SAVING SOCIAL SECURITY

Believe it or not most of the proposals, formal or not, put forth by various politicians for Saving Social Security have the equivalency of the plot to Saving Private Ryan—they are pure fiction. Even more so there is no need to “save” Social Security. Even conservatives concede that the Trust Fund will take care of retirees with no changes for at least the next twenty years.  http://www.ssa.gov/oact/trsum/index.html

But the system does require some tweaking to keep it on the right track. Surprisingly, this is fairly easy to do and can be accomplished with no pain to beneficiaries.

Any policies going forward must reflect fact, not assumptions and must be applied through achievable goals from an actuarial standpoint, not to provide check marks for the agenda of anti-Social Security ideologues.

One common claim made about SS is that our life expectancy is so much greater now than when the program was established in the 1930’s. Yes and no. Is the life expectancy from birth much higher? Indeed, yes, but that is because so many children born back then did not survive into adulthood.

Thus, as more children grew into adults the number of workers paying into the SS Fund grew over the years, more than anticipated at the time. But, interestingly if you reached the retirement age of 65 in 1940 your remaining life expectancy (the time when you would receive benefits) has only increased a few years.  http://www.ssa.gov/history/lifeexpect.html

It is true that the base of workers is decreasing presently due to declining birth rates. However, closer examination reveals this factor is minor.

There are those who suggest that privatizing Social Security…permitting private investment by individuals rather than conglomeration into a central fund…is the answer. The argument is that the potential return is much greater than what the funds currently earn. Can’t dispute that.

However, what can be disputed is that people would:

A. actually fully fund their own retirement by this method  or

B. that these investments will perform as advertised.

First of all, how do we ensure that workers so invest? The only way is to mandate their involvement by law. Did we not just go through all kinds of problems mandating individuals have health care coverage through private companies?

Second,  a common vehicle for such retirement planning privately is a 401K plan and during the recent recession these plans were bleeding losses and many have yet to recover. Additionally there is no guarantee these private investments will be profitable at all. How many young people will invest speculatively and lose all their money with the thought they can recoup as they age? And today’s younger workers are not jumping into the available investment pool with alacrity. http://www.cnbc.com/id/42321520/Gen_Y_and_Retirement_Are_Young_People_Saving

Of course they do have SS, designed as insurance against total poverty in one’s old age. But if SS is turned into a private option, why should we believe that the younger generation will be any more diligent in socking sufficient funds away to allow comfortable living when they no longer work?

In 1983 some major changes to Social Security were made which were believed at that time to be more or less a permanent solution. The most important of these was to raise the amount of income subject to SS withholding.

Today that figure is just over $110,000 and next year will be $113,000. The problem is that upper incomes have grown so much more than middle class ones that, while historically the tax applied to about 90% of ALL income, today it only reaches 84%.  http://economistsview.typepad.com/economistsview/2011/02/why-social-security-isnt-a-problem.html

Therefore, it is imperative that the income subject to the tax rises more quickly. Exactly how much I will leave to the actuarians, mathematicians, and accountants. And, while if I were in the income bracket that would be affected I might find myself opposing this step, since the limit should have been higher for years, the earners in this category have escaped paying this for several years already.

Finally let me speak to one idea that has been floated, even by some folks not seeking to destroy the program entirely.

Presently increases in benefits are determined by a Cost Of Living Adjustment (COLA) formula. That same formula is not uniformly applied even against other federal government programs. For example the commission that recommends Congressional raises uses a different formula. Thus, in 2010-2011 when no increase in SS benefits was forthcoming, Congress was awarded a raise. (To its credit, Congress voted to reject the raise each year.)

This year, 2012, we SS beneficiaries did get a hike in our monthly pay. In my case it was about $36 or $432 per year. Think that covered higher costs for food, utilities and gasoline over that time?

Now a proposal is on the table to further adjust the SS COLA formula in order to see lower future raises. I have a one word response. NO!

Although the payments into the SS fund are considered to be a tax, as SS is an insurance program, I suggest looking at those payments as insurance premiums instead.

Thus these are relatively small amounts to spend to have the assurance that, no matter what else transpires in your life, you will at least have an income in your old age and will not have to go begging door to door.

Sounds like a bargain to me.

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Comments

  • MZ  On December 4, 2012 at 11:05 PM

    The only thing we have to fear is politics itself…

    • umoc193  On December 8, 2012 at 12:27 PM

      I just wonder if you have any additional or alternate suggestions to mine.

      • MZ  On December 9, 2012 at 8:52 AM

        I agree that one need not privatize social security. But I do believe the role and use of 401K plans should be enhanced. To whit: Increase the amount one can place in a 401K beyond the current limits – up to say 10K a year. Since this would represent a significant increase in the country’s saving rate, we get the bonus of more well-funded retirement plan. Liberalization of 401K usage, like the temporary measures in place now would also promote the extra savings.But in exchange for this, let’s remove the upper limit for SS taxes. This would allow for a more reasonable COLA and set of SS benefits. While you do not discuss means testing – having net worth/income over a particular threshold should disqualify one for receiving SS benefits. If you want to play, you should be willing to pay.

        • umoc193  On December 9, 2012 at 3:17 PM

          I don’t disagree with anything you said, but one of the big problems with 401K’s is that too few people eligible for them actually establish them and those who do don’t always fully fund them. Here I’m speaking of those able to do so.

          I’m not intimately familiar with the rules about borrowing from a 401K, but I have heard anecdotes about folks doing so for non-emergency reasons which means they are diminishing long term returns for immediate gratification.

          I am very close to a professional financial advisor who agrees that SS should not be privatized, though he and his colleagues would personally benefit from the commissions generated.

          • MZ  On December 12, 2012 at 9:27 AM

            While I chafe under undue government regulation, perhaps this is a place where government can step in. Make a sliding scale to require people to fund a less restrictive IRA (as opposed to the draconian penalties one must endure to break open an IRA to say fend off starvation or other negative byproducts of living in capitalist system). Using 10K as the new maximum (straw man and easy to do the math), say taxable income was 20K, then there would be no requirement for an IRA investment. At 35K a 10% of total (1K) would be mandatory. at 50K, 20%, etc. Using this in times of long term unemployment not covered by regular unemployment, medical disaster, etc. without penalty would make this sequestration more popular and less painful. Sometimes enforcing a good thing and making something good better are proper functions of a government.

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