Tackling the Social Security Mess

Here's a report from the The American Economic Association annual conference which details the mess the United States Social Security system is in. If you know anything about economists, you know that it's hard to get any two of them to agree on anything, much less anything significant. So when they do agree on a topic, it's a pretty important event. To that point, here's what the author had to say about the meeting and the economists' views on Social Security:

I came away believing that a consensus exists among economists across the ideological spectrum on at least one important issue: America's entitlement spending -- mostly Social Security and Medicare -- is not sustainable. And neither political party is willing to talk about what needs to be done to fix the situation.

Yep. We all know it's a problem -- but no one wants to do anything about it (or they do, it's just they want someone else to pay for it).

The piece acknowledges that one (or several) of the following have to happen to make the system work:

• Cut benefits for retirees.
• Raise taxes on workers.
• Allow more young immigrants into the U.S. who will begin paying taxes into the system.
• Make workers so much more productive that existing tax rates will generate enough new revenue to fund the extra burden of an aging population. (This option would be great, but we have no idea how to accomplish this.)

For me, I think the option that works the best and is in the spirit of the program is to raise the retirement age (which probably falls under "cut benefits for retirees".) But let's face it, Social Security was set up a long time ago as a safety net for those few people who lived long enough to need it. Well today, people are living longer than ever, which is one of the main problems of the current system. Just seems like the most reasonable and fair solution is to make the new retirement age something like 70 or 75 instead of 65.

It's not going to be easy, whatever the fix turns out to be. What are your thoughts? What alternative do you think will work best?

Comments

[franky]

I think the best way to do this is to do multiple things, i.e. raise the retirement age, cut benefits, and raise taxes. Sounds draconian, yes, but to make the system viable, we really don't have any choice.

That way we make everyone pay a little bit for the program, instead of making one group, i.e. just the young or just the old, take the full burden of fixing the system.

[Dus10]

I am not sure I want it to be viable... I would rather not deal with it, and not pay for it. There are some benefits, however, for those who are not using it for retirement... Namely, survivor and disability benefits. However, there are much better solutions than a system that would be considered illegal if it were established by a private entity.

I am not wealthy, or even affluent, by any means... but I pay a couple hundred dollars a week on Social Security. That could be much better used elsewhere. I already have a life insurance policy that will cover my current salary based on a 10% return. I already invest in a 401(k). I even have disability insurance that will cover me for several years. I get all of this for much less that I pay in FICA, and I am never going to really benefit from it.

Now, I think we could pacify the entitlement mongers by reducing FICA dramatically, if we opt out. For instance, I am willing to pay 1-3% if I can invest the rest of it in a manner that I see fit. I will sign up to never receive benefits, but there would have to be a clause that states that I can get back in at any time, if I start contributing, and do so for ten years, or they decide to raise FICA again.

Why should we have to ever raise taxes? It is all based on percentages... seriously. If we are doing well, individually, we will pay more in taxes. If we are doing poorly, individually, we will pay less taxes. It makes sense. In 1929, total taxation (local, state, and federal) was 10% of the GDP. Today, federal is 20% of the GDP, and state and local are 10% of the GDP. Something seems fundamentally wrong with that.

[Easy E]

Dus10 you are right on

[Marty]

Allow people to opt out. The more people that opt out the fewer demands there will be on the system.

You get to keep your portion of the payroll taxes and your employer portion goes to pay for current retirees. That way we can take care of the people we've made dependent on government and everybody can make their own decision.

[srh]

I definitely agree with dus10's comments. I'd love to be able to opt-out of SS, even if I still had to pay a little.

I imagine that ultimately the retirement age will be raised a little and benefits will be cut particularly for those with higher net worth (i.e. who don't "need" it). I'd be surprised if they raised taxes on people, but I could see them raising the employer contributions (which winds up being the same thing, but easier to hide from constituents)

Like many folks, though, I'd like to see the whole thing phased out. Even if it just became more of the 'safety net' that it was designed to be, that would be an improvement over what we have now.

[Eric S.]

Socialism failed all around the world, so why we here in the US are so enamored with Socialist Security is beyond me. We need to bulldoze the whole system, assess the real need, and then design a program to really meet just the need.

- Eric.

[F. D. Bryant III]

Personally I think it going to probably take a combination of things. Most importantly coming up with a plan to shift it too private accounts. The problem with Social Security is that it relies on working people to provide the retirement on non-working people. Until we shift to a system where Social Security is a system we pay into to provide for our own retirement it will always be a flawed system that will eventually fail.

[Madame X]

The opt out idea is interesting, in terms of saving the system for those of us who might still opt in, but the opt-outers would not only demand less, they'd contribute less. Also I think a lot of people would not use that money responsibly-- just as people don't tend to participate in 401k plans unless their employer almost twists their arm about it. And then what do you do when all these elderly people suddenly have no income or savings whatsoever. What will happen to the cruise industry? :)

I'm looking at one of my SS statements right now. By the time I retire at 70, I figure I'll have contributed about $180k into the system based on current guidelines, and I'm told I'll get a payment of about $2351 a month. For me it seems like a good gamble, especially since people in my family tend to live well into their 90s. I only have to live to about 76 to get ahead of my contributions. That doesn't take into account the time value of the contributions, of course, but if I average those out and assume I invested them in something pretty risk free, which would have a low interest rate, say 6%? Then I figure I have to live until 83 to come out ahead. Still an ok gamble to me.
I see SS as a safety net. I would never make it my only retirement savings. I max out my 401k and save other money and invest it as I see fit, knowing that things might go well or they might go badly-- I take the responsibilty and the risk. But I'm happy to look as Social Security as a safe, guaranteed backup to augment that. And the projections say it should be guaranteed through 2042 or something like that, I believe, based on the current parameters. So I'd say raise the income cap for what is taxed and raise the retirement age a little, and be glad we have it.

[Captain Arbyte]

I've compiled a large number of reasons why people should be allowed to opt out of social security. It looks like I can't embed an HTML link in a comment (sigh!) so click on my name to see the reasons.