A Sensible Reform To Social Security

In the wake of the fiscal bump in the road, much was left undone in fixing the economy while paying down some of the outstanding debt.
A lot of trial balloons are being floated, and I want to focus on one for now: Social Security.
 First, let’s review the whole program. Social Security is a life insurance policy — I’l l get back to that– the government purchases for you with your money. While this is referred to as a “payroll tax,” it is more useful to think of it as a deposit into a long-term savings account. Monkeying with the withholdings may have immediate consequences as a stimulus (similarly, raising the rates can help quell inflationary spikes) but in the long run, what you put in, plus the minimal amount of interest the government can earn on it by law, is what you should get back.
How you receive this amount is determined by actuarial tables — like an insurance policy’s — based on life-expectancy calculations that even I have a hard time wrapping my mind around. Of course, none of this accounts for exogenous factors like, say, a change in your life expectancy.
And there’s the rub. When SocSec was implemented, the average life expectancy of a man at birth was 58, for a woman, 62. Retirement was deemed to be 65.
Yes, they worked them to death back then, literally.
It’s not as bad as that sounds, frankly. Once you reached age 5 — infant mortality was, and still is, a major health crisis in America –you stood a better than even chance of attaining age 65. And once you reached 65, you lived another decade or so (15 years for women.)
SocSec was designed to help ease poverty amongst the elderly, at one time the single poorest demographic in the country (it’s now among the richest.) Specifically, it was designed to ease poverty among elderly women who generally outlived their husbands and generally had not worked a day in their lives, except for the enormous job of running a household. This is why it’s generally described more as a life insurance policy than as a retirement plan.
Flash forward to 1990 for a moment: once you reached age 5 after 1990, you stood a 3 out of 4 chance of reaching age 65, and once you reached age 65, you stood an average chance of living to 80, not 75.
Clearly, there’s room to make some adjustments to Social Security. Clearly, those adjustments can come in the form of a slightly lower payroll “tax” in exchange for a slightly longer working life.
Because, let’s be honest, the percentage of people who can retire at age 65 dropped dramatically in the wake of the burst housing bubble. Many people were counting on now-non-existent equity in their homes to finance their retirement. Many more people were counting on 401ks and IRAs that lost enormous amounts of wealth in the past four years, and certainly lost enormous amounts of earnings on whatever wealth they did lose in the interregnum of rising balances over the decades.
Bear with me, I’m not calling for current cuts in the program.
But here’s the thing: retirement at age 65 was an arbitrary construct. It basically said, “After 40 years of working, you deserve the rest of your life, that last decade, to yourself.”
Now that people can’t afford to retire at 65, and have to work into their 70s….*shudder*…this later retirement will now become an arbitrary figure that we can peg for the payroll tax rates we charge people entering the workforce.
Here’s where we can make the cuts that will allow us to help pay down our deficit, if only as a facade. By making cuts 40 years down the road, and essentially borrowing those balances now, we can firm up the assets of Social Security and allow it to stand on its own merits. Down the road, as young people pay (less each paycheck but for a longer time frame) into these accounts, those shortfalls will reverse and the fund will fully fund once again.
Raise the retirement age, lower the payroll tax. That sounds like a winning formula and can help us now.

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  • Not so sensible if you do manual labor of any kind or your work depends on motor skills.

    Social Security is not broken. If you want to lower rates try raising the cap on income subject to the payroll tax.

    • I would agree with you, but the age could be wage adjusted to account for that. Lower average wage over your life = shorter lifespan and crappy jobs, often manual labor so let them retire at 65.

      • Why get so complex? Removing the cap removes an inequity where those very people who are likliest to live longer in retirement and have earned most during their working life don’t contribute all they could. “From each according to their means, to each according to their needs”, it doesn’t get simpler than that.

  • Sensible reforms should move towards policy that makes life better for all of us. We would be a rich country with decent leadership. That richness should make life better for us. We should spend less time working for pay — shorter work days/weeks, more paid leave, earlier retirement if desired. We should also address our disfunctional health care system, our deteriorated infrastructure, our restriction of freedom through out-of-control intellectual property laws.

    Slow changes that continue to extract value from the majority of the people simply extend bad policy.

  • I don’t see any good reason to collect payroll tax at all other than if there is a threat that current social security expenditures are inflationary. Even in that case, the payroll tax is not necessarily the best possible anti-inflationary measure.

    The point is that the questions ought to be separate. On the one hand there is a question of program-specific revenue (the payroll tax). On the other hand, there is a policy choice as to benefit levels. We can choose to balance payroll tax and disbursements as if social security were an interest earning insurance fund but nothing requires us to do so. For example, we could decide on benefit levels and then agree to pay the whole thing out of the general fund, eliminating the payroll tax entirely.

    So, it might or might not make sense to, say, raise the retirement age but it is odd to say that we ought to raise the age because we “must” balance the fund with respect to payroll taxes.

    Is raising the retirement age a good idea? To me, it seems like it would be an odd choice to make when un- and under-employment are such large problems. We’re in an era where it might make sense to encourage people to retire early, if they can. We have high unemployment among young adults and an aging workforce that is staying on the job longer as it is; we don’t need federal encouragement of this dysfunction.

  • I think some of the framing that seems implicit in this passage is a bit off –

    By making cuts 40 years down the road, and essentially borrowing those balances now, we can firm up the assets of Social Security and allow it to stand on its own merits. Down the road, as young people pay (less each paycheck but for a longer time frame) into these accounts, those shortfalls will reverse and the fund will fully fund once again.

    I don’t have the time or neural candle-power to explain it, but this post from Angry Bear does –


  • Oh good, i was wondering how long it would take for the Obama brigades to start telling us how it’s really for the best to chop up social security.

    There isn’t a problem with it now, except that every president/congress since Reagan has been using the surplus and replacing it with special treasuries, meaning that when the bill does come due it will have to paid out of current revenue. Obviously we haven’t gotten any infrastructure, technological advancements beneficial to the economy, or education for the next generation of economic contributors out of the deal.

    In the 80’s the tax that supports SS was raised to pay for the Boomer bubble; the easy fix right now for the long term is lifting the $106K ceiling on paying into the fund. Of course that won’t happen, and we won’t get a shred of honesty from Obama, his party, or his supporters. A moderate Republican running as a Democrat will cut SS and finish off the social safety net, and we’ll all be told how it’s for the best.


    • Lex, would you agree that proposals to cut social security benefits amount to a claim that in future years we’ll lack the productive capacity to provide a base level of support to our seniors, disabled, and so forth? Sorry future grandma, no room at the inn? We just can’t grow and distribute enough food for you or keep a roof over your head?

      We should be talking about expanding the safety net so that benefits are not so tied to past earnings — not cutting it.

  • When Social Security was first instituted, there was also a program to support the already-old who would not have paid into Social Security because it had not existed. It was commonly called ‘Old Age Pension’. I don’t know the official name or the age it started with – probably around 60. It was funded separately from SS. Some state/counties have such a program even today.

    This New Deal program simply acknowledged the fact that regardless of political circumstances and fiscal policy or conditions, old people should not live out their lives in extreme poverty. The same mindset lies behind Medicaid, AFDC, etc. Society has an obligation to protect its vulnerable citizens and this obligation over-rides other issues. The RightWingers simply refuse to recognize the humanity of most of the human race. The ironic thing is they only recognize their Fellow Travelers, who are decidedly less humane. Guess to some people, ‘human’ means ‘just like me’.

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