Overall, I give this plan a “C”. That grade is composed of two distinctly different analyses. On the pure question of economics, I give the plan a “B”. But on the more critical issue of “Is this fair” I give the plan a “D”.
Given that the proposal has some positive economics attached to it I think that something along these lines is what me might see if Congress ever got around to doing its business of passing legislation and fixing problems. I believe that if this plan were pushed to a vote it would get support from some Democrats and actually has a chance of passage sometime in 2012. The reason that there might be some Dems who cross the aisle to vote for something like this is that the structure of the proposal is very much a “Kick the Can Down the Road” approach. All politicians love that way of thinking.
The issues at Social Security are easy to define. It’s the Boomers that are the problem. The solutions are also relatively easy. Benefits can be cut, or taxes can be increased. A very convenient way to cut expenses is to just increase the age for eligibility by a few years. The critical questions are (1) when do these changes take place and (2) what age group is going to get screwed as a result.
Some details of the proposal:
A) Gradually increase Social Security’s full-benefit age starting in 2017, from today’s age 66 to age 70 for Americans born on or after 1970.
B) The legislation would increase the early-benefit age starting in 2021, from today’s age 62 to age 64 for taxpayers born on or after 1966.
C) Gradually change the benefit formula starting in 2017 so that upper-income Americans would start to receive smaller benefits while benefits for those with lower incomes would remain the same. These changes would become fully effective in 2055.
The financial health of SS is measured actuarially. This science looks at projected income and expense streams over a 75-year period and draws some conclusions. I don't see a better way to evaluate this mess. But I’m convinced that it is a flawed analysis. No one has the slightest idea what the world will look like in 50 years. And more importantly, the problems for both the broad economy and society that SS is bringing us have a window of only the next 15-years or so. It’s my opinion that if the USA does not address the imbalances that are currently impacting SS we will not make it to 2025. The system will sink from the weight of these UNFUNDED liabilities.
Clearly Senators Graham, Paul and Lee don’t see it that way. The vast majority of those who do pick apart the numbers would agree with them. So I'm a bit out in left field calling for a blowup. I will say that if one did adopt the 75-year measure of financial health, the proposals put forward in S. 804. would, in fact, move the needle in the right direction.
The plan does not include any increase in taxes on worker's or their employers. To me, this is essential. SS is already sucking up 12.4% of worker's income. That’s too much. If anything the program should be scaled back so that the contributions are lowered. Under no circumstances should they be increased.
The Senator's proposal increases the socialization of the system. I think that is essential. Workers with high lifetime earnings will be subsidizing those who had low lifetime earnings. Call this a tax on the rich. I don’t see anyway around this.
Increasing the age limit is something that significantly improves the financial profile of SS. It looks like an easy way to push the numbers around. That’s true, but it’s not without consequence. I would point to the riots in France just two years ago when the retirement age was increased. Who were the protesters? A coalition of younger and older workers. The older ones had obvious reasons. The younger ones were brought to the streets because they desperately wanted the old folks to retire. Why? Because they wanted the jobs that would become vacant. Youth unemployment in France is north of 20%. That is exactly where it is headed in the USA. So raising the retirement age “fixes” SS but it also closes some doors for younger people all the way down to their early 20’s.
For these reasons I give that favorable “B” grade (there is no “A”). But now consider who is getting screwed.
The Baby Boomers will reach age 65 in 2011. This population bulge will continue to hit the SS system until 2029. Note this. We are on the very first rung of a very tall (and shaky) ladder.
The problem for SS over the next 20 years (and a Medicare in a bigger way) is the Baby Boomers. When you look at the age group that is causing the problems and overlay the proposed changes you see that the Boomer contribution to the “fix” is not very much at all.
(a) Increasing the age limit to 70 after 2017 only impact those born after 1970. So the Boomers get a free ride.
(b) Increasing the early retirement age is limited to only those born after 1966. Another miss.
(c) Changing the benefit formula starting in 2017 would hit the boomers (At least it would on paper). But the phase in of this takes place over 40 years. The Boomers will be dead and buried before the actual hit takes place.
So who are the losers in the Graham, Paul, Lee plan? The answer is that anyone born after 1966. If you’re younger than 47 today, bend over. The Boomers are going to screw you. You’re going to pay more than you should and you’re going to get less than the boomers got.
How could that possibly happen? Easy. It’s the demographics. Those who will “win” this age war out vote those who will lose. There are some very powerful lobbies at work as well. The AARP has a very big stick; they use their weapons on the Pols very effectively.
I will be sad if this comes about. This would be the greatest “Pass the Trash” for any generation in history. While the proposed changes would take SS off the discussion table for another decade or so it will come back into the headlines in a very big way at some point. There is absolutely no fairness in a plan that protects Boomers at the cost of the rest of society.
I think that in their hearts, Senators Graham, Paul and Lee don’t really believe in SS and would like to see it go away. It is, fundamentally, a socialist approach and it does suck up a huge amount of current tax revenue. But even these powerful Senators can’t kill SS. If their proposals are adopted it would destroy Social Security. Ten/Fifteen years from today public support for SS will have completely evaporated. It will just take that long for those younger generations to realize how badly they got set up.
I’m a cynical guy. I think that Graham, Paul, Lee (and all the others) understand that they are lighting a slow burning fuse on a very big bomb with plans like this. But they want to keep their jobs, power and influence, so they don’t do the right thing. They propose to kick the can to another few generations.
Color me disappointed. Especially with Rand Paul.
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While the suggested alterations would take SS off the consideration table for another ten years or so it will arrive back into the headlines in a very large-scale way at some point.
ReplyDeleteFirst problem: When SS was invented, average US life expectancy was around 50 to 55 (depending on gender and race). No one expected an average life expectancy of 75 to 80. The system was never designed to deal with this. Lesson: Bad idea to create any system which counts on the future being the same as the present.
ReplyDeleteSecond problem: Government spent my money. All the self-employed social security payments that I made from 1970 until 2007 (when I incorporated) were embezzled by the federal government. My accountant used to try to persuade me not to minimize my SS payments. "What will you live on when you retire?" said he. To which I answered, "Do you really expect me to trust the federal government to keep my money for me?" Hmmm, guess I was right.
Third problem: AARP. The most odious special interest group pandering to whiners with a terrible air of entitlement. And they vote.
Fourth problem: Insufficient young people to sustain the scam any longer. Actually I consider this a blessing. SS was always a terrible idea. It created a government substitute for a traditional family function (i.e. taking care of old relatives). Like most government substitutes, it was inefficient, untrustworthy, and ultimately doomed. It encouraged people to abandon their grandparents because "They'll collect their SS payments so I don't need to worry about them." It discouraged saving and individual responsibility.
Time to admit the error and phase out the system.
Last problem: Governments don't like to admit errors. Bad for re-election prospects.
Solution: None that I can see.
A lady’s dog had a flap of skin that prevented it from eating; a surgery costing a small $150 at the vet. The same job on a person entails a higher cost, a low-ball of $15,000 for the surgeon, not including the hospital, tests and anesthesiologist.
ReplyDeleteThe simple solution to SS is to get rid of Medicare that is a third-party system and pay more in direct benefits. The US medical legal state is complex and unfair, tilted towards the money changers, a further aggravation by medicine monopolies. Inexpensive cancer treatments like eating the heart ingredient in almonds for $5 are illegal. Laws have been enacted that only allow chemotherapy which begins at $30,000. “Simple” solutions, not “simplistic” as these (three stooges) suggest.
Charles Platt said it. "Time to phase out the system."
ReplyDeleteIsn't there some way the "trust fund IOUs" can be converted to some nominal amount of cash, even a tiny one, and paid out as lump sums to current & expected beneficiaries? Don't forget that, henceforth, no one need then be burdened with payroll taxes at all!
The social welfare experiments should be abandoned. But they won't be, of course, which is why I am more and more certain, as time goes by, that the dollar is on its way to zero and that price inflation will - MUST, HAS TO! - ROAR...
It's interesting to read today that AARP has dropped its policy of opposition to cuts in SS benefits.
ReplyDeleteAARP generally follows the Dem viewpoint pretty closely so they may be acting as a harbinger.
Really excellent posts lately, Bruce! thanks--Jim,MtnViewCA,USA
The news media were typically sloppy in reporting the alleged willingness of AARP to "consider social security cuts." So far as I can determine, AARP made a cynical and predictable calculation: Better for them to screw people who are not yet members, rather than people who are already members. In other words, cut future benefits, not benefits for current recipients. See http://www.nytimes.com/2011/06/18/us/18aarp.html?_r=1
ReplyDeletesome nominal allowance of money, even a minute one, and paid out as chunk additions to present & anticipated beneficiaries? Don't overlook that, from now on, no one require then be burdened with payroll levies at all!
ReplyDeleteWhat would you say to someone who has faithfully, for the last thirty years, put $500 a month into their 401K, but has also borrowed $500 a month from the 401K. What would happen is, that person gets to the point of retirement and has no money in the 401K. The 401K contains a receivable that must be paid back out of the person's earnings, so guess what - that person doesn't get to retire.
ReplyDeleteThis is precisely what the Boomers have been doing for the last 40 years with Social Security. Saying, "I paid into it for all those years and the government screwed me," might be true, but it still doesn't justify dumping the obligation on the next generation. Especially since the Boomers make up 33% of the U.S. population! They have always held a voting majority over everyone else, and at any time could have insisted that the government stop borrowing from the trust fund. They could have done it, but they didn't, and now here they are reaching age 65, the trust fund is empty, and these people all still want to exit stage left anyway and draw funds from the empty program that end up falling on the backs of younger people.
So here you have these Boomers, people within a 20-year age range, who make up 33% of the population. Only by adding together the next FORTY years of age ranges do you come up with that many people, and many of the people within that forty-year age range are still in junior high or high school. Therefore, since we can safely assume the Boomers will never vote to have to keep working longer, this horrible unfair situation is going to happen. We can rail all we want about how much it sucks, but there simply aren't enough of us, and we are delusional if we expect the Boomers to collectively do the right thing.
Now we need to start thinking about what is going to happen to Gen X and Gen Y in their old age. Somehow we are going to have to pay benefits to these Boomers, even though we won't receive anything ourselves from Social Security. We're going to be saddled with their retirement benefits AND ours. I don't know how, with about half of the workers in the USA making less than $25,000 a year, we can possible manage this. People under thirty are the most underemployed. Pretty much, they're all going to have to work until past the age of 75 and will never be able to afford to have children of their own.
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ReplyDeleteThanks for this. Well said.
bk
As a Gen X'er, I might surprise you that I don't blamer the boomers. Contrary to Charles' assertions, the actuaries did a pretty good job predicting the future. For people who _make it_ to 65, the actual life expectancy only increased 3 years from the program's inception until today--that's part of what really matters and its a small thing since the 1983 reform of Social Security adjusted for most of that. Where the actuaries erred was in the percent of income covered by the earnings tax. At the time of the 1983 freform, the earnings tax covered 90% of income. Now the earnings tax covers 82%-83% of income primarily due to rising income ineqaility. Increasing the earning tax cap at a faster rate can solve the issue quickly. So really it's been the rich outmuscling the poor--gee, what a surprise.
ReplyDeletethanks for posting such a nice information
ReplyDeleteplease keep posting such information
Right! Fix income distribution so that the SS tax covers 90% of income and, voila, problem solved. OH, but, but, but, all our financial commentators, TV talking heads, and charlatans of both political parties always advocate policies that do the exact opposite. Maybe tinker with the SS tax cut off income limit and make it somewhat higher. OH, no, no, no, that would mean raising taxes on the rich.
ReplyDeleteAdopt a single payer health care program and get better medical services for everyone for 11% of GDP as opposed to 17% of GDP and SAVE MONEY. But, no, the politicians are bought and paid for by rent seeking corporations using the legislative process, rather than the business process, to boost earnings. And undereducated and befuddled Americans don't like "socialism". And so, I say, don't like socialized medical financing? Then eat the "cake" of less and less actual health care for yourself and your children.
If Americans keep being stupid enough to be led by the nose to accept policies that benefit only the very rich, they will deserve EVERYTHING they get. Lower incomes, less medical care, bad schools, no pensions, and a sicker and shorter life span - along with a bigger and fatter security state because that's what surely will follow.
So many so called conservatives are nostalgic for the society of the 1950's with polite, well raised children, intact families, and economic security for the broad middle class. Yet they constantly demonize the very economic, income distribution, and tax policies that made that world possible, like 90% marginal income taxes on the very rich and no NAFTA. So who are they kidding with their cloying and hypocritical "social conservativism"?
Each People in a democracy gets the government it deserves. If the American middle class lets itself be talked into policies that grind it into the dirt, that will be exactly what it will deserve. As a former American, I say this with a measured degree of sadness.
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