Fix Social Security

Various ideas that have been suggested by politicians and others to fix the coming social security collapse. Which ones will work?

1. Raise the retirement age.
2. Means testing
3. Increase payroll tax
4. Lift payroll tax cap
5. Increase employer contribution portion of the payroll tax
6. Change the cost of living adjustment
7. Add more years to the income average
8. Lower spousal benefits
9. Progressive indexing
10. Privatize
11. Ignore it and when money "runs out" drop benefits to match the current payroll tax input


1. Raise the retirement age.

My thoughts - This one seems to be inevitable as it has the broadest support of all of the ideas. If social security had been linked to lifespan in the first place, we'd be in a lot better shape. By SSA's own numbers the time that individuals collect benefits has increased by 5 years, so moving the age from the original 65 to 70 would close that gap (It's partially there already as it is in the process of moving from 65 to 67).

http://www.ssa.gov/history/lifeexpect.html

2. Means testing

My thoughts - This one is really unfair to those in the middle class who were frugal and saved for their retirement as they were warned to by employers, the news, public service announcements, TV ads, government statements etc etc etc. Everyone thinks it is only the "rich" that will be impacted but since the maximum social security benefit is capped (everyone making over $117000 gets roughly the same benefit), stopping benefits for Warren Buffet isn't enough. Pretty much every analyst who looks at the hard numbers comes to the conclusion that in order to make a meaningful impact, means testing is going to have to drop well into the middle class. This means those who saved get hurt while those who spent their money going to Hawaii annually etc get benefits (especially painful for those who were extremely frugal and saved high percentages of their incomes).

3. Increase payroll tax

My thoughts - Currently about 15% of income if you count the hidden part (employee pays half, employer pays half, self employed pay both halves). That's a lot already. (for those not in the US, that 15% is just for social security and doesn't include the rest of the taxes used to fund the rest of the government.)

4. Lift payroll tax cap

My thoughts - A bit unfair to the high income earners, especially because they won't benefit from it. These are the guys working hard for their money. The truly rich top 0.1% get their money as capital gains which is not payroll and thus don't pay payroll tax. Adding payroll tax to capital gains income would be interesting but I haven't heard of anyone proposing that.

5. Increase employer contribution portion of the payroll tax

My thoughts - It's a hidden tax on the employee. But since it's hidden politicians may go for this one.

6. Change the cost of living adjustment

My thoughts - COLA is weird. Government calculates it with some arcane formula. So it doesn't mirror inflation retirees are actually seeing and lately it's increasing at a lower rate making it effectively a benefit cut. The change COLA to save social security folks want to tinker with it further to guarantee that it will be an effective and hidden benefit cut. Kind of scary to those already retired depending on this money, so I don't particularly like that idea. Wouldn't surprise me if the politicians go for this idea though. It's easy to hide what they are doing with this trick and they're fond of that sort of sneaky thing. Incidentally, I do support changing it to more effectively match the inflation retirees are actually seeing.

7. Add more years to the income average (currently 35 years)

My thoughts - Another sneaky behind the scenes way to reduce benefits. It basically adds in the low income years from ones early career to decrease benefit eligibility.

8. Lower spousal benefits

My thoughts - Hurts stay at home moms the most. Sneaky, so they'll like it. But the anti-mom nature of the idea may hurt them. Depending on how they structure it, it could make life really fun for stay at home moms who become widows.

9. Progressive indexing - basically cut benefits for the young and leave them unchanged for those 55+

My thoughts - As the ratio of wage earners/retirees goes down with the new demographics, the benefits are going to go down for those now young anyway. At least this has the benefit of being honest and allowing the smart ones to plan for it. Since it's honest politicians aren't going to do it, they'll do the same thing in some sort of sneaky hidden way.

10. Privatize

My thoughts - May be the way to fix some of this as long as the % of money invested is STRICTLY limited and requires a SUPERMAJORITY of congress to increase the % invested. Otherwise when the market is doing great, congress will be tempted to nudge up the % and nudge it some more and some more etc, until the bad market hits and they've lost too much money!


11. Ignore it and when money "runs out" drop benefits to match the current payroll tax input, about a 25% benefit cut to all retirees overnight

I have actually heard people propose this. Basically they say that this is the worst case scenario and it isn't too bad so we shouldn't worry about social security.

My thoughts - A truly stupid idea. But one that the kick the can down the road politicians might saddle the country with.

Well thought out post. I can comment from the perspective of a similar (albeit smaller) society.
1. Our retirement age was 65 Male and 60 Female, but is now progressively trending to 70 for both. Ok if white collar but not so for a bricklayer or pole dancer.
2. Means testing is a must. To each their needs, but leaving a better future for the provident. Pension here disappears after about $100k (after tax write offs).
3. Payroll tax is not a good idea. We have it but it discourages employment and costs a lot to collect.
4. Ditto
5. Ditto
6. We are switching from the average male wage to basic cost of living. Saves money but keeps disadvantaged people down.
7. We have 5 years.
8. Each individual has to claim. Home spouses (usually women) are ok until the youngest child reaches 6, then must look for work to get benefit.
9. Not sure what you mean. We have a tiered income tax which the rich rort by using fancy exemptions. The below 30s usually don't plan much anyway.
10. Privatise makes sense if it makes the delivery of a service more efficient. Generally it is just selling off an asset to make the budget look better before the next election.
11. Easy option, so often done

12. Cut out dodgy exemptions for the rich, like capital gains exemptions, negative gearing, and such.


No easy answer but it needs to be fair.

A fundamental premiss of Social Security was that it was NOT intended to be a wealth transfer program that robbed from the rich to give to the poor. The idea is that it's is a Federal retirement system that would provide benefits that would be directly proportional to contributions. The idea is essentially the same as a bank where everyone has their own private retirement account that they pay into during their working years then draw from when they retire. The Government's role was to make savings mandatory and to provide security.

Most of the ideas to "Fix" Social Security, particularly from ignorant foreigners, essentially transform Social Security into yet another wealth transfer. Means testing benefits and removing the income cap essentially rob from the most productive members of society to provide for the retirement of the indolent.

Of course the real problem is demographic trends. When Social Security was founded, the TFR in the US was above replacement level. It was expected that there would be an ever expanding generation of workers to pay for the benefits of the previous generation of retirees. The decline in birth rates has reduced the cohort of workers. Women entering the workforce has effectively expanded the pool of workers temporarily, but this exasperates the problem by further reducing
birth rates and thus the size of the future work force. Intelligently managed immigration can offset or mitigate the lower birth rate. (One need only take a drive through the 97229 area code that has turned "brown and yellow" because of all of the extremely well educated immigrants from East Asia and India that all seem to work at Intell. Their new suburban neighborhoods look like Ozzie and Harriet or Leave it to Beaver America.). Unfortunately; most immigrants to the US are illegal aliens primarily from Mexico who lack the education to succeed in their own countries but have a willingness to work menial jobs. Unlike previous cohorts of immigrants from other regions who eagerely assimilated while raising children who worked higher paying jobs, most Mexican illegal immigrants don't assimilate and their children tend to be uneducated while lacking the work ethic of their parents.

The bottom line is that almost all modernizing societies are going to experience a crisis as their populations decline and the dependancy ratio increases.

1. Our retirement age was 65 Male and 60 Female, but is now progressively trending to 70 for both. Ok if white collar but not so for a bricklayer or pole dancer.

Some of the variants on this proposal have a 2 tier system. 67 (current age for those born after 1960) for bricklayers, pole dancers etc. 70 for office workers.

Although if I was actually to write a bill for this I would cap the top age at 69 1/2 for the same reason advertisers advertise products as being $9.99 and not $10.00.

2. Means testing is a must. To each their needs, but leaving a better future for the provident. Pension here disappears after about $100k (after tax write offs).

I just remember how mad my dad was about how his carefully saving money every paycheck for our college negatively impacted our eligibility for "need" based scholarships. Kids of people with whom he worked who MADE THE EXACT SAME SALARY but who spend the money on vacations, expensive boats, expensive cars, maxed out their credit cards. etc were eligible for all sorts of "need" based scholarships that we weren't eligible for since he not wasted his money.

3. Payroll tax is not a good idea. We have it but it discourages employment and costs a lot to collect.

It does discourage employment but it's so entrenched here I don't think it's going away any time soon.

8. Each individual has to claim. Home spouses (usually women) are ok until the youngest child reaches 6, then must look for work to get benefit.

The home spouse benefit here is 1/2 that of the working spouse. Widows benefits are complex (depending on relative ages, whether or not one or both are retirement age at time of death etc etc) but in general widows currently can collect the benefit the spouse was collecting but not the spousal benefit as well. Resulting in a household income decrease of 33%.

9. Not sure what you mean. We have a tiered income tax which the rich rort by using fancy exemptions. The below 30s usually don't plan much anyway.

Union pension benefits especially those for government workers were often gold plated unaffordable plans. The old kick the can down the road problem. Now that these workers are retiring in large numbers, cities/states are facing bankruptcy. One of the "fixes" for this problem has been to keep the current system for current employees but to "fix" it in the future by offering a significantly less generous package to new union employees.

Progressive indexing is politician speak for doing roughly the same thing to social security recipients. Keeping the current plan for those over 40, changing to the new plan for those under 40. The social security benefit calculation is a convoluted formula with the first part of eligible working income being multiplied by 90%, the second part by 30% and the third part by 15%. Progressive indexing would cut those percentages so that a worker who would have earned $4000/month by the old system would only receive $3000/month under the new calculations.

They might do it. The young don't vote in large numbers so politicians don't care much about them and most of the politicians are part of the 0.1% so it doesn't affect THEIR kids. (Amazing how people can enter politics as middle class and leave as part of the 0.1%)

10. Privatise makes sense if it makes the delivery of a service more efficient. Generally it is just selling off an asset to make the budget look better before the next election.

They haven't proposed privatizing delivery. Although I agree, it would make sense. The social security administration manages to waste an amazing amount of money.

When they suggest privatizing, they are suggesting investing in the private sector. Basically the government would put the payroll tax money in the stock market. In some variations, individual retirees would be able to choose what investments "their share" was invested in. The investment choices would be limited by the government to insure that no one invested their money in a "risky" fashion.

12. Cut out dodgy exemptions for the rich, like capital gains exemptions, negative gearing, and such

Currently the rich pay about 15% on capital gains + 0% social security tax. The max rate for someone who gets their money by salary is 40% income tax + 15% social security tax (if the hidden employer part is included), 55% combined. So, adding a 15% social security tax to capital gains income would double the tax rate the 0.1% are currently paying to 30%. Nice thought. But in reality it will never happen as that would make them scream to high heaven and buy a few politicians.

Demographic trends are a huge problem.

1. Increase retirement age past 70
2. Add incentives to have children (some European countries are trying this but the disincentives [high cost of living etc] have limited the success of their minimal efforts to date)
3. Immigration AND do a much better job of assimilating the immigrants than we are currently doing. We used to be good at that but political correctness has really hurt that effort.

This is a bigger problem elsewhere for countries with lower birth rates than the US. So they'll hit the wall first. We might get some good ideas seeing how precisely they go about fixing the issue. Always nice to have someone else experiment first and then to adopt the best of the solutions. (Probably the best of the worst, there's not likely to be any good solutions).

Interesting point in "When they suggest privatizing, they are suggesting investing in the private sector. Basically the government would put the payroll tax money in the stock market. In some variations, individual retirees would be able to choose what investments "their share" was invested in. The investment choices would be limited by the government to insure that no one invested their money in a "risky" fashion.".

What we did years ago was come to a national agreement that some inflation related wage rises would be sacrificed by the workers into individual Superannuation (personal investment) accounts held by specialist financial companies. Started at 3% of salary and is now at 9% trending up to 12%. The companies are regulated to encourage overall good results, with contributors being able to select investment risk level options, and the far away best ones are the not for profit union run ones. This then gives all workers on retirement an income source. Some still need some help from government welfare, but others have enough with other resources to live on.

For the "unsustainable" public sector schemes, successive governments have invested in a Future Fund which will provide enough to make them sustainable. Not as good as the Norwegian Future Fund that invested off shore oil field profits, but still pretty good.

No real need for comments such as "Most of the ideas to "Fix" Social Security, particularly from ignorant foreigners, essentially transform Social Security into yet another wealth transfer.".
My understanding was that the discussion was about the generic challenges faced by Social Security across the developed world, not necessarily US centric & even if it was then why not listen to suggestions even if from "ignorant foreigners"?

What we did years ago was come to a national agreement that some inflation related wage rises would be sacrificed by the workers into individual Superannuation (personal investment) accounts held by specialist financial companies. Started at 3% of salary and is now at 9% trending up to 12%. The companies are regulated to encourage overall good results, with contributors being able to select investment risk level options, and the far away best ones are the not for profit union run ones. This then gives all workers on retirement an income source. Some still need some help from government welfare, but others have enough with other resources to live on.

In general I like the idea. It sounds a lot better than the Ponzi scheme we are currently running in the US. And yes in the US our social security program is more and more frequently being referred to as a Ponzi scheme. And 12% is still less than the 15% we are paying through both sides of the payroll tax.

My biggest concern is that over time regulators may respond to political pressure to do unwise things. For example I can see them in the early 2000s saying that Fanny Mae and Freddy Mac (the US government mortgage guaranteers that drove a huge part of the mortgage crisis in the US by setting standards so low for the guarantees that you could get a mortgage if you were breathing) are great investments and should be considered as safe as traditional bonds because that was the general belief in the government prior to the 2008 financial crisis.

For the "unsustainable" public sector schemes, successive governments have invested in a Future Fund which will provide enough to make them sustainable. Not as good as the Norwegian Future Fund that invested off shore oil field profits, but still pretty good.

Some but unfortunately not all of the state and local governments are starting to do this with their own people. But on the Federal level, social security money for non-government employees is being "invested" in federal bonds and used to fund the every increasing government debt. It'd be one thing if the feds were using the money to fund infrastructure or other wealth generating long term investments, but they're mostly using the money for current expenses. And so while they can keep this going for a while, if they don't slow down the spending sooner or later they'll start defaulting on the "investment".

My understanding was that the discussion was about the generic challenges faced by Social Security across the developed world

I do tend to agree that all the countries in the developed world have this problem.

I actually believe that in some respects the US SS system of depending on continued contributions to pay benefits rather than having invested past contributions to pay for benefits is the worst. Other countries such as Australia and New Zealand have done far better than the US by investing revenue in the private sector to cover future benefits. Under the stewardship of Governor Palin, the State of Alaska invested so much money in it's Sovereign funds that they dwarf the surpluses that all of the other, GOP Presidential contenders boast about. Unfortunately, no other States follow her example. The fact that many foreign Governments are investing surplus revenues in quasi private industries rather than running massive deficits as the US habitually does might explain why their economies can do well in spite of much higher tax rates.

Aside from the demographic trends which may inevitably cause everyone's economies to implode as their populations begin to contract and their population pyramids become far to top heavy, the US is burdened with a dysfunctional political class (Republicans as well as Democrats) who will always spend more money than is collected no matter how high you raise tax rates, we have a very large, permanent underclass that has a marginal work ethic and is mostly immune to education.

Of course the easy solution to everyone's demographic and fiscal problems might be to start transforming the elderly into Soylent Green.

biochem wrote:

What we did years ago was come to a national agreement that some inflation related wage rises would be sacrificed by the workers into individual Superannuation (personal investment) accounts held by specialist financial companies. Started at 3% of salary and is now at 9% trending up to 12%. The companies are regulated to encourage overall good results, with contributors being able to select investment risk level options, and the far away best ones are the not for profit union run ones. This then gives all workers on retirement an income source. Some still need some help from government welfare, but others have enough with other resources to live on.

In general I like the idea. It sounds a lot better than the Ponzi scheme we are currently running in the US. And yes in the US our social security program is more and more frequently being referred to as a Ponzi scheme. And 12% is still less than the 15% we are paying through both sides of the payroll tax.

My biggest concern is that over time regulators may respond to political pressure to do unwise things. For example I can see them in the early 2000s saying that Fanny Mae and Freddy Mac (the US government mortgage guaranteers that drove a huge part of the mortgage crisis in the US by setting standards so low for the guarantees that you could get a mortgage if you were breathing) are great investments and should be considered as safe as traditional bonds because that was the general belief in the government prior to the 2008 financial crisis.

For the "unsustainable" public sector schemes, successive governments have invested in a Future Fund which will provide enough to make them sustainable. Not as good as the Norwegian Future Fund that invested off shore oil field profits, but still pretty good.

Some but unfortunately not all of the state and local governments are starting to do this with their own people. But on the Federal level, social security money for non-government employees is being "invested" in federal bonds and used to fund the every increasing government debt. It'd be one thing if the feds were using the money to fund infrastructure or other wealth generating long term investments, but they're mostly using the money for current expenses. And so while they can keep this going for a while, if they don't slow down the spending sooner or later they'll start defaulting on the "investment".

My understanding was that the discussion was about the generic challenges faced by Social Security across the developed world

I do tend to agree that all the countries in the developed world have this problem.

"Renew, renew"