Social Security "Reform": The Undead Return

[Hannah Bell]

Dean Baker in his post The Post's Jihad against Social Security points to this article 'Obama Predicts Years of Deficits over $1 trillion' and notes that they don't hesitate to single out the usual suspect. Is it the cost of the war? The cost of the bailout? The cost of the stimulus package? Nope apparently those are just short term problems. Instead as always the first stop for deficit reform is Social Security.

WaPo:

"The mounting debt has raised an alarm on Capitol Hill, where some Republicans and moderate Democrats are pressing Obama to tackle the looming challenge of skyrocketing Medicare and Social Security spending, and to adopt tough new budget rules to prevent future deficits from ballooning."

Which leads Dean to reply with some exasperation:

"The article includes a comment about 'the looming challenge of skyrocketing Medicare and Social Security spending.' Of course Social Security spending is not projected to skyrocket. It is projected to increase gradually, and its costs are fully covered by its own tax stream until 2048, according to the Congressional Budget Office's latest projections."


In a related note Paul Krugman poses the question in a Jan 5 post 'A Bullet Dodged'

"What would have happened if George W. Bush had actually succeeded in his plan to privatize Social Security?"

and suggests an answer 'Ask the Italians'

"Bloomberg News: Italian Pensions Sapped by Private Funds Bush Backed"


More:

http://bruceweb.blogspot.com/

[ColbertWatcher]

1. I hope Obama doesn't reach out to the privatizers.

Great thread as usual, Hannah.

Lots to think about.

[ReadTomPaine]

2. Obama won't have any more luck than Bush on that subject.

Bush cared far less about the consequences of his actions and had much more to gain, personally and otherwise.. and he still failed despite having the weakest opposition party in modern American history and a country whipped into mass psychosis. If it couldn't be done then, it's never going to happen - at least not for decades.

[sandnsea]

3. He previously discussed raising the FICA cap

I don't know why people are shocked that he's continuing to talk about the exact same things he talked about in his campaign.

[davekriss]

14. That's not "reining in entitlement spending"....

Increasing the cap would be augmenting revenue, not slowing spending. Now he's apparently talking about slowing spending, "reining in". That is the opposite of what he campaigned on.

[exboyfil]

4. I agree S.S. is not the problem

Medicare on the other hand needs to be addressed along with all health care. At this point the only way to address Medicare is with a Universal Single Payer system. Our whole medical/insurance system needs to be scrapped. If we can get to a German system in which we pay 15% of our income for coverage (versus the 24% which is paid now), we will be a whole lot further along. With that coverage we no longer face an issue with portability or denial for preexisting conditions.

I agree that privatizing S.S. into the equity market was a bad idea at the time, and I took some heat from some of my conservative friends for that opinion, this article demonstrates the basic problem that I have with S.S. The S.S. system being in the General Budget serves to hide the real problem we have with government spending in our system. The so called Trust Fund assisted in running huge deficits. Last year S.S. collected $600B and paid out $400B. The other $200B, in effect, went to AIG.

I really don't know what is going to happen when S.S. flips over from contributing to funding the national debt to drawing down the "Trust Fund", but it is going to get ugly. This is not a problem with S.S., but with the whole federal budget process. Having current payees cover their future benefits is appropriate, but I don't know how it can be done in a General budget process with $1T deficits and a $11T debt ($2.2T being S.S.). The money is just feeding the fire. As the date (2018) looms closer to tapping the "Trust Fund" it will like be turning on a light in a room full of cockroaches.


What bothers me are perceptions about S.S. are incorrect. A large percentage of retirees are subsidized in their retirement (in effect they are receiving welfare). S.S. has been sold so well that these retirees do not recognize that fact and bristle at the suggestion - even though it is true. Consider that all income is taxed at an effective 11% or so rate to $100,000 approximately, but benefits are defined by a 90%/32%/15% formula thereby establishing a minimum income for the low wage earners that is subsidized by the higher wage earners. The low wage earners think that they have "paid" for their benefits, but it is not true. 90% of your income in retirement in no way is actuarially sound on 11% contributions over 35 years. This problem is further complicated by the fact that earlier retirees piad no where near the 11% figure. They have benefitted from the Ponzi effect of the S.S. system.

The whole concept of taxing S.S. benefits also contributes to this subsidizing effect (first for S.S. and then for Medicare which also gets a portion of those taxes). The problem with this type of tax is that it is a disincentive to save for retirement. My stupidity was that I had 15% of my income withheld in a 401(k) from the time I was 28 to 43 not understanding this feature. Since I figured it out I only withhold to my employers match. I should have paid more attention to Roth IRAs when they first came out.

This is not to say that I think a guaranteed income for seniors is a bad thing, but what I have seen is a lot of smoke and mirrors from both sides of the debate.

[Hannah Bell]

5. "Having current payees cover their future benefits is appropriate,"

no, it's not. because that's not how it worked. not only the boomers, but gens x, y, z overpaid since 1983, supposedly to create a pool of money to fund the boomers.

but they're also going to pay to "repay" the money they already paid for 25 years.

ss began as pay-go. the "prefunding" thing is a 3 card monte scam.

[exboyfil]

7. The problem with pay as you go

and declining birth rates is that eventually the tax becomes so onerous on current workers that they will flee the system (either through refusal to work because the payback is not there) or by leaving the country.

We already pay a pretty healthy payroll tax (approximately 11%), and the system will need to tip into the "Trust Fund" in 2018. Assuming that no trust existed, from that point the payroll tax would have needed to increase beyond the 11% to enable pay as you go to work. Where is the tipping point in which that percentage becomes too great? I certainly don't want to burden my children with 20% payroll taxes to fund prior retirees with the future looking even more bleak as we cycle downward.

It is a 3 card monte scam, and it is being revealed for what it is now.

I like paying my own way in the world so I don't see a problem with funding my own retirement, but, as you point out, this "Trust Fund" is a sham.

[Hannah Bell]

8. The trust fund isn't a scam; it's a dedicated account. The scam is overfunding it

for 25 years, supposedly to prefund the boomers' retirement, but in fact to fund tax cuts for the rich.

[exboyfil]

10. If it is a pay as you go system then why even

have a trust fund? Unless you mean a one year trust fund for cash flow/stability? Just continue to raise current rates to meet current obligations.

[Hannah Bell]

15. That was pretty much how it was set up: the TF was mandated to

hold enough to cover a certain % of expected payout.

[Hannah Bell]

17. If you're interested, here are the numbers:

http://journals.democraticunderground.com/Hannah%20Bell/4

The only difference in the past was, once a cushion was built up in the Trust Fund reserve, no significant yearly surpluses (or deficits) were allowed to accumulate. Taxes taken in were kept in rough balance with benefits going out.2 From the 1950’s to the 80’s, the Trust Fund balance stayed at under 200 billion in inflation-adjusted value.

Performance of Social Security Trust Funds in Inflation-Adjusted (2005) Dollars*

Year Current $ (Mils) 2005 $ (Mils)

1943 4,820 55,709
1953 18,707 132,760
1963 20,715 129,015
1973 44,414 199,960
1983 24,867 48,434
1993 378,285 507,152
2003 1,530,764 1,611,323
2005 1,858,660 1,856,660

(*Social Security Administration, “Performance of Social Security Trust Funds, 1937-2005.”)


The formatting is bad, but left column = current dollars, right = constant 2005 dollars. You can see what happened in '83. Instead of just raising rates enough to keep the TF within its original mandate, they jacked up the schedule to more than double it from its 1973 level in less than ten years, & then to double it in another 5 years, etc.

Supposedly to prefund the boomers' retirement, but in reality, to create a nice slush fund. The boomers, x-ers, y-ers etc. will now be taxed on both sides, instead of just one. It did nothing to "take the burden of the boomers' retirement" off "future generations" - it did precisely the opposite.

One of the biggest scams going, & deliberately misrepresented by both pubs & dems. The phony mainstream "debate" on the subject ignores the real issues, & the real numbers.

[exboyfil]

20. The pay as you percentage of income has more

than doubled since the institution of Social Security. Even with the "Trust Fund" S.S. will get tapped out in 2042. What kind of rates will our children/grandchildren be looking at to keep the system going?

We both agree that the "Trust Fund" is a joke. The $2.2T has gone up in smoke.

[Hannah Bell]

22. The % we *should be* paying is about 5%. Considering the increases

in coverage, I don't see the problem you do.

The rate schedules, under present assumptions, stay the same 75 years into the future. So your worries about your children are misplaced.

The Trust Fund isn't a joke; the 2.2T has not "gone up in smoke" - unless the people concede to those who'd like them to believe that.

Evidentally you wish to concede.

[exboyfil]

24. We must be working from two different set of numbers

The withholding is a full percent higher than 5% (10% total with employer contribution) to fund the retirement portion (the other stuff gets really complicated so lets focus on that portion). Even with this higher withholding and the "Trust Fund" projections from the CBO show S.S. tapped out in 2042.

If S.S. holds for my children at 5% (or even 6%) then I am tickled pink. Lets reduce the percentage right now and go to a pay as you go system. I am not sure what to do about the "Trust Fund" though. We could look at some sort of payback to those who funded it through additional national debt to the Chinese and payments to those individuals. Well maybe not the Chinese. That works as stimulus as well and it is fair.

I am afraid that I don't buy the pay as you go no problem with the rate increasing argument though. It sounds too much like what was said in the 1930s about the system (see my earlier post).

Maybe you did not like my terminology, the "Trust Fund" is more tragic than comedic. No "Trust Fund" holding Federal debt can truly exist in an environment in which we have $1T deficits and a $11T debt.

Since money is fungible you can say the trust fund was spent on smoke ($1T for Iraq) and mirrors ($1T for the TARP and AIG bail outs).

[Hannah Bell]

26. Present SS rate = 6.2. If not for the overpayment, we'd be paying about 5.

gotta go, i'll return to this later, thanks for your civility.

[zeemike]

6. Well the real problem is that SS is not a retirement plan.

It was designed as a social insurance.
just like all insurance it is to protect the older people from being destitute in there old age.
But somewhere along the line the rich people saw that they wanted a piece of that pie and demanded there share of the pie and so we pay benefits to the rich who do not even need it.
And the same rich people saw all that money in the trust fund and wanted to use it to prop up the stock market and inflate there own investments.

[exboyfil]

9. Nope read what was said about it at the founding

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

Excerpts from Speech
by Vincent M. Miles
at Governors' Conference,
St. Louis, Missouri,
November 16, 1936

Vincent Miles was on original Board of Social Security


"Under the provisions of the act for old-age benefits, qualified workers will receive retirement benefits, as a matter of right, at the age of 65. No means test will be required. The old-age provisions are best understood if we compare them to insurance. They apply to wage and salary earners who are now young or middle-aged--men and women who work in industry, in business offices, in commercial enterprises of all kinds--about 26 million workers in all. This part of the Social Security Act provides, for these men and women, an income for life after age 65 when they are no longer at work. This income will be paid to them by the United States Government in monthly checks--like the installments on annuities from an insurance company. Or a payment will be made to the worker's family if he dies. Whatever happens, the worker or his family gets back more money than he pays in."

1. The worker or his family gets back more money than he pays in. Well not any longer.
2. No means testing. Well not any longer since benefits are taxed.
3. Age of 65. Well no longer it is 67.

The formula 90%/32%/15% ensures that "rich" people really don't benefit much from Social Security. Sure they get the 90% on their first $8500, but their payback quickly drops like a rock (especially over $50,000). The ones who really get taken to the cleaners in the system are those between $50,000 and $107,000 who get 15%. Those over $107,000 suddenly get a boost in their income because no longer get taxed after $107,000 and that income does not have to participate in the poor returns seen for the 15% bracket.

The rich get their means testing done on the back end by paying taxes on their Social Security income as well. A disincentive for saving for retirement.

For that portion of income between $50,000 and $107,000 (making some age assumptions about spouses etc) and assuming a 3% rate of return on the money paid into S.S. over 35 years, the final S.S. payment is 1/3 what could be obtained with an annuity.

[fasttense]

11. There you go again exboyfil, inserting facts into a discussion.

Some folks would prefer to keep their republicon induced fantasies.

Thanks for the info and a belated welcome to DU.

[zeemike]

12. But isn't that also true of some insurance?

You only make out if you die young...and auto insurance for me has been all money down the drain sense I have not had an ace-dent in 30 years.
And benefits are only taxed if you make additional income over 12k. And if you do have income after retirement why should you not pay taxes on it?
And why would it discourage savings sense savings are not taxed? Only the income from savings are taxed.
And if you receive income from savings of over 12k at 5% that means you must have over 240,000 in the bank...there are a lot of older people that would love to pay the taxes to have the benefit of such a bank account.

[exboyfil]

13. All income from savings are taxed

but Social Security is also taxed after a certain income threshold. These S.S. dollars were originally taken out on pretaxed income.

Consider two individuals with identical earning streams during their lifetime. One is a saver/investor in the 401(k) system and the other spends his money as soon as he gets it.

At the end they both have a Defined Benefit plan. The saver further has his 401(k) that brings him to the threshold of taxing Social Security. His S.S. is now taxed. Once I figured out this game my 15% contribution to my 401(k) dropped to just my employer match.

On a long term basis I argue we want to encourage saving and investing, and taxing S.S. does the opposite. It is needs testing. Maybe if the tax isn't that great then the societal impact is not significant or the uncertainity about what might happen to the sure portions of an individual's retirement (S.S. and th DB plan) is so great that individuals continue to save because they are uncertain about what will happen.

I don't disagree with your point about insurance or whether S.S. should be structured in some other fashion - what I am arguing is that the program was sold in a certain way but it is something else.

If it was a true unsubsidized insurance system then you would not see the graduated formula (90%/32%/15%). Low income workers have been sold the belief that they have fully funded their income insurance when in no way they have (it is even further the case when you consider how the withholding rate has increased over time since I am using current numbers). With current numbers an annuity on the 90% of the portion would only have income of 10-20% of what is actually received.

I remember when I brought these points up to my grandmother and she nearly freaked (S.S. is not a welfare program....).


I am wondering if, as Obama wants to do, he applies the withholdings to over $200k whether those individuals will also get to participate at the 15% level noted above. I personally see no reason, once you recognize that S.S. is a subsidized insurance system, from applying the payroll withholding all the way up to infinite income as long as those folks get benefits at the 15% level. Right now folks making $50K-$107K are getting jabbed big time. They are carrying the brunt of the subsidizing.

I still don't know what to do about the "Trust Fund" problem (actually it is a federal budget spending/taxation problem and not a problem with the "Trust Fund" per se).

[Hannah Bell]

16. fully funded their income insurance when when in no way they have

I agree with you on not taxing SS benefits; that's another "gift" from the 1983 "fix" that raised contribution rates over actuarial need, & it was indeed a way to soak the middle to benefit the very rich.

But your statement above depends very much on who's doing the figuring, & what assumptions they use. For example, wealthier people live from 4-14 years longer, on average, than poorer people, who are more likely to die before seeing any return from their contribution, & are also more likely to die before getting much even when they make it to retirement. So what is true for the individual is not necessarily true for the class.

[zeemike]

18. I seem to sense a good bad thing here

On the one hand the good people save their money and the bad ones spend it as soon as they get it.
It may come as news to you but there are a bunch of people living on minimum wage jobs that have no choice but to spend it as fast as they can get it
And still others covered up in medical bills and for other reasons that don't have the ability to save their
money.
These are the people that SS was intended to help, not those that had good jobs with benefits that can chose how much they can save up.

But I find it amazing that anyone would cut there savings to keep from paying taxes on SS that they will get in the future.
In short I am saying SS is not about those that do well for themselves but about the vast numbers of others that don't do so well. But I guess in this modern world it is all about me and what I can get for myself.

[hfojvt]

28. the tax on social security is very low and income must be pretty high

before that tax kicks in. At most, tax is paid on about 1/4 of your social security income. It also appears that the dollars you put into a 401K would not be taxed since line 2 of the worksheet on page 25 of the 1040 is "cost in the plan". Thus some of that does not add to the income which makes your social security income taxable.

Also, only half of your social security contributions were pre-taxed. The other half came from your employers and were never taxed.

[Hannah Bell]

29. theoretically, the employer portion is in lieu of higher wages. so theoretically.

at least, it IS a tax on wages.

most economic models make this assumption.

[originalpckelly]

19. I think that's obvious, but there is a problem.

The best solution I've heard is eliminating the upper cap on SS payroll taxes.

[Greyhound]

23. Do that and we get surpluses which allow an over-all lowering of contributions.

All the Projections of loss are meaningless as it is impossible to predict beyond 10 - 12 years with any accuracy.

Remove the cap, make the primary beneficiaries of the system pay to keep the system. (The US system, not just the SS system)
:kick:

[Hannah Bell]

25. The most consistently accurate forecast from the SS Trustees

already shows surplus into infinity.

course you never hear about that one, just about the one based on the assumption we're going to have 75 years of Depression-level growth.

*That* forecast has not even accurately predicted the next year, let alone the next 75.

[Greyhound]

27. Exactly. This is all just their obsession with getting their hands on the last

reservoir of cash in order to prop up the Ponzi scheme a little longer.

Wall Street has been drooling over those funds for decades. They got the pensions, they got the wages, they got our manufacturing infrastructure, they've killed their opposition, they got the real estate, SS is all that's left.

[bobbolink]

21. I'm K&R-ing the "competition"

:rofl:

VERY good, Hannah!

On BOTH counts! :applause: