Solving four problems…just like that✔️

Depending on who you listen to, America faces these four problems:

  1. Social Security faces a significant income shortfall
  2. The benefits provided by Social Security are inadequate
  3. Americans for the most part are doing a poor job of saving and investing for their retirement
  4. Business’s are not paying adequate taxes and also contribute to future retirement problems by their handling of worker retirement programs or have none in the case of small business

Left to their own devices, not much is likely to change. Workers are not suddenly going to take responsibility and become prudent spenders and savers. Corporations are not going to voluntarily take on new spending for retirement programs as relatively few did decades ago.

That leaves us with the sad reality that government must step in (unless you have a better and practical idea).

The answer is simple.

Begin a gradual and consistent increase in the Social Security payroll tax percentage until the trust is sustainable. Thereafter require by law adjustments as necessary to assure ongoing solvency of the trust fund.

Immediately double the employer portion of the Social Security payroll tax from 6.2% to 12.4% and designate that revenue for increased benefits for future retirees. Yes, that may increase some consumer prices and even lower current wage increases, but it should be thought of as deferred compensation.

Raise the taxable wage cap to $400,000, but consider all those earnings in the calculation of future benefits by adjusting the bend points in the benefit formula.

Like I said, if you have a better, practical, workable and fairer solution, let’s hear it.

17 comments

  1. My solution would start with increasing the retirement age for those more than 20 years from retirement (at least raise the minimum age from 62 to 65). In order to get buy in from those who think SS won’t be around when they retire, I would allow them to designate (voluntary program) up to 15% of their SS withholdings to a personal account (IRA or similar to one). In return, the SS benefit of those people would be reduced at a rate of 2x the percentage they direct towards the personal account (30% reduction for those doing the 15% max).

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    1. Goodbye “Hello girls”.

      “The automation of telephone operation is among the largest discrete automation shocks in U.S. history, and as such it provides a unique opportunity to study what happens when technology replaces an entire major category of work, and in particular an entire major entry-level occupation.”
      (NBER WORKING PAPER 28061)

      An article in 1980 claimed that, without automatic dialing, –every– female over the age of twelve would need to be a switchboard operator (“Hello” girls).*

      Anyone suggesting increasing the retirement age is putting the cart before the horse. You don’t understand the concept of “labor saving” devices and industries. We don’t need jobs, we need goods and services. If we have a sufficient supply of those with fewer and fewer workers (we do), requiring people to ‘work’ longer is worse than useless. It is counterproductive; a waste of valuable resources and infrastructure, make work jobs, featherbedding.

      *Not misogynistic. Males typically proved to be more trouble than they were worth as operators.

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  2. Members of Congress have their own ideas (so this effort is futile).

    As they say, when you find yourself in a hole, stop digging. So, first step is to freeze the eligibility and benefit formula – forever. Then, if Congress wants to do something special to buy votes in the future, well, they can pass a separate piece of legislation and a separate funding solution.

    One last change to create some certainty, some reliance – offer a guarantee where a taxpayer (and spouse, if applicable) die prior to receipt of a return of their contributions. The guarantee is simply a nominal dollar return of taxes paid to any surviving children. Amazing how people are willing to participate where they know with some certainty that they won’t lose their nominal, dollar amount of contributions – else, the only guarantee is $255.

    Second, change the program from an entitlement to a contract between the government and among taxpayers. The contract can be enforced (taxes must be paid) by legally present individuals who are contributing to (have contributed to) the system. This way, no one can skip out or receive a benefit not otherwise provided by the system today.

    Third, many Americans have listened to (believed?) decades of lies told by members of Congress and the various administrations that workers earned their benefits. Most Americans never fully funded their own benefits. A handful will have caused to be contributed more than what they will receive over a normal life expectancy. Instead, Congress consistently levied taxes and benefit cuts on future generations (those too young to vote and generations unborn) when approving benefit increases. All to buy votes.

    So, no time like the present to fund those benefits. As someone once said, “don’t tax you, don’t tax me, tax the guy behind the tree”. And, as someone else once said, “the best tax is the one I owe and you pay”.

    So, the solution here is that everyone gets a haircut – current retirees, workers, etc. We maintain the “social” in “social security”. Each individual is assessed a burden that, over time, will result in a sustainable benefit program, in balance at 1, 5, 10, 25, 50, and 75 years (so there is intergenerational equity). The burden is calculated in a manner to retain the “social” focus of the current design. Then, you give each individual, taxpayer or beneficiary, a choice of haircut – a reduction in benefits, an increase in taxes or a combination of both (calculated actuarially, with a load for antiselection). Choices would include more taxes (taxing Social Security benefits), increases in Medicare premiums, increases in worker-paid payroll taxes, foregoing COLA, deferring commencement, foregoing increases in benefits due to deferred commencement, a reduction in benefits, etc. Each year, the actuaries update the pricetags. The default is increased taxes – payroll taxes for workers, income taxes for beneficiaries (benficiary taxes are a progressive tax rate in addition to and separate from the regular income tax). A person cannot reduce their benefit below the poverty level.

    My experience is that when people get to choose their own poison, and when they see that everyone has a proportionate share of the burden, the changes will receive broad support and the system becomes sustainable. Those who are not happy with the changes will press their members of Congress to pursue new legislative entitlements.

    Or, we can leave it up to Congress to find a new way to buy votes while sending the bill to those too young to vote and generations yet unborn.

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  3. “Begin a gradual and consistent increase in the Social Security payroll tax percentage…”

    It is already taking in more than it is paying out. Just make it pay-as-you-go and gradually increase as needed. The trust fund is already pseudo-imaginary anyway.

    Reconsider Milton Friedman’s negative income tax, for all ages.

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  4. A) Add a third break point based on 2021 taxable wage cap that has a slope of zero percent. This break point value never changes until second break point raises to match the 3rd break point, then eliminate the 3rd break point and make the slope of 2nd break point zero percent. Only after this change, remove the taxable wage cap, all wages are SS taxed just as is Medicare.

    B) Raise initial slope from 90% to 95% and lower second break point slope from 15% to 10%.

    C) Phase out post FRA delay credits by changing FRA from 67 to:
    68 for those born during years 1980 thru 1999
    69 for those born during years 2000 thru 2019
    70 for those born during years 2020+

    Addresses need for increased payroll tax revenue, enhanced low income worker SS, and longer life spans.

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    1. One step forward, two steps back. We should be reducing retirement age and/or aiming for a four day work week.

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  5. “Immediately double the employer portion of the Social Security payroll tax from 6.2% to 12.4% and designate that revenue for increased benefits for future retirees.”

    Immediately there go the jobs and here come the robots

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    1. How long before they figure out how to tax the robot’s work hours? If Congress can figure a way to do it, they will. A tax because somebody got laid off and replaced by a robot. In the meantime, the government will not see a need to train robot repairmen but keep sending kids to college for basket weaving.

      In 1696, England taxed windows because it was a sign of wealth. People bricked in their windows. Having no windows resulted in lack of light and fresh air causing health problems. Took until 1851 to repeal the window tax. Will a robot tax do more harm than good?

      In the end it might be worth the extra money to a business so that don’t have to bear the costs of defending identity politics. A robot doesn’t care what pronoun you call it.

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  6. Consider
    1. fund the Trust with dollars saved by removing all benefits to non-citizens and illegals
    2. mandate zero new benefit programs unless offset by program cost removal from another source
    3. initiate a government waste assessment of social security to identify and eliminate non-productive processes, duplicate work activities, validate qualification requirements and audit same
    4. establish an income or net worth boundary where no Social Security is paid

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    1. 1,2,3 insignificant amounts of money relative to what’s needed. 4 would you turn SS into a welfare program? The benefit formula already favors the lower income worker.

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      1. It’s important to start … somewhere. And, as you have stated in previous post we always “kick the can down the road”. It can’t be all or nothing. I know I can’t extend my longevity 15 years, but I can change my diet away from processed foods, I can be aware of what affects the good bacteria in my gut, I can exercise … I am a whole lot better.

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      2. RD – Social Security is a welfare program already. My parents working from 1948 to 1995 paid less than $25,000 in SS tax. My mother age 91 has collected over $150,000 in SS benefits. My father died at age 66 in a car accident, so he collected benefits for just one year. Even with inflation adjusted 2018 dollars = $87,000. I will have everything paid in SS taxes from 1971 to 2006 back in just 5.6 years, I will be 67.6 years old then. I started SS benefits at 62 $1,288 per month and in 20 years I will receive (not inflation adjusted $309,120 No one has paid for their SS benefit once they have collected benefits for 10 years therefore – everyone is getting benefits that they did not pay for = welfare!
        Melton Friedman called SS the biggest wealth transfer to the rich ever devised. As the rich send their kids to college, so they enter the workforce later and make more money per year and because of their higher income they receive higher SS checks. We need to change the system to where employers pay in the same amount for each worker and everyone gets the same SS benefit in retirement.

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      3. What you suggest is welfare, not what we have now. SS is a combination insurance/ annuity program. What you relate about some people collecting a lot and others virtually nothing
        happens with pensions and annuities as well. Some people pay a lot all their lives for health insurance and collect little others collect millions in benefits. Those who collect a larger benefit paid more in taxes while the benefit formula give more credit to lower incomes.

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      4. Those who collect a larger benefit paid more in taxes while the benefit formula give more credit to lower incomes.

        “Social Security does not redistribute from people who are rich over their lifetime to those who are poor. In fact, it may even be slightly regressive.”

        “Mortality rates differ with potential income: rich people tend to live longer than poor people, and so collect more years of benefits. Taking this into account in the calculation, the researchers show that Social Security is no longer progressive: the effective progression measure is barely above 1.”

        There are several other factors also:

        https://www.nber.org/digest/may00/social-security-does-not-redistribute-income

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      5. If everyone who reaches retirement age and gets everything paid in SS taxes back in 6 to 10 years, then the higher paid worker gets more total dollars than the low wage worker. How is this fair? That is why the system needs to be changed. After all things are considered, that is why Melton Freidman called SS the biggest wealth transfer to the rich ever devised. The higher wage worker does pay more in SS taxes, but he also gets more in SS taxes paid by his employer and with higher average income the higher wage worker gets a much bigger SS benefit. Who needs the bigger SS check to stay out of poverty and have a better retirement? Of course it is the lower wage worker. The more I live, the more I believe Melton Friedman was right about the SS system.

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      6. The higher paid worker paid much more in taxes and relative to earnings got back less as a percentage of income. What you are talking about is simply giving lower paid workers a welfare check when they get older. There are way fewer seniors in poverty today than younger Americans and even children. And the median income and net worth of seniors as a group is equal to that of the typical American family. Helping people avoid poverty and to have basic needs may be societies responsibility, but a better retirement not so much.

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      7. Yes, those consistently paid more do receive a higher benefit than those consistently paid less. However, those higher paid individuals consistently paid more in taxes than they will ultimately receive. And, importantly, when the employer pays 50% of the costs, almost every economist would agree that it reduced the current wage when the tax was paid.

        Milton Friedman did say it was a transfer from actively employed wage earners (who often don’t have much accumulated wealth, and where a much larger percentage of those under age 65 live in poverty), to older Americans, many of whom have accumulated some wealth and only a handful (perhaps 1 in 20) live in poverty.

        That’s an intergenerational transfer of money/assets from the young (Millennials) to Baby Boomers) not an intra-generational transfer within each generation (lower income to higher income). In fact, if you look solely at intra-generational wealth transfers, the combination of Social Security taxes and benefits is a transfer from higher income to lower income – they don’t call it “Social” for nothing.

        I too agree with Milton Friedman … and his recommendation (way back in the 1990’s) to transition to individual accounts.

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