays will rise to 6.1% of GDP in 2030. Combine Social Security with Medicare and Medicaid, and spending is running at 7% of GDP. By 2030, when most of the boomers are retired, spending on these three programs will shoot up to almost 15% of future GDP.

So what's the solution? William F. Buckley has an interesting perspective: Social Security has always been something of a shell game.

It becomes clearer, day by day, that the talk about reforming Social Security is an ideological debate. The New York Times’s summary on December 17 is useful: “Away from the conference [called by President Bush during the week], some opponents of Mr. Bush’s approach, mostly liberals who want to preserve the current Social Security program, said in interviews that the administration was exaggerating the scale of the problem to create an air of crisis that justified radical but unnecessary changes like creating private investment accounts.”

Buckley points out:

Conservative critics pursue their long war of attrition. It begins with the question: When should a recipient be entitled to receive money?
Here the liberals won the battle decisively — payments would not correspond with health. True, by the year 2027, Americans will start receiving payments only on reaching age 67. But if the spirit of the whole arrangement were faithfully exercised, payments would not begin until approximately age 73. The fiscal problem would not evaporate, but it would have been hugely diminished.

This is an important point: with Americans living - and living in good health - longer and longer, delaying payout of retirement benefits would have a huge impact on the system. Tying payouts to disability would be one way to achieve a savings.

Another would be to eliminate the income cap on FICA taxes. Currently, only the first $87,000 earned is subject to FICA taxation at 6.2%. Despite being both a Republiscum and belonging to a household that would be very much impacted by such a measure, I actually have no problem with this suggestion, especially if I were allowed to manage my own retirement account. I've always been somewhat mystified by it - it seems somewhat regressive to me.

The American Prospect is sceptical of the Bush plan (quelle surprise!):

The Bush scheme has huge defects. The basic Social Security benefit would have to drop by 25 percent to 50 percent after a transitional period, because payroll-tax receipts now pledged to Social Security payouts would shift to funding the new private accounts. Even people who did not choose private accounts would end up with far lower benefits than under present law.
With private accounts, you’re in big trouble if you happen to reach retirement age when the market is down, or make bad investments, or live too long. Also, the current system is redistributive: Low-income workers get a higher percentage of their lifetime earnings when they retire than affluent retirees do. But with individual accounts, there’s little redistribution except for a very meager minimum benefit, and hence more poverty in old age. Last, this shift would increase the public debt by about $2 trillion -- on top of deficits that every reputable economist considers already dangerously high.

And in the bolded text lies the real objection, I suspect. 'Nuff said.

Posted by Cassandra at December 18, 2004 08:45 AM

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Comments

Face it, Social Security is a Ponzi Scheme that the 'Dems have annointed as the Holy Grail of their platform.The system MUST be overhauled, the math just doesn't work out as us Baby Boomers reach retirement age.Yet the uproar over W's "intention" to reform the system is deafening.Thank God for my 401k which has performed admirably despite being tied to the stock market.Raising the tax ain't the answer.Heck, I'd sign up for "privatization" Monday if I could, and I'll retire as soon as possible.I'm just waiting on the usual 'buzzwords' to come out of the Lib's pie-holes........like how the Social Security tax is regressive, it favors the rich, poor people shoulder the burden, etc. etc.Unless we hold the line here, the Geo. Soros wing will want to legalize drugs, with the profit going to Social Security.

OK, finished ranting.

Greg

Posted by: Greg at December 18, 2004 03:14 PM

We've waited for years in the military for some kind of investment program - they finally came up with the Thrift Savings Program - a non-matching program - now that the Unit is close to retirement.

Figures... Oh well...better late than never. I keep telling him at least he didn't take a bath when everyone else lost money: we didn't have much in the stock market then and my funds did well.

Posted by: Cassandra at December 18, 2004 07:52 PM

Social Security would be an illegal scam if the same deal were offered by a private insurance company. Every one of the officers would be thrown in jail for trying to peddle such a fraud.

Let me out now, and keep what you already took. I'll never see it either way.

Posted by: KJ at December 18, 2004 09:45 PM

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