All of the above are likely as noted in Making Social Security Actuarially Sound in a Business-Friendly Manner
For more on Social Security trends please see ...
- January 8, 2013: Social Security Trends: Beneficiaries, Total Costs, Number of Workers, Ratio of Workers to Beneficiaries
- January 11, 2013: Social Security Payouts Per Worker; Accrued Interest on Accrued Promises; Imagination
Jed Graham Reflections
Jed invited me to post a few of his personal thoughts. Those thoughts are not necessarily reflective of the opinions of Investor's Business Daily, nor are they reflective of mine.
However, for the sake of further discussion ...
Jed wrote the 2010 book A Well-Tailored Safety Net. He proposed a new approach to reform called "Old-Age Risk-Sharing".
Under Jed's approach, the maximum benefit cut would come in the first year of retirement; cuts would be progressively smaller for lower earners and the cuts would phase out over 20 years to preserve a robust safety net in very old age.
You can read about his views in his post What I Told Obama’s Fiscal Commission About Social Security
In the above link, Jed writes ... "If we want a Social Security system that maintains the promise of income security late in life, additional benefit cuts that apply in very old age should be off the table"
I have to ask: Is that want we want? My second question is: If so, how do we expect to pay for it?
It's far easier to come up with a want list, than a means to pay for it. People always want things, unless and until they have to accept tax hikes to pay for them.
The income redistribution philosophy of tax hikes to support Social Security goes against my own Libertarian beliefs of minimalist government.
Cuts Coming, Regardless of Beliefs
However, and regardless of my viewpoint (or yours), cuts of some kind are without a doubt actuarially necessary as fewer workers support more and more retirees.
The only way cuts are remotely possible now would be to combine cuts with tax hikes. Politically speaking however, Democrats won't accept cuts, and Republicans won't accept tax hikes.
Yet, if cuts eventually come (and demographically speaking they must), then perhaps the phased-in approach suggested by Jed is a pragmatic starting point for discussion, whether or not one believes the stated goal of "guaranteed income security" is socialist silliness.
Once again, I am attempting to separate my own personal beliefs from something that may be more politically feasible.
Two Sure Things
- The path we are on is not sustainable
- Burying one's head in the sand because Social Security is the third rail only makes the problem worse
Safety Net Discussion
I have spent an amazing amount of time on this post already, probably 14 hours. I thought I finished yesterday but I didn't.
Yesterday evening I realized I did not fully address the concept of what constitutes a "safety net", and how much it would take for the average worker to accumulate one.
Jed has done quite a bit of research on the subject, so I decided to ask him.
"I think since we are talking the bare bones safety net w/ SS that people can’t do without, it makes sense to use the risk-free (some might argue with “free”) Treasury rate. Rule of thumb is that to overcome a 10% benefit cut, an average earner (now about $45k a year) has to save 1% of wages (assuming Treasury returns and a lifetime annuity). For new workforce entrants facing a ballpark 25% benefit cut, as in the Romney plan, that means roughly 2.5% of annual wages. "
The key words are "average earner". In a phone conversation with Jed, he acknowledged things are not so simple. Someone making minimum wage needs to save far more on a percentage basis. Those making $100,000 a year need to contribute far less on a percentage basis.
The problems do not stop there because we are not starting from scratch. What about the "average earner" who is now age 40?
Jed notes such a person may need to contribute 5% of his wages for a minimal return.
That still does not cover all the bases because it assumes everyone is funding their own plan.
Is self-funding the new idea? Or is the original intent of Social Security (minimum retirement income assistance regardless of how much one contributed) still intact?
Regardless of your answer, those making minimum wage will never be able to meet a reasonable "safety net" goal, on their own accord.
I do not champion the idea that Social Security is a "right". It isn't. Rather, I simply state the pure mathematics of the setup.
Funding Your Own Way
I have a close friend who objected to "Means Testing" which was point six of Six Possible Ways to Make Social Security Actuarially Sound, as listed above.
She proposed that what she puts into SS should be hers or her heirs, and no one else's.
Ideally, I agree.
However, if her money is hers (and your money is yours) let me ask a simple question: Does government belong in the "income guarantee" business at all (taking your money only to return some portion of it later)?
If so, why? If not, then let's stop Social Security altogether.
It's certainly a debate worth having, and the answer determines whether or not there should be any "safety nets".
Privatizing Social Security
In a follow-up phone call I discussed privatization of Social Security with Jed. He was once in favor of partial privatization, but that was when Social Security was running a surplus. He is not in favor of it now.
Let's discuss this from the point of view of my friend who states "What I put into SS should be mine, no one else's".
To create a real "lock box", not an imaginary lock box, with imaginary interest, we need to privatize Social Security, not send money to Washington to be confiscated for whims of the moment.
Assuming that is politically feasible, and ignoring all the people already fully committed to the current system (those retired), as well as those half-way in (those in their 40's), what are the ramifications of privatization?
Before answering, please note that Social Security revenues are in practice used for general expenditures. Simply put, if payroll taxes were diverted to funding private plans, the deficit would soar.
Such a step would require massive tax hikes or massive cuts across the board somewhere (I would vote for massive cuts across the board, especially cuts in military spending).
Then we would still need to do something about partial funding and those already retired. Finally we would need to discuss limitations on those who want to tap their SS funds before retirement.
For a discussion on tapping retirement money, please consider Over 25% of 401Ks Tapped to Pay Current Bills; Dead-Fish Housing Assets; Walking Away Yet Again.
Quickly you can see we are back to the basic question "Whose money is it anyway, and why should government dictate what I do with it?"
Frank Discussion of the Issues is Needed
Regardless of your point of view on what should or should not be done (Jed has his ideas, I have mine, my friend has hers, and you have yours), it's long overdue for a frank discussion of the issues.
Solutions can only happen following admission of the problems. The starting point for discussion is simple admission that Social Security and Medicare are both insolvent, that promises have been made that cannot possibly be kept.
Without a doubt the country needs a frank discussion of "safety nets" and how they should be funded, as well as frank discussions on Medicare and healthcare rationing.
Unfortunately, few if any politicians are willing to admit the truth or to have those discussions, for fear of losing votes.
Mike "Mish" Shedlock