Social Security And You

This isn't going to end well. Here is an interesting article from an economist at Harvard.

It's times like these that I wish we had a stronger education in Mathematics. While I don't want to go off on a tangent, away from the topic of Social Security, I have to complain: our second rate education system has let us down. I live in a country where only a few understand compound interest, where calculating a tip requires a calculator, and where Asians are thought to be better at that "math stuff". We risk making important decisions concerning a pending crisis based on emotional partisan positions rather than the cold hard numbers.

I haven't heard either side really present the whole picture to us, probably because they suspect we'd get glassy-eyed and lose interest. It really isn't that difficult. Here are some things that we have to understand.

1. There is no trust fund. Each year the government receives revenue from social security taxes. It has done so since 1935. Part of the money is paid to retirees. Whatever is left over is used for general non-SS expenditures. The trust fund is nothing more than an accounting designation of that part of the US Debt, which was covered by Social Security Taxes. That some of the notes in the US Debt are earmarked for Social Security doesn’t mean anything. If you were to take those notes and tear them up, it wouldn’t change a thing; the shortfall that will appear sometime in the next decade, when disbursements exceed revenue, will still have to be covered by tax revenue or more borrowing.

2. Social Security is already tied to private accounts. Where do Social Security Taxes come from? They come from the “private” earnings of US Taxpayers, the major portion of which is derived either directly from medium to large corporations or from their employees. And when I say private, I mean private because public federal employees, including our legislators, do not participate in Social Security. If the economy goes south, government revenues (including SS Taxes) will also. It is interesting to note that the government once allowed state governments to opt out of SS, which many did in increasing numbers until 1983 when their luck ran out. Just when I thought I was out, they pull me back in.

3. Private Accounts: It’s what FDR wanted. John Fund created a stir when he quoted FDR supporting private accounts, which jolted Media Matters into a spirited campaign to counter this assertion. Read for yourself: Remarks from FDR to Congress January 17th, 1935. Of course, FDR didn’t really spell it out clearly either way but there is this one phrase that’s hard to avoid: “It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans”. Further, FDR clearly stated “that for perhaps 30 years to come funds will have to be provided by the States and the Federal Government to meet these pensions”. It’s pretty clear that the creator saw the initial system as temporary. Some, of course, like Media Matters, have said that what FDR wanted was that people would have the ability to pay more money into the system to draw more out later. This is preposterous. The Federal Government does not generate interest. The rate it provides on its notes is merely a promise to tax the people more in the future. If you don’t believe this then take 100 bucks from your wallet and replace it with a note which says that in 10 years you will pay back $150. Let me know how you make out.

4. Know thou the History of the Calamity of Social Security. So what happened at the end of that 30 years? The system went bankrupt just like FDR said it would. What did congress do? They raised taxes. Did that fix it? Nope, less than 20 years later, it was in trouble again. Solution: Raise Taxes. Originally, it was 2% of the first $30,000 (in today’s dollars). Now, some 70 years later, it’s 12.4% of the first $75,000.

How could so many congresses and presidents have been unable to foresee what was going to happen? The truth is that they all knew this was coming. There were plenty of critics at the time and the situation we’re in now has been faced before. The basic problem is that congress is loath to fix a system which is so popular with a growing segment of the society whether it is wrong to let the pillage continue or not. As George Barnard Shaw said, "A government which robs Peter to pay Paul can always depend on the support of Paul." And when Paul votes at a much higher frequency, Peter’s in trouble.

5. Follow the money….to Las Vegas. The real problem has been that congress and presidents have continually expanded the system to curry favor with retirees. Even now, Medicaid has been expanded to provide prescription drug coverage to retirees regardless of their need. This system will cost taxpayers over a half of a trillion dollars over 10 years.

It is clear that the initial system was meant for, and I quote once again from FDR’s 1935 speech, “to provide security, in the form of regular payments, to people who could not support themselves”. Our present system covers retirees for everything regardless of their need.

And since only a small % of the elderly rely on Social Security as their only means of support, we have to look at what happens with the rest of it. The 65+ demographic in this country is the richest demographic. They have the most disposable income of any age group. Retiree gambling accounts for more than half of casino income in Atlantic City. Click here to read the full story. Casino watch has even more scary stories.

6. And now the bad news. People are getting older and the cost of adding additional years (and even months) is growing exponentially. Does it seem reasonable that you pay 15% of your check for 45 years and then be able to live the next 20 on it? Especially if those years could be the most expensive years you’ve lived? We haven’t even talked about Medicaid and Medicare and those programs are predicted to be much more of a burden than Social Security.

This mass transfer of wealth from one demographic to another is getting out of hand. Read the remarks from a Federal Reserve Board Governor. In 1950, there were 16 workers for every recipient, now it is less than 4 and is slated to drop to 2 in 3 decades. The system has become a grab-as-grab-can game. Recipients receive as much assistance as they can, even to the point of shedding assets to their children to protect their estates from recovery. So whatever money doesn’t make it into slot machines, builds equity for children of the wealthy. Recently, I had a conversation with a man involved in a battle to keep the government from confiscating his recently deceased mother’s house. She had shed many of her assets to him to go onto Medicaid but kept the house. Now Medicaid wanted that house. He hired a lawyer and was able to keep the estate. Guess what he did with the cash? He retired early.

7. The Final Analysis. Social Security is basically a system that cheats the poor, who typically die before they draw on it, and creates a boon for those who have the means to take advantage of it. Some of Social Security is necessary. Much of it can be discontinued tomorrow and all it will mean is one less Cadillac and fewer trips to the Casinos. My plan is simple, though politically impossible:

One) Control of system has to be put in someone else’s hands. Congress cannot control the urge to bestow gifts upon the voting public. It should be turned over to the Federal Reserve for administration, or at least for the right to increase benefits or structures to the plan. This will never happen, of course, but it should happen.

Two) Means testing must be instituted to control the growth of benefits. I know Ted Kennedy will likely have a conniption fit, but the vote buying has to stop. Severe penalties must be there for asset shedding to avoid payment.

Three) Part of Social Security should be funded through private accounts. This will force retirees to remember that they are subject to the health of the economy. This part of the pie has gotten to be too big to be outside economic forces and not have the potential to cause a real disaster down the road. There are plenty of secure investments that will yield significantly better than the 1% average SS does, such as your mortgage, for instance.

Four) The work age must be raised. If you live longer, then you must be expected to work longer. The system should encourage retirees to work part time past 65. In this day and age when people are capable of working well into their 80s, it is ridiculous to not be able to have that experience contributing to the economy.