Let’s re-think this thing called Social Security

2013

I keep rethinking the issue of Social Security. One part of me says Americans should not rely so much on this program and the other says, get real, Social Security is essential to nearly all Americans; that is not going to change because the vast majority cannot or do not save adequately for retirement and never will. All this is one of the consequences, good or bad, of government entitlements, sooner or later they are irrevocably relied upon.

The far right’s idea that private accounts or some other such thing will do the trick is nonsense. The far left’s idea that everything is just fine and we can go on our merry way is likewise foolish.

So what to do, what to do?

We face the facts and recognize that pie in the sky fixes are not the answer and that we not only need to preserve Social Security, but to improve it. In fact, I will go so far as to say, we should find a way to actually increase the benefits for the next generation. No, I don’t like more and more big government, but ignoring reality might be far worse. Unless we find a way to change human nature, I think we are stuck with what we have.

One of the key concepts we must decide is how far toward a welfare program do we want to push Social Security. Simply put, up until now the wage base for the Social Security tax was also the wage base for the calculation of the benefit. Today there is a body of thinking that says we should raise the wage base for taxation, but not for the benefit calculation. This means that higher income people pay more and receive less and that lower income people no longer are funding their own benefit (in theory), but are being subsidized by others, a move that may serve to discourage even those individuals inclined to save for retirement.

What do you think, should we change the very concept of Social Security?

Social Security is so complex and provides so many benefits beyond simply a pension, that it is hard to deal with. Some people receive a benefit when they never worked, multiple wives and ex-wives can receive a full spousal benefit as long as they were married for ten years, disability can start at any age, 100% survivor annuity benefits are generous by pension standards, etc.

As much as it pains me, I have come to a way of thinking that Social Security must be a form of forced savings meaning gradually raise the benefit, by gradually raising the tax employees and employers pay. Before you anti-tax folks throw me under the bus, give me your thoughts on an alternative that actually works in the real world for the average American, the under educated, under informed, undisciplined, lower income, unreliable, irresponsible American. And don’t tell me tough luck for them, as we all know it doesn’t work that way.

A recent editorial in the New York Times makes several suggestions:

To ensure that the system is paying proper COLAs, Congress should instruct the Bureau of Labor Statistics to develop a statistically rigorous index of inflation among retirees.

Raise the level of wages subject to Social Security payroll tax to about $200,000 from the current $113,700.

A sensible change is to raise the payroll tax rate, currently 6.2 percent for both workers and employers. The rate has not been raised since 1990. A one percentage point increase could be phased in over 20 years and still raise enough revenue to close about half of the funding gap.

The Times also throws in this little tidbit:

… trimming benefits for upper-income recipients, who live longer and draw larger benefits, could close about 10 percent of the system’s long-term funding gap.

The above suggestions merely attempt to keep Social Security going as is. Is that what we want and need?

I have long said that the COLA needs revision. The Times idea makes sense, the COLA should be geared to what retirees spend money on. However, the COLA also needs other changes in my view. For example, the COLA should not begin the first year after retirement, but at some later date. It should not be fully automatic, but subject to review as to each years impact on long term liabilities and funding requirements. Finally, it should be paired back for the highest income levels. That is, only make adjustments every two or three years, not every year.

The payroll tax percentage must be raised gradually over several years and that increase must be sufficient to increase the basic retirement income benefit available at normal retirement age (not applicable to ancillary benefits). Such increase should be skewed more to employers rather than the employees. For example, say the increase is 1.5% over many years. Employers should pay 1% and the workers .5%. Why, simply because employers have gained over the years through the elimination of retirement plans and in larger employer cases the elimination of retiree health benefits, plus it is in the best interest of all employers for workers to retiree with adequate incomes.

I don’t buy the idea that the taxable wage should be raised without an accompanying increase the the wage base used for the benefit calculation. However, there is a middle ground. Increase the wage base while at the same time revise the benefit accrual formula so that the additional benefit based on higher wages accrues at a lower rate than for the bulk of income (say the current wage base as indexed).

While we hear a great deal of angst over Social Security, it is usually related to lower income and the poor. The unfortunate fact is that the middle class, and upper middle class will come more and more to rely on this program. We have made available more tax advantaged retirement vehicles than we need and still retirement saving is inadequate.

We know we have a coming crisis not only with Social Security, but with retirement income in general. What are we going to do about it?