Tuesday, December 18, 2007

Titanic vs. Iceberg, Live!

Social Security is a titanic government obligation and a touchy subject that many politicians shy away from, which is unfortunate. The reality is that the Social Security Board of Trustees believes that by 2017 we will be withdrawing more money from Social Security than we are collecting in taxes. The board also believes that Social Security will go bankrupt by 2041 because the so-called trust fund will run out of money. Of course, the trust fund is mostly imaginary because Congress long since spent it on other things, so this later date is somewhat meaningless. In 2017, we will have to cut benefits, cut other government programs or raise taxes. This massive iceberg is ten years out and it is not moving out of the way.

Who pays what and who gets what under Social Security?

The payroll tax is 12.4% of your first $97,500 of wages. You pay 6.2% and your employer pays 6.2%. Income above $97,500/yr is not subject to payroll taxes because people who make $97,500/yr and those who make $2 Billion/yr receive the same Social Security Benefit. Or put another way, your Social Security benefits top out when you make $97,500/yr in payroll income.

Your benefits are a proportion of the income you made during the years you paid into Social Security. Those with low incomes have their benefits subsidized and are generally a higher proportion of their working salary than benefits received by those with high incomes. These benefits are indexed to wage inflation, which means about a 4% increase in benefits each year.

How do we fix it?

In general, there are three major proposals to fix it:

1) Extend payroll taxes (which you see on your check as FICA) on wage income above $200,000 to keep benefits as high as they are now. Those making above $200,000/yr will not receive any more benefits with the new extra taxes. This amounts to a 12.4% tax hike on all payroll income above $200,000. This means that those who work for a living like doctors, lawyers, and athletes would get a tax hike. Those who have inherited money or are independently wealthy who receive their income from investments would not pay any extra tax.

My salary does not begin to approach this level, but I despise how this proposal treats high wage people like a piggy bank we can raid. Many people toss around the term Socialism far too much, but this is by definition Socialism. This is merely taking money from one person and handing it to another. We have many policies, like national defense, where the wealthy pay more taxes, but they still participate in the benefits. We have other policies that transfer funds from the wealthy to those in need. This is not one of those policies. It is not based on need, and is not based on community benefit. It is simply a plan put forward to get money for some by taking it from someone else. It is pure greed.

2) Increase the retirement age. At first glance, this seems like an equal way to reduce the benefits, but when digging a little deeper it is not quite as fair. Poor people tend not to live as long as wealthy people. The poor are more often employed in physically demanding jobs, have more health problems, or simply made bad decisions in their life that led to a shorter lifespan. Under this plan, those who live the shortest lives face the largest percentage cut to their benefits. To cut the largest percentage from the benefits of those who are poor and/or have medical problems, but have paid into the system their entire lives seems unfair.

3) Reduce the growth rate of benefits. First proposed under George W. Bush, and now supported by Fred Thompson, this plan cuts the growth in benefits for anyone under the age of 58. On a percentage basis, everyone who receives social security retirement benefits would have the exact same amount reduced from their benefits as everyone else. On a dollar basis, those who receive more social security benefits would have their benefits reduced the most.

Technically speaking, it would reduce the growth rate from the wage growth rate (normally 4%) to the inflation rate (normally 3%), effectively reducing the growth rate of social security benefits by 1% a year. Some believe that this will not cure the entire problem, but the sooner we act the less dramatic the changes will have to be in the future. We need to tap the rudder on this titanic program now so we don’t risk hitting the iceberg later.

Virtually every American is eligible to receive social security retirement benefits. America needs to cut benefits so that the system does not go broke. Every American eligible for benefits should have their benefits cut and the same proportion should apply to everyone. If the ship is sinking, we should not be throwing some people over board so we can save our luggage.

As always, tell me what you think.

Here are a couple quotes in response to Alex’s guest post last week:

Steve S. – “Accountability. What a novel idea! Why that's practically un-American…”

Craig W. – “I agree with [Alex] up to a point in his letter-to-the-editor…I believe the banks put these folks in this precarious position; knowing full well that they barely could make the introductory payment on their current income…I think it is mostly [the banks’] responsibility to work with the individuals to come out with a workable solution.”

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