Friday, December 22, 2006

Social Security Concerns (Part II)

As I said in Part I, we have several options for improving the downstream solvency of the Social Security program. This assumes, of course, that we believe that this is a worthy goal.

Some deny that any problem exists. For these people, no action is necessary. Many of these people would not be directly impacted during their lifetimes, so for them, no problem exists. However, for those that believe they have at least some duty to future generations, some action must be taken to resolve eventual solvency problems.

I previously discussed the various feasible options (privatization, cutting benefits, raising retirement age, raising taxes, etc.), but I said that each of these options was difficult to implement. I surmised that no meaningful change would likely occur during the 110th Congress.

But why is change so difficult to achieve? Part of the reason for this is the dual nature of the Social Security system itself. It was sold to Americans both as a way to care for the elderly and disabled in our society AND as a retirement investment plan — a pooled investment plan.

Today we are all familiar with 401(k) plans, IRAs, and the like, where we each have an individual account. Back in the 1930s when the Social Security plan was formulated, very few had access to individual investment vehicles. Company pensions were more common, as was the case until a shift occurred about two decades ago. Americans understood the idea of paying into a pension plan that would provide a retirement payout.

For many Americans today, especially those that have entered the workforce in the last decade, this system where the individual is divorced from his/her personal investment seems antiquated and bizarre. Many in conservative circles tout the ideals of pure privatization and individualization of retirement planning.

However, this completely denies the other aspect of the system — the aspect that takes care of those that are less fortunate in our society. Some would very much like to divorce these two elements from each other. They would make retirement investment its own program, and make social care a separate program that is paid for out of the general revenue fund. This would expose the true cost of the social side of the equation.

This sounds reasonable, but splitting the program is not quite as easy as it sounds. What about provisions for the working poor — those that pay into a retirement system throughout their lives, but never generate sufficient to provide a decent retirement benefit? Do we really want to bear the societal costs of leaving a significant group of seniors in a more indigent situation than at present?

While liberals (increasingly joined by those that call themselves conservatives) have long touted the idea of reducing benefits “for those that can most afford it,” this changes the basic nature of the program’s contract as understood by most Americans. It changes the program more into a wealth transfer system.

Some have likened this concept to an insurance pool where benefits are paid only to those that need it, and others that paid premiums are simply happy to have been so fortunate as to not require receiving benefits. But most Americans that pay into Social Security think of it more like a life insurance/annuity policy. They pay a premium and expect a guaranteed payout. Most Americans don’t buy into limiting benefits because they see it as the breaking of a contract.

Reducing benefits also has a very real impact on productivity. As with all social programs, those at the margins are most impacted. I saw this happen when my father discontinued a productive and fulfilling electrical engineering contract because the net effect of the tax increase was very little take home pay. Of course, he didn’t discover this until he filed his income tax return, but it chagrined him that the government made his work essentially of no value.

Raising taxes on current producers to pay benefits to non-producers hardly seems equitable. After running up the tax rate for years, politicians realized that they had pretty much pushed it to its limit. Further increases will only further harm productivity, which may even reduce program revenues.

And it simply galls most Americans that the Social Security Trust Fund consists of government IOUs. The T-bills that represent the program’s funds are “investments” in the same way that giving yourself a loan is an investment. The interest paid on these bills at some point must come from the pockets of the taxpayers.

Social Security is a tough nut to crack because of the dual nature of its contract with the American people, and the way it is funded. No solution that fails to address all of these elements will resolve the program’s future solvency problems. Some of the solutions might push eventual insolvency further down the road a few years without really fixing it.

Our nation has a poor track record of seriously addressing problems until a crisis occurs. We’re not in crisis with Social Security, and we likely won’t be for at least several decades. However, we could resolve future problems now with far less pain than the next generation will face when the crisis looms large.

Will we do that? I would like to think that we would be insightful enough to do so, but due to the politically difficult nature of fixing the problems now, it doesn’t look like it will happen anytime soon.

4 comments:

Democracy Lover said...

Since you choose to ignore reality and insist that some horrible problem exists that requires drastic overhaul of the SS system, you then make straw man proposals. Not surprising.

The retirement system that is "bizarre" is the one where corporations have abdicated their role in guaranteeing retirement benefits from investments they manager, and turning over the investment risk to individual workers. The "shift" that occurred two decades ago (i.e., on Reagan's watch) was not a random event, but a planned shift in government policy.

I do not join those who call for reducing benefits on the wealthy - that is not necessary. I think that many who do so are motivated by a desire to turn this popular program into one they can attack as a "wealth transfer" system. (As though our economy were not currently acting as a wealth transfer system - from the bottom to the top.)

The government constantly borrows money for its operations using Treasury bills. Those T-bills are backed by the full faith and credit of the United States - or at least that's what we tell those who buy them. The T-bills held by the Social Security system are no different from those used to borrow money for the military. This is one of the chief lies being spread by those who want to destroy social security.

You also seem to be under the mistaken impression that taxes have been rising and are somehow reaching their "limit". Obviously, the facts are that Federal taxes have decreased dramatically, particularly on the wealthiest Americans, over the last 30 years. That explains a lot of the so-called fiscal crisis talk - the Republicans cut taxes and increase spending then yelp that the government cannot afford things. Shame on them!

Reach Upward said...

I don't understand why anyone should be forced to have their retirement investments managed by Big Brother, whether that be the government or their employer. What is wrong with managing this personally or chosing to hire someone to do it for you. Personal wealth (mostly in retirement savings) has soared since this shift occurred on Reagan's watch.

While the government constantly borrows money, the guarantors of those notes are the American people. We loan our future capital (our children's capital) to buy services, including military protection. However, in the case of SS, we are lending future capital to pay ourselves.

Think of how well this would work in your own family. It's like taking out a signature loan to fund current living expenses. It doesn't take a financial expert to realize that this would eventually lead to bankruptcy (passing the debt to others) unless there was some assurance of ballooning income in the future. In the case of SS, the debt is passed to future generations. It still must be paid at some point.

The difference between using debt for SS funding and using debt for military funding is that we are, in essence, paying the proceeds of the loan to the loan's guarantors. That's a faulty financial scheme.

The increasing taxes I discuessed was the amount withheld for FICA. During the 60s through the 80s we increased that from just above 4% to 15.3%, where it stands today. For employees, your employer pays half of that. (That is, you don't see it on your paycheck.) Economists (and even the GAO's numbers) show that this tax rate stresses and harms income production. That is why Congress has been loath to increase it beyond that point.

Democracy Lover said...

What's wrong with each person managing their "wealth"? First of all, far too many Americans cannot afford to save, and virtually all are not adept at managing investments. When privatized pensions have been tried, such as the highly touted experiment in Chile, they fail.

The goal of society is to insure that no senior citizen is going to be hungry or homeless simply because they were unable to make sufficient investments or unlucky in their investment choices, and that those citizens who are disabled or the surviving children of breadwinners are not put out on the street either. That goal requires that all of us pool our resources and see that those resources are well managed and can meet the needs of all our fellow citizens.

The Social Security tax and the Medicare tax are a bit different so comparing the tax burden of one to that of both is a bit disingenuous. I would agree that we need to reform the SS and Medicare tax burden to make it more progressive, but that is politically unwise because the same people who are now arguing against SS because of the tax burden on the poor would then argue against it as a wealth redistribution system.

What we fail to bring in to this argument is that the US has had a government sponsored wealth redistribution system in place since the early 1980's - one that moves wealth from the lower 3/5 of society and gives it to the upper 1/5. We need to moderate that redistribution scheme so that all Americans can benefit from our economy, not just those on top.

Reach Upward said...

DL, your class warfare shtick is laughable. I will not claim that there have never been and are not now abuses of subordinates by some with wealth, however, no one is preventing anyone from getting ahead (except that we have some social programs that effectively keep some people in the welfare class).

Your idea of wealth transfer from the bottom to the top is out of whack with reality. You sound like some of my co-workers that constantly grouse about senior management and investors. The truth is that they wouldn't even have the jobs they have without the structure and vision supplied by senior management and the capital supplied by investors.

Decoupling people's retirement savings from their employers has had a two-edged effect. Employers are less loyal to their employees, but workers have far more capacity to move to diffrent jobs as well. They are not stuck with the golden handcuffs that the old company pension paradigm engendered.

Your claim that personal investment management has failed flies in the face of the statistics that follow the 401(k) class -- those that have invested in 401(k) plans. As a group, their overall wealth gains have been nothing short of astronomical.

Your claim about people not having enough money to save is wrong-headed. It's simply a matter of priorities. I couldn't "afford to save" when I started putting money into a 401(k). However, I made hard decisions and made it work. By keeping priorities straight, my little nest egg continues to grow. I'm no investment genius. Anyone can do this unless they are shortchanged on intelligence and/or lack self-discipline.

None of that is to say that we don't have a responsibility to help the less fortunate in our society. As I said in my original post, any solution that fails to take this into consideration will fail. But so will any solution that fails to recognize the value of contributions to the system.