Looking at Social Security in a Different Light

I found this to be interesting:

Most economists will tell you that the real problem with Social Security is demography. (Here's William Poole). The fraction of people over 65 will keep rising, implying a growing dependency ratio.

The problem is that this is only the ratio of retirees to working-age people. But wouldn't a better measure of dependency just be the ratio of workers to people? When you think about it this way, the aging of the population is balanced by (a) the fall in the fraction of children, and (b) the rise in female labor force participation. As one website that I wouldn't normally like explains:

It's the overall dependency ratio—–the number of workers relative to all non-workers, including the aged, the young, the disabled, and those choosing not to work—that determines whether society can "afford" the baby boomers' retirement years. In the 1960s we had 1.05 workers for each dependent, and we were building new schools and the interstate highway system and getting ready to put a man on the moon. No one bemoaned a demographic crisis or looked for ways to cut the resources allocated to children; in fact, the living standards of most families rose rapidly. In 2030, we will have 1.27 workers per dependent. We'll have more workers per dependent in the future than we did in the past. While it is true a larger share of total output will be allocated to the aged, just as a larger share was allocated to children in the 1960s, society will easily produce adequate output to support all workers and dependents, and at a higher standard of living.

Hmm, I hadn't though about that.

Entitlement Spending Could Top 75% of Budget by 2030

Robert Samuelson notes that there is not enough talk about entitlement reform, either out of the Presidential candidates nor out of the think tanks. This is a problem, of course, because in about 23 years or so, entitlements could eat up 75 percent of the federal budget according to the Congressional Budget Office:

The aging of America is not just a population change or, as a budget problem, an accounting exercise. It involves a profound transformation of the nature of government: commitments to the older population are slowly overwhelming other public goals; the national government is becoming mainly an income-transfer mechanism from younger workers to older retirees.

Consider the outlook. From 2005 to 2030, the 65-and-over population will nearly double to 71 million; its share of the population will rise to 20 percent from 12 percent. Social Security, Medicare and Medicaid—programs that serve older people—already exceed 40 percent of the $2.7 trillion federal budget. By 2030, their share could hit 75 percent of the present budget, projects the Congressional Budget Office. The result: a political impasse.

The 2030 projections are daunting. To keep federal spending stable as a share of the economy would mean eliminating all defense spending and most other domestic programs (for research, homeland security, the environment, etc.). To balance the budget with existing programs at their present economic shares would require, depending on assumptions, tax increases of 30 percent to 50 percent—or budget deficits could quadruple. A final possibility: cut retirement benefits by increasing eligibility ages, being less generous to wealthier retirees or trimming all payments.

It is no wonder that politicians are so quite, none of the current solutions offer any political cover and political cover is what politicians want more than anything else.

Samuelson posits an idea to get the think tanks to at least put pen to paper--a proposal that may not have legs.

Simply put, our political leaders are going to have to make some changes. The problem is that those changes will likely be late in coming because Congress has little ability to deal effectively with problems of the future, despite being paid to do so.

The problem that we as a nation face is that none of the above mentioned proposals are that appealing. So far, the dilemma has been posited as:

1. Raise Taxes
2. Cut Benefits (including raising eligibility rates, which is cutting benefits entirely to individuals ofa certain age)
3. a combination of the two (which is far more likely right now)

But must we be wed to these concepts? Are there other alternatives?

If there are any alternatives, I have not heard of any. I would like to hear some.

Advice on Social Security

I liked this short little post over at Coyote Blog on Social Security, particularly these last two points:

If you have some control of when you you earn your lifetime income, try to earn as much as you can in the next 10-15 years. After that, taxes are almost sure to go up substantially. It would not surprise me to see top marginal rates back well above 50% again.

Democrats in Congress are pushing for new welfare programs, particularly socialized medicine, right now because they must understand that in 10 years, the window for major new spending programs will be closed. The pressures in a decade will be for program cutbacks as costs really start to balloon, and I can't imagine that new transfer programs will be taken seriously as the old ones eat up a larger and larger part of GDP. Of course, my point is that this is the last time that such a program would be politically feasible. From a financial management point of view, we are past the point where adding major new social programs makes any sense. In fact, adding such a program now would be like a guy who has gotten over his head and knows he can't pay his credit card bills taking his last money out of the bank and buying a plasma TV.

Coyote also points out that if you are under 50 and in the top 40% of earners in this country, simply forget about getting Social Security beneifts.

I had pretty much given up on getting SS about 10 years ago, although only recently has the savings rate in my household gone up. It has taken a hit due to those nasty student loan payments, but we are trying.

Why Not?

Yesterday Speaker Hastert and Majority Leader Tom DeLay called the Bush Administration proposal to increase the wage ceiling for Social Security Taxes, calling it a tax increase on the wealthy.

I certainly don't buy into the Democratic rhetoric that the Bush Administration and the GOP are all about tax breaks for the rich. The richest 1 percent of Americans pay probably 20 percent of the income tax revenue in the country, so a tax break for them is justified since they are footing a larger share of the bill than anyone else.

But in this case, I think the Hastert and DeLay have this one wrong. Most taxes are about the redistribution of wealth to pay for necessary government programs. In exchange for their tax breaks, which will be made "permanent," the wealthy need to consider giving a little up in Social Security taxes. It is better to pay now, than later when the costs of supporting the elderly go up.

Raising the wage ceiling is not a silver bullet, but with the Bush plan, they need to come up with some way of regaining some of the lost income for the system. This is one way to do it.


Idea to Raise Social Security Wage Limit Criticized (washingtonpost.com)

Why Is Private Accounts Such a Bad Idea--It's Not New

As I wrote my previous post, I was struck by a thought--private accounts are not new and government investing is not new. All over the country, states manage pension funds through private investement. In fact, one of the largest, if not the largest, institutional investor is CalPers, the California pension fund manager. Calpers is a defined benefit plan, like Social Security, based upon age, years of service and a few other variables. They provide financial and health benefits. Members of the pension plan pay into the system, at a rate of $2.2 billion in 2003-2004. Those funds are then managed by the CalPers board in an attempt to increase the revenue through investments. I 2003-2004, the plan earned some $24.2 billion in investment income. The system did lose money in investment incomein 20000-2002, about $21 billion, but have obviously made that up.

If they system works for California public employees, why can't it work for all Americans? By the way, CalPers was created by the California legislature in 1932, which is about the time the Social Security Program was making its way through Congress. Hmmmmm.....

by the way, are you worried about corproate scandals and malfeasance affecting public investments. Never fear, if the federal government becomes the largest institutional investor in the country, you can bet that it will have the clout to ensure proper corprate governance among the companies it invests in. CalPers has a corporate governance program where is contiually seeks to improve the corporate governance practices of the companies it invests in. The influence is huge and the program, proven over time.

For the First Time

Morton Krondake, in Roll Call, has finally raised, perhaps for the first time, a proposal by Sen. Lindsay Graham to increase the cap on wages subject to Social Security taxes.

Since most Americans do not make $95,000, they are unaware that only the first $95,000 of someone's salary is subject to the 12.4 percent tax rate. Thus, in what Democrats could conceivable argue is a true upper class tax break, the very rich do not pay into the system more that $11,780 a year. Assuming Sen. Graham is able to convince the rest of Congress to raise teh salary cap to $200,000 and lower the rate to 11.4 percent, the few people out there making $200,000 would pay almost $22,800 per year into the system, a difference of $11,020 or double what the truly rich pay into the system. With the increasing salaries in this country, such a move is guaranteed to bring in more money.

If President Bush were to support such an idea, he could kill two birds with one stone. First, he can increase the amount of revenue being brought in through the Social Security tax by increasing the salary cap. Second, he can honestly say, with a straight face, that although there was a cut in the tax rate for all Americans, the super-rich are actually paying more than the average Joe--a PR move sure to deflate the sails of the Democratic leaders.

Democrats Yield Social Security Initiative to Bush

My Fantasy for Social Security Reform

Not that I want to jump on the bandwagon of talking about Social Security Reform, but I had a dream last night to reform the social security system.

First, we have to get the President and Congress to agree that Social Security is a matter of national security--which it is--sort of.

Once delcared that Social Security is a national security problem that demands secrecy in it proceedings, you go and get 25 people, lock them in a hotel, make them work 12 hours a day and talk to each other every day. This group of 25 people will have six monhts to come up with a plan that they will present as a group. They will work in secret (like the Framers did in Philadelphia). They will have access to any an all data that can be found by the Library of Congress, experts and people.

the end product a plan, produced without all the grandstanding and partisan politics. The proposal they issue will be signed by everyone--no partisan labels, no majority, no minority but a panel of 25 experts.

The plan goes to Congress for an up or down vote. No amendments, no debate, just a yeah or nay. If the plan fails, send the group of 25 back for a few more weeks. Then another up or down vote.

That is my dream--but it will probably stay just that--a dream.

The fact of the matter is that we are not going to be able to generate reform anytime in the near future because there will be too much posturing and pandering. Furthermore there are not enough people in Congres that have the balls to stand up and say, passing this legislation is more important than getting re-elected.

This is the case whenever there is something difficult to do. Not enough members of Congress remember that they are representatives elected to make the tough decision and that sometimes you have to say to your constituents this is one of those things that we have to do, like it or not, re-elect me or not-but this is what I'm going to do.

But alas, balls and spines are a rare commodity in politics.

Social Security Revisited

Yesterday, I posted a note that President Bush didn't have to run for re-election and he was going to have to deal with a Congress that did have to run. Looks like Congress is setting things up.

CNN.com - Some�Republicans wary of Bush's Social Security plan - Dec 22, 2004